Risks of Trust Decantings

Take-Away: A trustee may be exposed to removal and ordered to reimburse the trust for fees and legal expenses incurred in a trust decanting that went awry.

Background: In the past we have covered Michigan’s two trust decanting statutes. MCL 700.7820a permits changes primarily to a trust’s administrative provisions. A limited opportunity also exists to modify through a decanting a trust’s beneficial provisions under MCL 556.115a. Since both statutes are relatively new there is, so far, only one Michigan court case that addresses the trustee’s power to decant, addressing MCL 700.7820a. In re Lakeside Trust No1, Michigan Court of Appeals, No. 351047, October 15, 2020. However, additional insights can be gained from looking at trust decanting decisions from other states.

New Hampshire: Previously we covered a New Hampshire Supreme Court decision that set-aside a trustees’ decision to decant non-grantor trusts at the behest of that trusts’ settlor, which effectively disinherited trust beneficiaries, i.e. the second trust(s) removed some beneficiaries from the existing trusts. In Hodges v. Johnson (I) , 177 A.3d 86 (2017) the New Hampshire Supreme Court affirmed the reversal of a series of decantings of several non-grantor trusts created by the settlor. The Court concluded that the trustees had decanted the several trusts at the settlor’s direction when the settlor became upset with some of the trust beneficiaries. The Court at that time also affirmed the removal of the trustees who carried out those trust decantings because the trustees had not treated the trust beneficiaries impartially. However, in its decision, the Court did not address the question of whether the former trustees would be entitled to reimbursement of the fees and expenses that they incurred in their unsuccessful defense of their decision to decant the several trusts.

Hodges v Johnson (II) 2020 WL 5648573 (N.H. 2020): When the case returned to the trial court, the former trustees filed a motion for reimbursement of their attorneys’ fees and costs that they had incurred for their appeal which they had paid for personally. The successor (newly appointed) trustee objected, and asked the trial court to direct the former trustees to repay the fees and costs for defending the decantings at trial which had been borne by the trusts. The trial judge denied the former trustees’ request for reimbursement and granted the motion of the successor trustee to compel that the trusts be reimbursed by the former trustees. Those two decisions were sustained by the New Hampshire Supreme Court.

• Reimbursement: New Hampshire’s trust law on reimbursement from a trust is similar to Michigan’s, in that it is based upon the Uniform Trust Code. [See MCL 700.7709.] That provision provides that a trustee is entitled to reimbursement from trust property for expenses that were properly incurred in the administration of the trust. The former trustees argued that the expense of defending the decantings were properly incurred because they had to defend the interests of the beneficiaries who were benefited by the trust decantings.  The Court rejected this argument noting that there would have been no conflict between the two groups of trust beneficiaries had the former trustees not violated their fiduciary duty by decanting trust assets to eliminate the interests of the disfavored beneficiaries.  In effect, the Court found that there was no fiduciary duty to defend the former trustees’ own ‘serious misconduct.’
• ‘No Law’ Argument: The former trustees also argued that since there is virtually ‘no law’ on the propriety of a trustee exercising a decanting power, the fees they incurred to defend the decantings were properly incurred. The Court rejected this argument, too. The Court noted that in the absence of established law on the need or authority to decant trust assets, the former trustees should have petitioned the probate court for directions. It noted that a trustee can commit a breach of trust by violating a duty because of a mistake concerning the proper exercise of the trustee’s powers under the law, relying on Restatement (Third) of Trusts, sections 71 and 88 for this conclusion.
• Attorney’s Fees: The Court sustained the trial judge’s order that the former trustees repay the fees and costs related to the former trustees’ defense of the trust decantings, relying on Uniform Trust Code section 1004, which creates an exception to the “American Rule” that otherwise makes each party to a legal proceeding responsible for that party’s own attorneys fees. That Code statute allows a court in a proceeding involving a trust to award ‘costs and expenses, including reasonable attorneys fees’ to any party to be paid by another party or by the trust as ‘justice and equity may require.’ [See MCL 700.7904(1), which provides, in part:  “In a proceeding involving the administration of a trust, the court, as justice and equity require, may award costs and expenses, including reasonable attorney fees, to any party who enhances, preserves, or protects trust property, to be paid from the trust that is the subject of the proceedings…..(3) A court may reduce or deny a trustee’s claim for compensation, expense or disbursements with respect to a breach of trust. ]

Conclusion: The practical ‘message’ from these two Hodges v Johnson decisions is that a trustee needs to be careful in using the new concept of a trust decanting, which is relatively new to probate judges. While decantings of discretionary trusts has arguably been around for the better part of a century at common law, the appearance of statutorily authorized decantings is relatively new phenomenon we are only now beginning to rely on. If there is any doubt as to a proposed decanting, specifically  with regard to the terms of the proposed new trust, a trustee should seek instructions from the probate court before proceeding with the decanting. Perhaps even more important is the ‘message’ from these cases with regard to the former trustees’ breach of trust in their attempt to alter irrevocable trusts to conform to the settlor’s changed views with regard to the trust beneficiaries. Many settlors, while acknowledging that the trust that they created is irrevocable, still expect the trustee to ‘dance to their tune.’ A trustee acts at its peril when it tries to give the settlor what the settlor’s hindsight decides is a ‘better’ distribution plan rather than adhering to the terms of the trust the settlor actually created.