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Trustees and beneficiaries who want to modify irrevocable trusts have acquired additional tools and options over the past 35 years: unanimous court-approved compromise settlements (1991); discretionary court-approved modifications and equitable deviations (2005); out-of-court nonjudicial settlement agreements (NJSAs) approved by all affected beneficiaries (2019); and the practice of granting limited amendment powers to a trustee or trust director in the written terms of some more recent irrevocable trusts.
However, for uncounted numbers of older irrevocable trusts that do not grant a limited amendment power to anyone, there is only one trust modification tool that does not require either probate court approval or the consent of beneficiaries: trust decanting, which was first permitted in Indiana under its 2010 statute, Indiana Code § 30-4-3-36. The essence of trust decanting is a trustee’s discretionary distribution of principal assets out of a first or original trust and into a new or second trust that has most or all of the same beneficiaries but different terms. Indiana’s original decanting statute contained only 574 words and very few explicit prohibitions and was silent on many significant issues. As a result, the old decanting statute allowed trustees to make some ill-conceived or unwise changes to irrevocable trusts.
Trust decanting is still a legal and viable trust modification method, but effective July 1, 2022, the old decanting statute was repealed by Public Law 161-2022 (House Enrolled Act 1205) and replaced with Indiana’s version of the Uniform Trust Decanting Act. (“UTDA” or “the new act”). Indiana’s new act comprises 60 sections in new Chapter 10 of the Indiana Trust Code, runs 7,642 words and contains 47 specific definitions. The new act applies to all existing or newly created irrevocable trusts except (1.) trusts that have only charitable beneficiaries and (2.) trusts whose written terms explicitly prohibit decanting.
Because the new act is longer and more detailed than Indiana’s repealed older decanting statute, trustees, beneficiaries and their advisers who are thinking of using trust decanting must take a radically different and more careful approach to determine whether decanting is possible and will work under the new act.
Indiana’s new trust decanting act, like the repealed 2010 statute, requires the trustee to serve a written pre-decanting notice with a 60-day lead time on all qualified beneficiaries of the first or original trust, and requires the trustee to confirm the decanting itself and the modifications made by signing a written record. But because the new act adds so many detailed restrictions and requirements, a trustee’s lawyer should reread the entire new act for each new potential trust decanting project. For example, the new act prohibits some changes to charitable beneficiaries’ interests and prohibits the use of decanting that could cost the loss of any of 11 types of tax benefits that applied to the first or original trust or to transfers made to it.
Depending on how the first or original trust instrument describes the trustee’s discretionary power to distribute principal, the new act may prohibit modifications that were easy to make under the repealed 2010 decanting statute. If the first or original trust instruments define the trustee’s discretionary distribution power as limited by an ascertainable standard such as “health, education, maintenance and support” (HEMS), then that trustee has “limited distributive discretion” (I.C. 30-4-10-42(a)), and the new act will allow that trustee to make extensive administrative changes but only minor changes to the substantive interests of beneficiaries. Conversely, if the first or original trust instrument gives the trustee “expanded distributive discretion” (I.C. 30-4-10-14) that is not limited by an ascertainable standard, that trustee can use decanting under the new act to make any administrative or substantive changes that are not specifically prohibited by the act. This is a significant departure from Indiana’s repealed decanting statute, which allowed the trustee to make extensive modifications so long as the trustee had any discretion (even limited by HEMS) to distribute principal.
Under the pre-2022 Indiana law, if a trust beneficiary (1.) was entitled to receive mandatory distributions of income or principal or (2.) was entitled to withdraw trust principal at a specific time, trust decanting could not be used to modify that beneficiary’s interest if the beneficiary later became disabled, because the trustee had no discretion with respect to distribution. Indiana’s new act addresses this problem by adding a broad and detailed definition of “beneficiary with a disability” (I.C.§ 30-4-10-6) and by allowing a trustee to use decanting to replace a disabled beneficiary’s mandatory interest with a discretionary interest, such as under a self-settled or non-self-settled special needs trust (I.C. 30-4-10-43).
A lawyer who is designing and drafting a new irrevocable trust for a living client (settlor) should consider discussing the following issues with that client:
• Whether the client wants the trust instrument to explicitly prohibit or restrict the trust decanting that could otherwise be done under the new act.
• Whether there is a legitimate tax-driven or practical reason to define a trustee’s discretionary distribution power by an ascertainable standard, which would limit the modifications that the trustee could make under Indiana’s new act.
• Whether the client should explicitly grant a customized trust decanting power to a trustee or trust director in the written terms of the new trust so that decanting could be used to make modifications that would be prohibited under the new act.•
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Jeffrey S. Dible is a partner with the law firm of Frost Brown Todd LLP. Opinions expressed are those of the author.
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