Decanting Trusts in Colorado

Working with trustees and beneficiaries who find themselves in changed circumstances can present very difficult roadblocks in the administration of a trust. It is tempting (and justified) to bemoan the fact that Colorado has yet to put a decanting statute into place. With some creative problem solving, though, it may be possible to achieve the same result that a decanting statute offers.

Decanting, in trust terms, means distributing trust property to another trust using the trustee’s discretionary authority to make distributions to or for the benefit of a beneficiary. In the absence of a Colorado statute allowing decanting, it is arguable that common law principles provide authority for decanting or the terms of the trust agreement may expressly authorize a trustee to decant trust property to another trust. Trustees may wish to decant to achieve a variety of tax or nontax results or to address changes in state law. Consider these scenarios:

• There is a change in circumstances surrounding property. An irrevocable trust agreement created twenty years ago requires that the trust hold certain property, but now, because of a change in the property, it is in the best interest of the beneficiary for the trust to sell the
property. Ideally, the trustee could decant the trust assets into a new trust that does not limit trustee investments.

• There is a change in the beneficiary’s circumstances. A grandparent creates an irrevocable trust for the benefit of a grandchild, with rights of withdrawal upon the grandchild attaining certain ages. As a young adult, the grandchild begins presenting signs of mental illness and makes irrational decisions when handling money. Ideally, a trustee would have the authority to decant the trust assets into a new trust that allows discretionary distributions, but no mandatory payout.

• A beneficiary becomes disabled. A beneficiary becomes disabled after the trust becomes irrevocable. The trustee may want to create a special needs trust to protect the trust assets and allow the beneficiary to make use of means-tested public benefits. Decanting
can be a useful tool in structuring this new trust.

• There is a change in tax law. An irrevocable trust created years ago relies on outdated tax concepts and frustrates the true intent of the grantor. Decanting may help maximize the transfer of wealth.

In many states, the common law principle of the power of appointment serves as the principal basis for a trustee’s decanting authority and many states view their decanting statues as a codification of the common law principle, but it might not withstand the scrutiny of a tax audit or a lawsuit initiated by a disgruntled beneficiary.

Without a decanting statute, it would be ideal for the trust to contain a provision allowing a nonfiduciary (e.g., a trust protector acting in a non-fiduciary capacity) to exercise a special power of appointment to appoint the trust’s asset to another trust.1 Some trust instruments may give a non-fiduciary this power, but if the trust instrument does not provide such a power, the trustee may need to get creative, as Colorado does not have a decanting statute in place. In 2009, the Statutory Revisions Subcommittee of the Colorado Bar Association Trust & Estate Section considered whether to recommend that the Colorado General Assembly amend the Colorado Probate Code to provide trustees with the power to distribute trust assets in further trust.

While a prudent fiduciary may be reluctant to begin decanting based on common law principles alone, there may be another way to achieve the same result. It may be more practical to look at the language of the existing trust. Often, trusts contain language allowing trustees to distribute assets “to or for the benefit of” the beneficiary. Using a literal interpretation of this language, the trustee should be able to distribute assets in further trust for a beneficiary, thereby accomplishing the same result as would be authorized by a decanting statute. We recently worked with a beneficiary to do just this – distribute part of a special needs trust with restrictive provisions, with Court approval, to a new special needs trust with less restrictive provisions. There can be complex income, estate, gift and GST tax issues involved. For example, decanting a trust with life insurance or appreciated investment assets may require an analysis of the grantor trust rules. The IRS has suspended private letter ruling requests regarding GST issues. We have consulted with trustees and provided creative approaches to shifting trust assets from one trust to another, even without the benefit of having a decanting statute. We have also provided co-counsel to many Colorado beneficiaries and Grantors who may be involved in creating a trust to be administered in states that do have decanting statutes.  

1 CR.S. §15‐2‐102 (1) provides:  A power of appointment is any power other than a power held in a fiduciary capacity created or reserved by any person, institution, or corporation having property subject to its disposal, enabling itself or another to designate, within such limits as it shall prescribe, the appointees of the property or of any right, interest, or estate therein or the shares in which it shall be received. A power of appointment shall include all powers which are in substance and effect powers of appointment regardless of the language used in creating them. (Emphasis added.)