Do Trustees Have a Duty to Consider Decanting?

Massachusetts’ highest court recently held that the trustees of an irrevocable trust could decant the trust property to a new trust even though, at the time of the decanting, the beneficiary, who was going through a divorce, had the current right to withdraw 75 percent of the trust property. The trustees, apparently on their own initiative, may have protected the trust property from the beneficiary’s divorcing spouse.

Ferri v. Powell-Ferri, 476 Mass. 651 (2017), will interest trustees and practitioners who work with clients concerned about their loved ones’ potential future creditors, including divorcing spouses. Although Ferri was decided under Massachusetts law, it will undoubtedly be a reference point for courts in other jurisdictions, especially those jurisdictions that don’t have any statutes regarding decanting, because it’s one of a small number of reported cases regarding decanting. 

The Decanting

Ferri involved a Massachusetts irrevocable trust (the 1983 trust) for the benefit of Paul John Ferri, Jr. In 2010, Paul's wife, Nancy Powell-Ferri filed for divorce in Connecticut. In 2011, the trustees of the 1983 trust decanted the trust’s assets to a new trust formed by them (the 2011 trust) without informing Paul and without his consent.

At the time of the decanting, Paul had the right to withdraw 75 percent of the assets of the 1983 trust. Paul had no withdrawal rights over the property of the 2011 trust, so the trustees effectively took away his presently exercisable withdrawal rights.

Trustees Go to Court

Following the decanting, an action was brought in a Connecticut trial court. The trustees submitted an affidavit from the grantor of the 1983 trust stating that he’d intended to give the trustees the power to take “any action necessary” to protect the trust assets. The trial court struck the affidavit on Nancy’s motion.

The trial court eventually ruled against the trustees and ordered, among other remedies, the restoration of 75 percent of the assets to the 1983 trust. The case was transferred to the Connecticut Supreme Court on appeal.

Trustees Can Decant

The Connecticut Supreme Court certified the following questions to the Massachusetts Supreme Judicial Court (SJC):

• “Under Massachusetts law, did the terms of the [1983 Trust] … empower its trustees to [decant] substantially all of its assets . . . to the [2011 Trust]?”
• “Under Massachusetts law, should a court, in interpreting whether the 1983 Trust’s settlor intended to permit decanting to another trust, consider an affidavit of the settlor … offered to establish what he intended when he created the 1983 Trust?”

The SJC answered “yes” to both questions. (The court didn’t answer an additional question given its other answers.)

In reaching its decision, the SJC examined the “extremely broad discretion” granted to the trustees of the 1983 trust, the trust’s anti-alienation provision, Paul’s withdrawal rights and the settlor’s affidavit.

Trustees’ discretion. The SJC reiterated its position, originally stated in Morse v. Kraft, 466 Mass. 92 (2013), that “a trustee’s decanting authority turns on the facts of each case and the terms of the instrument that establishes the trust.” Nevertheless, the court compared the terms of the 1983 trust with those of the trust in Morse. The court observed that the 1983 trust granted its trustees “far more expansive discretion to act than even the broad discretion we recognized in Morse.”

Anti-alienation provision. The SJC found that the anti-alienation provision in the 1983 trust didn’t preclude the trustees from decanting. Indeed, it evidenced “the settlor’s intent to protect the trust income and principal from invasion by the beneficiary’s creditors.”

Withdrawal rights. The court determined that Paul’s withdrawal rights weren’t inconsistent with the trustees’ decanting power. The SJC noted that the trustees of the 1983 trust continued to have powers and duties with respect to the property that Paul could withdraw. To conclude otherwise would be to negate the trustees’ role.

Note, however, that in an concurrence, three of the justices raised a public policy concern. They emphasized that the SJC didn’t decide “whether Massachusetts law will permit trustees in Massachusetts to create a new spendthrift trust and decant to it all of the assets from an existing non-spendthrift trust where the sole purpose of the transfer is to remove the trust’s assets from the marital assets that might be distributed to the beneficiary’s spouse in a divorce action.”

Affidavit. The court found that there was a genuine ambiguity in the 1983 trust instrument regarding the trustees’ ability to decant, because the trust neither expressly authorized nor prohibited decanting. Because the trust was ambiguous, the court concluded that the settlor’s affidavit should be considered.

Lessons Learned

Trustees and estate planning attorneys can take several lessons from this case:

• This decision creates an opportunity, and possibly a dilemma, for the trustee of a trust with a divorcing beneficiary who has withdrawal rights.
  • On the one hand, the decision suggests that the trustee may have an affirmative duty to protect the trust assets by decanting. The decision explicitly refers to the trustee’s “duty to decant if the trustee deemed decanting to be in the beneficiary’s best interest.” This duty may apply in other creditor protection situations.
  • On the other hand, the concurrence in Ferri puts trustees on warning that a decanting in these circumstances may be against public policy.
• It appears that property subject to a beneficiary’s withdrawal right has an appreciably greater degree of protection from the beneficiary’s creditors than property held outright by the beneficiary.
  • Attorneys may wish to counsel trust beneficiaries to refrain from exercising withdrawal rights to maintain at least some level of creditor protection.
  • If a client is considering establishing a trust that would require an outright distribution to a beneficiary at a certain age, the client instead may wish to consider granting the beneficiary a withdrawal right instead.
  • Of course, a fully discretionary trust that grants no withdrawal rights offers even better protection.
• When a trust instrument neither expressly permits nor expressly prohibits decanting (or another fiduciary power), an affidavit from a settlor can play an important role in a court’s construction of the trust instrument.