To get the most enjoyment and best flavor from a bottle of wine, connoisseurs sometimes recommend decanting – transferring the liquid to another container before serving, allowing the wine to separate from the sediment. With the recent overhaul of Minnesota trust law, trustees may now employ the same concept to the advantage of trust beneficiaries. As decanting a bottle of wine produces a more pleasing taste, decanting trust assets to a trust with improved terms may please beneficiaries. What is defined as “better tasting” and “more advantageous” is, however, a matter of personal taste. While the decision to decant a bottle of wine has few risks, decanting a trust without thoughtful intention can have more serious consequences. As a result, it’s important to start by understanding the potential and limitations of the new decanting statue.
Structure of the Minnesota Decanting Statute
The term “decant” means to transfer from one vessel to another. In the case of trust assets, the transfer is from the original “invaded” trust to a new “appointed” trust. Minnesota’s decanting provisions are located in the revised version of Chapter 502, which governs powers of appointment.
The law creates two tracks for decanting; the appropriate track depends on how much discretion the trustee has to distribute under the original trust instrument. Under either track, the trustee may lengthen the trust term, act without regard for the need to invade the trust principal and impact later-discovered assets if the decanting explicitly addresses all assets.
If the trustee has limited discretion, the appointed trust must have the same beneficiaries and for the time period of the original trust, the same distribution standard. Consequently, the trustee must limit any additional discretion to an extended term and ensure the inclusion of present and future members of any identified class of beneficiaries.
Trustees with unlimited discretion have more options. The appointed trust may benefit some beneficiaries of the invaded trust to the exclusion of others. The trustee may potentially change the distribution standard and act broadly with regard to present and future members of any identified class of beneficiaries.
Trustees must take care in identifying the right track. If in doubt, trustees should opt for the more conservative track to minimize the chance of objections from beneficiaries. No matter how carefully a trustee proceeds, however, due to the retroactive nature of the statute, some beneficiaries may object simply because the settlor could not have contemplated decanting because previous law did not permit it.
In addition to choosing the right track, trustees exercising the discretion to decant have a fiduciary duty to act in the best interests of one or more objects of the exercise of the power. This duty may provide a legal counterweight to trustee’s power to “exercise the power to appoint in favor of an appointed trust under subdivision 3 or 4 whether or not there is a current need to invade principal under the terms of the invaded trust.”
Finally, trustees must comply with applicable notice provisions. Practically speaking, trustees should consider whether to provide notice to interested parties earlier than the required notice. Doing so may help garner buy-in.
Usefulness of Decanting
Decanting allows trustees flexibility in satisfying certain needs of trust beneficiaries. A trustee might consider decanting to address differing circumstances and needs of various trust beneficiaries. In this situation, a trustee can decant into separate trusts for separate sets of beneficiaries with trust terms suitable to each varied situation. In addition, a trustee might consider decanting from an older trust to a more modern trust if doing so better addresses present familial, legal or tax realities. In these situations, trustees may be better off decanting than wrangling with the execution of the original trust.
Minnesota’s new decanting provisions give trustees another tool to meet the needs of beneficiaries. Trustees should have a clear understanding of the structure and usefulness of the decanting provisions before making a decision. Carefully weighing the options, considering the appropriate track, fulfilling fiduciary duties and complying with notice provisions will put trustees and beneficiaries in good stead. If done right, all involved will have reason to toast!