Fall 2013: Amending an Irrevocable Trust?

Irrevocable trusts are often used as a tool to remove assets from the a taxable estate, and preserve tax benefits for the trust beneficiaries. Although the grantor of an irrevocable trust may retain some ability to remove or replace trustees or amend administrative provisions of the trust, there is generally no ability to modify the dispositive provisions of the trust.

So what happens when an irrevocable trust no longer “works” for the beneficiaries, whether due to unforeseen changes in the law or circumstances of which the grantor could not have foreseen?  This is where a process called decanting is useful.  Decanting is a process by which the assets of one trust are transferred to a new trust that serves the same beneficiaries and purpose of the original trust.

Although many practitioners would argue that decanting has always been available under common law, Massachusetts has no statute in place to provide trustees with the ability to do so. The recent case of Morse v. Kraft brought by the Kraft family, settles the question of whether decanting is an available option to trustees in Massachusetts.  Prior to the decision in Kraft, a trustee who made the decision to decant a trust did so at the peril of losing the tax benefits available in the original trust.

In 1982 Bob and Myra Kraft created an irrevocable trust and four subtrusts for the benefit of their four sons. In 2012, the sole trustee of the subtrusts was nearing retirement and desired to transfer the assets of the four subtrusts to new substrusts, established in accordance with the terms of a new master trust for the benefit of the Kraft sons. Under the new trusts, each of the Kraft sons would serve as trustee of his own trust for the benefit of himself and his children – a direct contradiction to the terms of the 1982 trust.

While the Court acknowledged that each of the Kraft sons were all well qualified to manage the assets in his subtrust, the trustee argued that the decanting would only benefit the Kraft sons from a financial perspective if the transfer would not cause the property or distributions to be subject to the generation skipping transfer tax, which depended, in relevant part, on whether the terms of the original trust authorized distributions to the new trusts without the consent or approval of any beneficiary or court.

Ultimately the Court decided that the language of the 1982 trust, which provided the trustee with unlimited discretion to make outright distributions to and for the benefit of the Kraft sons, also allowed him to make outright distributions in further trusts (i.e. decanting was allowed).

Determining whether decanting is an available option for an irrevocable trust is dependent upon the provisions of the original trust and should be carefully reviewed by counsel prior to decanting in order to preserve the tax benefits of the trust.