The following is part of a series of posts on 2013 Texas probate, guardianship and trust law legislation. The changes became effective September 1, 2013. For information on other changes, go to the 2013 Legislation page.
The modernization and liberalization of Texas trust law that began with enactment of the two UPIAs (the Uniform Prudent Investor Act and Uniform Principal and Income Act) in 2003 continued in 2013 with enactment of Texas’s first default decanting statute. New Subchapter D of Chapter 112 of the Trust Code (Sections 112.071 – 112.087) permits a trustee to distribute trust principal “in further trust” in some cases.
Several states have preceded Texas in permitting trustees to move property from one trust to another even if the first trust does not expressly authorize the move. Since it is always better to use an obscure word when one is available rather than a word that is easy to understand, these statutes are known as “decanting” statutes. They permit the trustee to “decant” (pour) principal from one trust into another if the conditions stated in the statute are met.
Trustees have used decanting statutes in other states to fix problems in irrevocable trusts. For example, the trustee of a trust with archaic administrative provisions may use the statute to move trust property into a new trust with modern administrative provisions. Of course, it is not always clear that the problem is a “problem” at all, nor that the settlor of the trust would want it to be “fixed” in this way.
Under prior law, there was no default statutory decanting provision that applied if the trust instrument was silent, but the settlor could provide for decanting in the trust instrument. Under the new law, the settlor may expressly provide for decanting or expressly prohibit decanting. If the trust instrument is silent, then the new decanting rules apply.
The Texas statute distinguishes between “full discretion trusts” and “limited discretion trusts.” In a full discretion trust, the trustee’s power to distribute is not limited in any manner. In limited discretion trusts, the power to distribute is limited in some way. HEMS trusts – trusts permitting the trustee to distribute property for the beneficiary’s health, education, maintenance and support – are “limited discretion trusts” under the Texas statutes.
Under the decanting statute, the trustee may distribute principal from a full discretion trust to another trust for the benefit of one or more of the current beneficiaries of the first trust. Also, the trustee may give a wholly discretionary beneficiary a broad power of appointment. The justification for these actions is that, if the trustee could distribute the entire principal to a beneficiary, the trustee ought to be able to make that distribution in further trust with new rules for a beneficiary.
In order to decant from a limited discretion trust, the current beneficiaries of both trusts must be the same, the successor and remainder beneficiaries of both trusts must be the same, and the distribution standard of both trusts must be the same. Due to these limitations, it is likely that the decanting power in limited discretion trusts will be useful only for administrative changes.
When decanting, the trustee must act in good faith, in accordance with the terms and purposes of the trust and in the interests of the beneficiaries. In no case is the trustee deemed to have a duty to decant. The power to decant is reduced to the extent it would cause any intended tax benefits to be lost.
The trustee may not use decanting to take away a beneficiary’s mandatory distribution right, materially impair the rights of any beneficiary, materially lessen the trustee’s fiduciary duty, decrease the trustee’s liability or exonerate the trustee, or eliminate another person’s power to remove the trustee.
Significantly, the trustee may not modify the applicable rule against perpetuities period, “unless expressly permitted by the terms of the first trust.” This eliminates one of the key reasons why a trustee may wish to decant. Still, this gives Texas estate planning attorneys a drafting tip: in appropriate cases, include language in the trust instrument making it clear that the perpetuities period may be modified by decanting. In most cases, there is very little downside to doing this, since most clients have not given a lot of thought to the vested remainder beneficiary rights of their unborn remote descendants when they create trusts.
The trustee must give 30 days’ written notice to current beneficiaries and presumptive remainder beneficiaries. If a charity is a beneficiary, the notice also must be given to the attorney general. If no one objects during the 30-day notice period, the trustee may decant without judicial approval, although the trustee may seek judicial approval if desired. If a beneficiary other than the attorney general objects, the trustee may seek judicial approval but is not required to do so. If the attorney general objects, the trustee must seek judicial approval before decanting.
The trustee may not decant without judicial approval solely to change the trustee compensation provisions. However, the trustee may change compensation provisions without judicial approval if the change is in conjunction with other changes for which there are valid reasons, so long as the change does not provide for unreasonable compensation under Texas law.
Except as otherwise provided in the trust instrument, the decanting provisions apply to trusts existing or created on or after September 1, 2013. Interestingly, the effective date provision states that the Legislature intends the decanting provisions “to be a codification of the common law of this state in effect before the effective date of this Act.” The Legislature does not get to say what the law was before it enacts a statute, but this is an attempt to bolster the argument that there already existed a common law power to decant in Texas.