8-Jun-21
Trust Decanting Power: Use Your Own Built-in Provision
Take-Away: A trust can be decanted pursuant to Michigan’s two decanting statutes. However a trust instrument can have its own built-in decanting provision.
Background: As we have covered in the past, in 2012 Michigan adopted two separate trust decanting statutes that give to the trustee the authority to decant trust assets to a new trust.
- Administrative Changes: The Michigan Trust Code contains a provision that authorizes a trustee to decant trust assets to a second trust in order to make administrative changes to the trust instrument. [MCL 700.7820a).] Five conditions must exist before a trust can be decanted under this statute. (i) The trust must be irrevocable; (ii) the terms of the trust must not prohibit a decanting; (iii) the trust must have a discretionary trust provision (defined in MCL 700.7103(d); (iv) the decanting to the second trust cannot materially change the beneficial interests of the first trust; and (v) the decanting cannot be inconsistent with any tax benefit associated with the first trust, e.g. marital deduction. Notice must be given 63 days prior to the trustee exercising the decanting power.
- Beneficial Interest Changes: The Michigan Powers of Appointment Act permits a trust decanting to alter the beneficial interests of the trust beneficiaries, so long as the beneficiaries of the second trust include only permissible appointees, even if fewer than all permissible appointees, of the first trust are the beneficiaries of the second trust. The conditions and limitations under this statute to implement a trust decanting to change beneficial rights are even more rigorous than under the Michigan Trust Code.
- Built-in Decanting Power Authorized: The Michigan Trust Code expressly authorizes a trust’s own built-in decanting power, [MCL 700.7820a(9)] as does the Michigan Power of Appointment Act [MCL 556.115a(7).] In effect, these authorizations acknowledge that the conditions and limitations under the Michigan decanting statutes can be avoided, or strengthened, with a trust’s own built-in decanting power, which is in effect a common law decanting power.
Built-in Decanting Power: If a trust is intended to serve as a dynasty-type of irrevocable trust, i.e. one that is intended to serve multiple generations of beneficiaries, then a built-in decanting provision should be seriously considered, even though Michigan’s Trust Code and Powers of Appointment Act specifically permit a trustee’s decanting via the enactment of the state statutes, but subject to the conditions and limitations those two statutes impose. Such a built-in decanting provision gives the trustee the needed flexibility to administer the trust. Moreover, the situs of the trust could be moved in a long-duration trust over several generations to another jurisdiction that does not authorize any decanting of a trust. Accordingly, having specific language in the trust instrument itself allows the trustee to exercise the decanting authority under the terms of the trust instrument rather than rely on local law, in order to avoid its limitations, conditions, and required notice to beneficiaries, to effect a trustee’s decanting of trust assets to a second trust.
Example: An example of a trustee’s built-in decanting authorization follows:
‘Subject to the provisions of this Trust which relate to the distribution trust director (if any) with regard to any trust created by or pursuant to this Trust of which the trustee possesses the power to invade the principal of the trust to make distributions to or for the benefit of one or more persons (‘the First Trust’), the trustee may instead exercise the power by appointing all or part of the principal of the First Trust subject to the power in favor of the trustee of another trust (the “Second Trust’) provided that the beneficiaries of the Second Trust must also be one or more of the beneficiaries of the First Trust. The Second Trust may have dispositive and/or administrative provisions that differ from the First Trust. The trustee must obtain the written consent of the distribution trust director (if any) prior to the exercise of the trust decanting power conferred under this section.’
Conclusion: As individuals contemplate making large lifetime gifts to irrevocable trusts in order to use their remaining gift tax applicable exemption amount and their generation skipping transfer tax exemption, before they are reduced (either by Congress, or on January 1, 2026) they should consider including their own built-in decanting authorization to provide additional flexibility in the administration of the trust, without many of the conditions or notice requirements of Michigan’s decanting statutes.