Presenting a live 90-minute webinar with interactive Q&A Trust Decanting: Flexibility and Danger Achieving Tax Benefits, Revising Fiduciary Powers, and Mitigating Trustee Liability TUESDAY, OCTOBER 2, 2012 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: James P . Spica, Member, Dickinson Wright , Detroit Meryl G. Finkelstein, Sr. Counsel, Fulbright & Jaworski , New York Thomas R. Pulsifer, Partner, Morris Nichol Arsht & Tunnell , Wilmington, Del. Todd A. Flubacher, Partner, Morris Nichols Arsht & Tunnell , Wilmington, Del. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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S TRAFFORD P UBLICATIONS W EBINAR Trust Decanting: Flexibility and Danger Thursday, October 2, 1:00-2:30 PM (EDT) T HE U SES AND B ENEFITS OF D ECANTING AND D ECANTING ’ S C ONCEPTUAL B ASIS IN THE C OMMON L AW James P. Spica Dickinson Wright PLLC Detroit 313-223-3090 jspica@dickinsonwright.com
6 T HE U SE OF ‘D ECANTING ’: A L OOSE M ETAPHOR FIDUCIARY AND NON - FIDUCIARY POWERS OF APPOINTMENT By ‘Trust Decanting,’ we generally mean the exercise of a fiduciary, special power of appointment to distribute assets from one trust to another This use of the term is under- determined by the metaphor on which it’s based The analogy to pouring spirits from one vessel to another is apt enough, but there’s no analogue in the decanting of spirits to our narrow reference to fiduciary powers: oenophiles know that one doesn’t need a sommelier to decant wine; and similarly, in the right circumstances, a beneficial , special power of appointment may be as good as a fiduciary one for moving assets from one trust to another
7 T HE U SE OF ‘D ECANTING ’: A L OOSE M ETAPHOR POWERS OF APPOINTMENT BY ANY OTHER NAME There are also powers of appointment we’re not in the habit of calling powers of appointment that can be used to move assets from one trust to another, or to achieve practically equivalent effects. These include: • powers of substitution (of the kind regularly used to attract “grantor trust” status), • powers of amendment, • powers of revocation or termination and • disclaimers
8 T HE U SE OF ‘D ECANTING ’: A L OOSE M ETAPHOR POWERS TO DO THINGS OTHER THAN APPOINT And there are means of effectively “moving” assets from one trust to another that have nothing to do with powers of appointment (nor, indeed, with the movement of assets), including: • reformation or modification proceedings and • trust mergers
9 T HE U SES OF D ECANTING TO DECANT ( ASSUMING ONE CAN ) OR NOT TO DECANT Whether “decanting” (in its narrow, if metaphorically under -determined sense) is a better means of “moving” trust assets than • a beneficiary’s, special power appointment, • a power of substitution, • a power of amendment, revocation or termination, • a disclaimer • a reformation or modification proceeding or • a merger of trusts will often depend on one’s particular motivations, on why exactly one wishes that the trust terms governing the assets in question were different
10 T HE U SES OF D ECANTING COMMON MOTIVATIONS Common motivations for decanting include wishes: • to correct drafting errors or revise accurately rendered, but ill-advised provisions, e.g., a hobbling tax or perpetuities saving clause • to enhance administration, e.g., by bifurcating fiduciary functions so as to protect a less sophisticated, but integral trustee from investment responsibility • to address unanticipated circumstances concerning a beneficiary’s creditors, marital status, wealth or health, e.g., by creating a supplemental needs trust so as to allow a beneficiary to qualify for public assistance • to change a trust’s vintage so as to put the beneficiaries’ interests in the way of prospective legislative innovations, e.g., perpetuities reform
11 T HE U SES OF D ECANTING COMMON MOTIVATIONS ( CONTINUED ) • to change situs or governing law • to supplement inadequate trustee provisions, e.g., by distinguishing the administrative powers of interested and disinterested trustees • to engineer income tax consequences, e.g., by granting the settlor a power that‘ll trigger grantor trust status, or by spinning off capital loss assets for sale by a separate trust that can promptly be terminated in distributions to beneficiaries who have capital gains • to increase the longevity of transfer tax advantages, e.g., by tying the termination of a trust “grandfathered” under Treasury’s GST tax effective date regulations to the durations of extraneous measuring lives or by evading perpetuities constraints all together for trust assets to which GST exemption has been allocated
12 T HE B ENEFITS OF D ECANTING COMPARING ALTERNATIVE MEANS As the common motivations we’ve described fairly suggest, one’s reasons for wishing that particular trust terms governing particular assets were different will often implicate possible alternative means of achieving preferable results The point is that in many cases, decanting may be superior to other means at hand; and that, in any case, one has to compare the relevant alternatives
13 T HE B ENEFITS OF D ECANTING ILLUSTRATION 1: DECANTING VS . EXERCISE OF A BENEFICIAL POWER WHEN THE NEW TRUST WILL GRANT POWERS OF APPOINTMENT As between the use of a fiduciary, special power of appointment (i.e., “decanting”) and a nonfiduciary one (i.e., a trust beneficiary’s power), for example, one has always to reflect that the nonfiduciary power may implicate the so- called “Delaware tax trap,” IRC section 2041(a)(3) and its gift tax counterpart, IRC section 2514(d); whereas the legislative history of these sections indicates that the “trap” wasn’t intended to apply to purely fiduciary powers of appointment, such as a trustee’s discretionary power to invade principal See S. R EP . No. 82-382, at 1 (1951), as reprinted in 1951 U.S.C.C.A.N. 1535, 1535
14 T HE B ENEFITS OF D ECANTING ILLUSTRATION 2: DECANTING VS . MERGER WHEN THE MERGER STATUTE REQUIRES SEGREGATION Another example is the case of longevity planning for tax advantaged trust assets when the goal is to subject beneficial interests in the assets to a more favorable perpetuities regime In that case, use of a special power of appointment, whether a fiduciary power (i.e., “decanting”) or a nonfiduciary one (i.e., a trust beneficiary’s power), may be superior to merger of the existing trust―or a part of the existing trust, following a strategic trust division―with a new trust that qualifies for the desiderated perpetuities treatment if the applicable merger statute requires post-merger segregation of distinct perpetuities parcels Under the Michigan Trust Code’s merger provision, for example, the merger of a trust that’s subject to the Michigan USRAP with a trust to which the Personal Property Trust Perpetuities Act applies may well not subject the assets of the earlier trust to the reformed perpetuities regime See M ICH . C OMP . L AWS A NN . § 700.7417(2) (“[i]f the rule against perpetuities speaks from different dates with reference to the trusts . . . .”)
15 T HE B ENEFITS OF D ECANTING ILLUSTRATION 3: DECANTING VS . CONSENSUAL MODIFICATION OF A TRUST “ GRANDFATHERED ” FROM GST TAX Another example is the case of longevity planning for “grandfathered” status under the Treasury’s GST tax effective date regulations In this case, perpetuity isn’t in point, because the effective date regulations subject the tax advantage of grandfathered status to a RAP of their very own, one that’s completely independent of state law See Treas. Reg. §§ 26.2601-1(b)(1)(v)(B) (nonfiduciary, special powers of appointment); 26.2601-1(b)(4)(i)(A) (fiduciary, special powers)
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