Morrison & Foerster LLP: Decanting a California Trust

Morrison & Foerster LLP: Decanting a California Trust

By Joshua Glucoft,* Morrison & Foerster LLP

In the administration of an irrevocable trust, situations can arise that were beyond the anticipation of the trustor.  Therefore a trustee may want to "decant" a trust by transferring funds from one trust to another with preferable terms.  The trustee may be unsure, however, as to when the trustee is authorized to decant the trust.  "A trustee's powers include those specified in the trust instrument, those conferred by statute, and those needed to satisfy the reasonable person and prudent investor standards of care in managing the trust."The first source of such authority therefore would be the trust instrument itself, but the source of authority to decant a trust is less clear when the trust instrument is silent or ambiguous with respect to decanting.

The second potential source of authority is statutory authorization.  At least 15 states have statutes explicitly authorizing some form of decanting when certain conditions are satisfied, and several more states are considering legislation on the topic.However, California does not have a statute clearly authorizing a trustee to decant trusts3 nor does the state legislature appear to be currently considering such a bill.4

The third potential source of authority would be the trustee's duty "to satisfy the reasonable person and prudent investor standards of care in managing a trust."5 However, except in cases of clearly faulty trust instruments, there may not be a robust demonstration that decanting to obtain preferable terms would be necessary to maintain the reasonable person and prudent investor standards of care in managing a trust.6

A trustee's ability to decant may, however, be established by common law.  For example, in In re Estate of Spencer, 232 N.W.2d 491, 493 (Iowa 1975) [enhanced version available to lexis.com subscribers], Ms. Spencer left some of her estate in trust for the benefit of her children with a non-general power of appointment granted to her husband as trustee.  Upon his death, the husband appointed the trust property in further trust rather than allowing the trust property to pass outright to Ms. Spencer's children.  Id. at 494.  The Iowa Supreme Court held that such an exercise of the power of appointment was valid because the trust instrument did not clearly manifest a contrary intent.  Id.  There is a line of somewhat old but still valid case law from other jurisdictions holding that a trustee with a non-general power of appointment is allowed to appoint in further trust.  See, e.g., In re Estate of Mayer, 672 N.Y.S.2d 998, 1000 n.2 (Sur. Ct. 1998) [enhanced version available to lexis.com subscribers] ("[T]he power of a trustee whose discretion is unlimited to appoint in further trust had been judicially recognized in other jurisdictions.").

The subtle nexus supporting the common law ability of trustees to decant is that a trust that gives discretion to the trustee to invade principal or pay income or principal to or among the designated beneficiaries essentially grants the trustee a non-general power of appointment.  Restatement (Second) of Prop.: Donative Transfers § 11.1 cmt. d (1986) ("The discretion given to the trustee gives the trustee the power to designate beneficial interests in the trust property. . . . Consequently, the trustee holding a discretionary power has a power of appointment as defined in this section."); see, e.g., Ariz. Rev. Stat. Ann. § 14-10819 (2012) (using "discretion" essentially interchangeably with "special power to appoint" in granting trustees with discretion over distribution, but not specifically a power to appoint, the authority to decant by appointing in further trust).  While it may be more common to reference a trustee's discretion over distribution as distinct from a power of appointment, functionally they perform substantially equivalent roles, although a trustee is subject to a fiduciary duty in making distributions7 to which a beneficiary who holds a non-general power of appointment may not be subject.  A broader body of case law and the Restatements support the more general proposition that the holder of a non-general power of appointment may appoint in further trust, and it was this foundation that provided the grounds for extending the authority to a trustee with discretion over distribution to distribute in further trust.  E.g., Nat'l State Bank of Newark v. Morrison, 9 N.J. Super. 552, 559 (Sup. Ct. 1950) [enhanced version available to lexis.com subscribers] ("If, but only if, the donor does not manifest a contrary intent, the donee of a special power can effectively appoint interests to trustees for the benefit of objects.") (internal alterations omitted) (quoting Restatement (First) of Property § 358); Restatement (Third) of Trusts § 10 cmt. f (2003) ("[T]he donee can effectively appoint the property subject to the power, or any portions of or interests in that property, in trust for the benefit of permissible appointees (the 'objects') of the power unless the terms of the trust or other disposition that created the power of appointment clearly manifest the creator's (the 'donor's') contrary intention."); Restatement (Second) of Prop.: Donative Transfers § 12.2 (1986) ("The scope of the donee's authority as to appointees and the time and manner of appointment is unlimited except to the extent the donor effectively manifests an intent to impose limits.").

The common law ability of a trustee to decant therefore relies on two prerequisites: (1) there is no clear manifestation of intent to disallow decanting, and (2) the trustee has some discretion over distribution.  With respect to the first requirement, the intent of the trustor is a dispositive consideration and clear manifestations of intent to disallow appointments in further trust cannot be overcome.  Thomas v. Gustafson, 45 Cal. Rptr. 3d 639, 643 (Ct. App. 2006) [enhanced version available to lexis.com subscribers] ("[The] extent of trustee's discretion [is] defined by settlor's intention.") (citing In re Miller's Estate, 230 Cal. App. 2d 888, 908-09 (Dist. Ct. App. 1964) [enhanced version available to lexis.com subscribers]); see, e.g., Union & New Haven Trust Co. v. Taylor, 50 A.2d 158, 170 (Conn. 1946) [enhanced version available to lexis.com subscribers] (holding that an appointment in further trust that distributed only income for the life of the beneficiaries was not valid where the original trust directed that the principal "be paid over"); In re Bracken's Estate, 11 Pa. D. & C.2d 521, 523 (Orphans' Ct. 1956) [enhanced version available to lexis.com subscribers] (holding an appointment in further trust invalid when the trust directed that the trust property "be paid over absolutely").  However, in all of these instances disallowing appointment in further trust, the intent of the trustor was explicit and clear that the trust property needed to be distributed outright.Accordingly, silence and possibly even ambiguous9 language in the trust instrument might still allow for decanting, as long as such a construction is consistent with the ascertainable intent of the trustor.

With respect to the second requirement for a common law ability to decant, in those cases allowing a trustee to appoint in further trust, the trustee had relatively broad discretion in the distribution of principal or income.  See, e.g., Phipps v. Palm Beach Trust Co., 142 Fla. 782, 783-83 (1940) [enhanced version available to lexis.com subscribers] ("[A]n individual and a corporate trustee clothed with absolute power to administer a trust estate in the interest of designated beneficiaries [may] create a second trust estate.") (emphasis added).  Likewise, of the states that have codified the ability to decant, approximately half require that the trustee must have the power to invade principal10 and the vast majority of the rest explicitly require at least that the trustee has the discretion to distribute principal or income.11 Accordingly, decanting of California trusts should only be considered by trustees that have relatively broad discretion in the distribution of at least trust income, if not principal.

A trustee may be able to work around uncertainty by transferring jurisdictions, if the trust has requisite ties to a state with more favorable decanting statutes.  Several of the states with explicit decanting statutes provide that those statutes apply to trusts that have their governing jurisdiction transferred to that state.  A trustee of a California trust may petition a court to transfer the place of administration to another state pursuant to California Probate Code sections 17401-04.12 Transferring jurisdictions might be the preferred option for trustees with relatively less management authority as granted by the trust instrument. 

Ideally California would one day consider a statute that explicitly allows decanting and clearly delineates the requirements that would apply.  Until then, a trustee evaluating whether or not to decant an irrevocable trust can consider the authority for doing so, the tax implications, and applicable perpetuities provisions.  A trustee will also need to consider several other safeguards before decanting, including but not limited to:  providing notice,13 seeking court approval,14 and possibly waiting to decant until there is a current need to distribute.15  Alternatively, a trustee seeking the certainty provided by decanting statutes may investigate whether it is possible to transfer jurisdictions to take advantage of another state's statutory grant of the power.

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* The author was a 2012 summer associate at Morrison & Foerster LLP.

Morrison & Foerster's Trusts and Estates group provides sophisticated planning and administration services to a broad variety of clients.  If you would like additional information or assistance, please contact Patrick McCabe at (415) 268-6926 or PMcCabe@mofo.com.

© Copyright 2012 Morrison & Foerster LLP.  This article is published with permission of Morrison & Foerster LLP.  Further duplication without the permission of Morrison & Foerster LLP is prohibited.  All rights reserved.  The views expressed in this article are those of the authors only, are intended to be general in nature, and are not attributable to Morrison & Foerster LLP or any of its clients.  The information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.


1. Moeller v. Superior Court, 16 Cal. 4th 1124, 1129 (1997) [enhanced version available to lexis.com subscribers].

2. Rashad Wareh & Eric Dorsch, Decanting: A Statutory Cornucopia, Trusts & Estates, Mar. 2012, at 22 (Already enacted: Alaska; Arizona; Delaware; Florida; Indiana; Missouri; Nevada; New Hampshire; New York; North Carolina; Ohio; South Dakota; and Tennessee.  Considering legislation: Colorado; Illinois; and Michigan.); Va. Code Ann. § 55-548.16.1(B) (Virginia, already enacted); H.R. 155, 2012 Reg. Sess. (Ky. 2012), http://www.lrc.ky.gov/record/12RS/hb155.htm (Kentucky, already enacted).

3. See Cal. Prob. Code § 16200-49 (2012).

4. See Legislative Index, Legislative Counsel of California (last updated June 6, 2012), http://www.leginfo.ca.gov/legindexhtml/legindexALEAD.html.

5. Moeller, 16 Cal. 4th at 1129.

6. See id.

7. Cal. Prob. Code § 16081 (2012).

8. See Taylor, 50 A.2d at 171 [enhanced version available to lexis.com subscribers]; Bracken's Estate, 11 Pa. D. & C.2d at 522 [enhanced version available to lexis.com subscribers].

9. Courts seek to construe ambiguous language in a manner consistent with the intent of the trustor, and even a vague, general intent of flexibility in trust administration may be extended to allow flexibility in distribution, potentially including the ability to decant, when the instrument language is ambiguous.  For example, in Romans v. Pearce, No. F055910, 2009 Cal. App. Unpub. LEXIS 4614, at *9-10 (Cal. App. 5th Dist. June 11, 2009) (unpublished) [enhanced version available to lexis.com subscribers], the court held that granting the trustee with essentially all of the powers provided by statute indicated an intent to provide flexibility and that "this flexibility was intended to extend to the distribution of the Trust estate as well."  The court subsequently allowed the trustee to distribute shares in an LLC that owned the real estate that comprised the trust property instead of distributing the land in kind, where the instrument required distribution of the arguably ambiguous "trust estate" upon termination.  Id.

10. Alaska Stat. Ann. § 13.36.157(a) (2012); Del. Code Ann. tit. 12, § 3528(a) (2012); Fla. Stat. Ann. § 736.04117(1)(a) (2012); Ind. Code Ann. § 30-4-3-36(a) (2012); N.Y. Est. Powers & Trusts Law § 10-6.6(b) (2012); Ohio Rev. Code Ann. § 5808.18(A)(1) (2012); Tenn. Code Ann. § 35-15-816(b)(27)(A) (2012).

11. H.R. 155, 2012 Reg. Sess. (Ky. 2012), http://www.lrc.ky.gov/record/12RS/hb155.htm; Mo. Ann. Stat. § 456.4-419(1) (2012); Nev. Rev. Stat. Ann. § 163.556(1) (2011); N.C. Gen. Stat. Ann. § 36C-8-816.1(b) (2012); S.D. Codified Laws § 55-2-15 (2012); Va. Code Ann. § 55-548.16.1(B) (2012).

12. A trustee may petition the court for a transfer of property or place of administration by providing the court with all the information required in section 17402 and by providing notice to all beneficiaries and subsequent trustees pursuant to section 17403.  The court may then grant the order pursuant to section 17404 if the transfer is in the best interest of the trust and the beneficiaries, provided that the new trustee is able to administer the trust and the transfer does not violate the terms of the trust instrument.

13. See, e.g., Fla. Stat. Ann. § 736.04117(4) (2012) (requiring notice to all qualified beneficiaries at least 60 days prior to decanting).

14. See, e.g., Va. Code Ann. § 55-548.16.1(I) (2012) (granting, but not requiring, the trustee authority to commence judicial proceedings to approve the decanting).

15. See, e.g., N.C. Gen. Stat. Ann. § 36C-8-816.1(b) (2012) (explicitly allowing decanting even when there is no need to distribute).

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