A new decision from the Massachusetts Supreme Judicial Court (the “SJC”), Ferri v. Powell-Ferri, gives additional guidance regarding trust decanting in Massachusetts and may have important implications for both estate planning and divorce law in the state. The SJC held that under the terms of a trust giving the trustees broad discretion to make distributions, the trustees could decant (i.e. transfer) the trust assets into a new, more “protective” spendthrift trust for the benefit of the trust beneficiary.
The Ferri case came to the SJC after the Connecticut Supreme Court asked for guidance on three questions surrounding whether the trustees of a 1983 Massachusetts trust established by a settlor for the benefit of his son (the “beneficiary”) could decant all of the trust assets into a new spendthrift trust for the beneficiary.
The questions arose because, while a divorce action was pending between the beneficiary and his wife in Connecticut, the trustees of the 1983 trust decanted substantially all of the trust’s assets into a new spendthrift trust for the benefit of the beneficiary. The 1983 trust granted the beneficiary the right to withdraw certain amounts of principal from the trust as he attained certain ages, but the new trust did not give the beneficiary that right. At the time of the decanting, the beneficiary had the right to withdraw 75% of the 1983 trust’s principal based on his age, the new trust prevented him from doing so – which meant that the wife was hindered from claiming a share of those assets in the divorce.
Trust Decanting in Ruling Allows for Transfer to Protective” Spendthrift Trust
The trustees completed the decanting from the 1983 trust to the new trust without informing the beneficiary or obtaining his consent. After the decanting, the trustees sought a declaratory judgment from the Connecticut Superior Court, to confirm that the decanting was proper. The Superior Court strongly disagreed, ruling against the trustees and ordering the return of the assets back to the original 1983 trust. The Superior Court also directed the trustees to pay the wife’s attorneys fees. On appeal, because the 1983 trust was a Massachusetts trust, the Connecticut Supreme Court asked for guidance from the SJC regarding whether the decanting was proper under Massachusetts law.
The SJC disagreed with the Superior Court’s finding and held that the decanting in this case was proper. In doing so, the SJC cited its earlier decision in Morse v. Kraft, holding that “if a trustee has the discretionary power to distribute property to or for the benefit of the beneficiaries, the trustee likewise has the authority to distribute the property to another trust for the benefit of those same beneficiaries.” The SJC reiterated that the authority to decant need not be based on explicit decanting language in the trust, but on an examination of the trust instrument as a whole, as well as other evidence of the settlor’s intent.
The SJC determined that the 1983 trust’s language giving the trustees discretion was extremely broad, even more so than in the Morse v. Kraft case. This discretion included the trustees’ authority to “segregate [trust property] irrevocably for later payment to” the beneficiary; the SJC found that this irrevocable segregation authority was strong evidence of the settlor’s intent to permit decanting – even though the decanting eliminated the beneficiary’s right to withdraw 75% of the trust’s principal.
The SJC rejected two arguments by the beneficiary’s wife that the trustees should not have decanted the 1983 trust. First, the SJC held that the creditor protection language of the 1983 trust was consistent with the settlor’s intention to permit decanting: The SJC found that “if a settlor intended a trust’s assets to be protected from creditors, he or she necessarily intended that the trustee have the means to protect the trust assets, consistent with his or her fiduciary duties.” This duty of protection continued to apply to trust assets over which the beneficiary had a withdrawal right, so long as the assets remained in the trust.
Second, the beneficiary’s wife argued that the right of the beneficiary to withdraw at least 75% of the trust at the time of the decanting was inconsistent with the trustees’ authority to decant. However, reading the trust instrument as a whole, the SJC found that “unless and until all of the trust assets were distributed in response to the beneficiary’s request for a withdrawal, the trustee could exercise his or her powers and obligations under the 1983 trust, including the duty to decant if the trustee deemed decanting to be in the beneficiary’s best interest.”
The SJC also noted that the court may consider an affidavit by a settlor regarding his or her intentions in creating the trust, citing its decisions in Morse v. Kraft, the Restatement of Trusts, and several Massachusetts trust reformation cases, all of which allowed similar extrinsic evidence.
Chief Justice Gants’ concurring opinion (joined by Justices Lenk and Budd) may point to future decanting decisions in Massachusetts divorce cases. Justice Gants wrote separately to emphasize that the SJC was not deciding whether Massachusetts law would permit decanting from a non-spendthrift trust to a new spendthrift trust for the sole purpose of “removing the trust’s assets from the marital assets that might be distributed to the beneficiary’s spouse in a divorce action.” Justice Gants did “not offer any prediction” regarding whether the SJC might find such a decanting against public policy, but noted, “if our legislature were to choose to enact its own decanting statute, I would urge it to consider the use of decanting presented in this case.”
Katie L. S. Von Kohorn, a partner at Casner & Edwards, specializes in trusts & estates and exempt organizations. Katie’s practice focuses on estate planning, estate and trust administration, charitable giving, and advising exempt organizations. www.casneredwards.com