Winter 2019 Gavel Gavel Winter 2019 - Page 14

A Brief Overview of North Dakota’s New Trust Decanting Statute By Thaddeus E. Swanson On March 21, 2017, the North Dakota Legislative Assembly enacted N.D.C.C. Ch. 59-16.1, which allows a trustee to decant a North Dakota-created trust.1 North Dakota now joins 25 other states that have enacted this procedure.2 “Decanting” is traditionally defined as “[t]o pour (a liquid) from one receptacle into another.”3 Similarly, trust decanting involves “the distribution of trust property to another trust pursuant to the trustee’s discretionary authority to make distributions to, or for the benefit of, one or more beneficiaries.”4 Trust decanting may be accomplished by operation of common law,5 express authority in the trust agreement itself, or by state statute.6 Under Chapter 59-16.1, a North Dakota trustee, in its discretion, is now permitted by statute to appoint part or all of the trust principal of an invaded trust7 to a second trust, called an “appointed trust,”8 for the benefit of one, all, or less than all beneficiaries.9 Section 59-16.1-12 sets forth a procedure for the trustee to execute this power, as well as a mechanism for a beneficiary or other interested person to lodge an objection to the trustee’s exercise of the power. North Dakota law provides two sets of rules for decanting: first, when the trustee has unlimited discretion, 10 and second, where the trustee does not have unlimited discretion. 11 Section 59-16.1-04 grants a trustee with unlimited discretion authority to appoint all or part of the trust principal of an invaded trust to an appointed trust. 12 The trustee is authorized to make such appointment for one, more than one, or all of the current beneficiaries and exclude one or more of the same. 13 The trustee is further authorized to name any or no successor or remainder beneficiaries of the appointed trust. 14 The statute does not consider the words “best interests,” “welfare,” “comfort,” or “happiness” to be a limitation on the trustee’s power to distribute principal. 15 In contrast, a trustee without unlimited discretion may appoint part or all of a trust’s principal to the trustee of an appointed trust, so long as the current and successor or remainder beneficiaries of both the invaded trust and the appointed trust are the same. 16 Decanting often stems from a desire to make changes in an otherwise irrevocable trust. 17 Generally, irrevocable trusts are created for three primary reasons: to purchase life insurance, for charitable giving, and for gifting property to family members. 18 An irrevocable trust, as the name suggests, is “often viewed as not capable of being modified or terminated after the grantor’s death in light of their ‘irrevocability.’” 19 A common reason for decanting is to modify the terms of an irrevocable trust due to changed circumstances. 20 Commentators have indicated a list of reasons a trustee may find a need to decant, e.g., correction of a drafting mistake or combining trusts for efficient management. 21 A trustee’s discretion, even when broadly granted by the governing instrument, is not without limits. North Dakota’s trust decanting statute places restrictions on a trustee’s power to decant. 22 There are four main limitations on the trustee’s power under Chapter 59-16.1 of which trustees, practitioners, and advisors may wish to take note. First, a trustee may not reduce, limit, or modify a beneficiary’s present right to mandatory distributions, mandatory annuities, or unitrust interest or a current right to withdraw a percentage of the value of the trust or a specific dollar amount. 23 Second, a trustee may not decrease its liability or exonerate itself from liability for failure to exercise reasonable care, diligence, and prudence. 24 Third, a trustee may not alter or eliminate a provision granting another the right to remove or replace the trustee. 25 Finally, a trustee, for all practical purposes, may not change provisions regarding its compensation as trustee or receive compensation for decanting a trust. 26 Trustees and practitioners should also be aware the issue of whether the exercise of the special power of appointment in a decanting situation is done so in a fiduciary or non- fiduciary capacity remains unsettled. 27 With the recent enactment of Ch. 59-16.1, North Dakota trusts and estates practitioners, as well as trustees, have at their disposal another tool to adapt to changing circumstances in the administration of trusts. Thaddeus E. Swanson is an associate attorney at the Nilles Law Firm where he practices in the areas of estate planning, probate, and general business and corporate law. He is a graduate of the University of North Dakota School of Law and North Dakota State University. 14 THE GAVEL