One of the options possible for modifying an irrevocable trust is known as “decanting”…
Despite what the name suggests, it is possible to modify an irrevocable trust. One of the options is known as “decanting,” where the trustee transfers some or all of the principal and undistributed income of the trust to another trust for the benefit of the beneficiary.
What Is Decanting?
As the name suggests, when transferring assets to an irrevocable trust, the grantor relinquishes the right to amend or revoke the terms of the trust in exchange for certain legal and tax benefits. In contrast, a revocable trust allows the grantor to revoke it or change the terms at any time.
Family, financial, or legal circumstances can change after the execution of an irrevocable trust and may make the original terms of the trust less desirable to the settlor, trustees, or beneficiaries. In some cases, the cost and expense of subsequently amending the terms of a trust through court proceedings can be avoided through decanting.
In its most basic terms, decanting involves transferring some or all of the assets of one irrevocable trust to another. Reasons for decanting typically fall under one of two categories — administrative or dispositive. Administrative reasons for decanting may include changing trustees, clarifying a trust provision, and appointing a trust advisory committee. In contrast, dispositive changes involve changes to a beneficial interest, such as amending the distribution standard, changing the age attainment requirement, and adding or elimination current/remainder beneficiaries.
Decanting Under New Jersey Law
Generally, the trustee must have the authority to decant, either through the trust documents, a state decanting statute, or common law. In total, 29 states, including New York, have decanting statutes. While New Jersey is not one of them, decanting is still permissible in certain circumstances under the state’s common law.
In Wiedenmayer v. Johnson, 106 N.J. Super. 161 (App. Div. 1969), the Appellate Division held that a trustee had the authority to distribute the trust assets to a new trust on behalf of the beneficiary, while eliminating two contingent remainder beneficiaries. The irrevocable trust at issue was established by John Seward Johnson for the primary benefit of his son, John Seward Johnson Jr. The trust directed the trustees to pay to the son “so much of the net income in any year as the trustees in their absolute and uncontrolled discretion may deem to be for his best interests,” following his attainment of majority.
In approving the transaction, the Appellate Division concluded that the son’s “best interests” were not limited to a finding that distribution served his best “pecuniary” interests. “His best interests might be served without regard to his personal financial gain,” the court explained. “They may be served by the peace of mind, already much disturbed by matrimonial problems, divorce and the consequences thereof, which the new trust, rather than the old contingencies provided for in his father’s trust indenture, will engender.” The appeals court concluded that because the trustees’ decision was made in good faith, after consideration of all the facts and attendant circumstances, and for reasonably valid reasons, it should not intervene. As the court explained: “Courts may not substitute their opinions as to the son’s ‘best interests,’ as opposed to the opinion of the trustees vested by the creator of the trust with the ‘absolute and uncontrolled discretion to make that determination.”
Trustees have long relied on Wiedenmayer to support decanting. Unfortunately, the decision is not applicable to every situation. Most notably, it will generally not apply if a trustee isn’t governed by a best interest standard or lacks unfettered discretion to make distributions. In such cases, the alternatives to decanting include seeking to alter the terms of the trust via a judicial reformation or modification proceeding and changing the situs of the trust and its governing law to a state with a decanting statute.
If you have any questions or if you would like to discuss the matter further, please contact me, Jeff Pittard, or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.
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When Decanting Can be Used to Amend an Irrevocable Trust in New Jersey
Author: Scarinci Hollenbeck, LLC
One of the options possible for modifying an irrevocable trust is known as “decanting”…
Despite what the name suggests, it is possible to modify an irrevocable trust. One of the options is known as “decanting,” where the trustee transfers some or all of the principal and undistributed income of the trust to another trust for the benefit of the beneficiary.
What Is Decanting?
As the name suggests, when transferring assets to an irrevocable trust, the grantor relinquishes the right to amend or revoke the terms of the trust in exchange for certain legal and tax benefits. In contrast, a revocable trust allows the grantor to revoke it or change the terms at any time.
Family, financial, or legal circumstances can change after the execution of an irrevocable trust and may make the original terms of the trust less desirable to the settlor, trustees, or beneficiaries. In some cases, the cost and expense of subsequently amending the terms of a trust through court proceedings can be avoided through decanting.
In its most basic terms, decanting involves transferring some or all of the assets of one irrevocable trust to another. Reasons for decanting typically fall under one of two categories — administrative or dispositive. Administrative reasons for decanting may include changing trustees, clarifying a trust provision, and appointing a trust advisory committee. In contrast, dispositive changes involve changes to a beneficial interest, such as amending the distribution standard, changing the age attainment requirement, and adding or elimination current/remainder beneficiaries.
Decanting Under New Jersey Law
Generally, the trustee must have the authority to decant, either through the trust documents, a state decanting statute, or common law. In total, 29 states, including New York, have decanting statutes. While New Jersey is not one of them, decanting is still permissible in certain circumstances under the state’s common law.
In Wiedenmayer v. Johnson, 106 N.J. Super. 161 (App. Div. 1969), the Appellate Division held that a trustee had the authority to distribute the trust assets to a new trust on behalf of the beneficiary, while eliminating two contingent remainder beneficiaries. The irrevocable trust at issue was established by John Seward Johnson for the primary benefit of his son, John Seward Johnson Jr. The trust directed the trustees to pay to the son “so much of the net income in any year as the trustees in their absolute and uncontrolled discretion may deem to be for his best interests,” following his attainment of majority.
In approving the transaction, the Appellate Division concluded that the son’s “best interests” were not limited to a finding that distribution served his best “pecuniary” interests. “His best interests might be served without regard to his personal financial gain,” the court explained. “They may be served by the peace of mind, already much disturbed by matrimonial problems, divorce and the consequences thereof, which the new trust, rather than the old contingencies provided for in his father’s trust indenture, will engender.” The appeals court concluded that because the trustees’ decision was made in good faith, after consideration of all the facts and attendant circumstances, and for reasonably valid reasons, it should not intervene. As the court explained: “Courts may not substitute their opinions as to the son’s ‘best interests,’ as opposed to the opinion of the trustees vested by the creator of the trust with the ‘absolute and uncontrolled discretion to make that determination.”
Trustees have long relied on Wiedenmayer to support decanting. Unfortunately, the decision is not applicable to every situation. Most notably, it will generally not apply if a trustee isn’t governed by a best interest standard or lacks unfettered discretion to make distributions. In such cases, the alternatives to decanting include seeking to alter the terms of the trust via a judicial reformation or modification proceeding and changing the situs of the trust and its governing law to a state with a decanting statute.
If you have any questions or if you would like to discuss the matter further, please contact me, Jeff Pittard, or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.
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