The provisions of an irrevocable trust might not make as much sense today as they did years ago when the trust was created. Restrictions on the types of investment products a trustee can access that made sense years ago might be limiting the trustee’s ability to take advantage of new and profitable investment opportunities. The enactment of the California Uniform Trust Decanting Act offers a more streamlined method under which the terms of a trust can be altered.
Until the Uniform Trust Decanting Act became law on January 1, 2019, modification of the provisions of an irrevocable trust posed a procedural challenge for trustees. Unless the terms of a trust provided otherwise, a trustee who believed circumstances were such that modification would benefit a trust had to obtain the consent of the settlor and beneficiaries, and almost certainly obtain a court order approving the modification, regardless of consent.
The new law provides a procedure for a trustee to “modify” a trust through the creation of a new trust containing the modified provisions. This process allows for the terms of a trust to be updated to suit the current needs of the beneficiaries and the assets and does not require the slow, expensive and sometimes unnecessary additional step of seeking a court order to make changes that are not controversial. Once a notification process occurs, the assets from the old trust are “poured” or transferred into the new trust containing the modifications. There are, not surprisingly, limits the extent of the modifications permitted through decanting.
A trustee cannot exercise the decanting procedures of the Uniform Trust Decanting Act without first serving written notice to the following:
- Qualified beneficiaries
- Persons with presently exercisable powers of appointment
- Anyone having the right to remove or replace the trustee
- Trustees of both the old and new trusts
These requirements are outlined in Codified in California Probate Code Section 19507. Decanting must wait for at least 60 days after the notices have been served. The notice requirements become more complex when any of the qualified beneficiaries are minors and require the appointment of a guardian ad litem upon whom service can be made on behalf of the child.
Anyone upon whom notice of proposed trust decanting is service has the right to file a court proceeding to challenge it. The law provides that someone failing to challenge proposed decanting within 59 days of the notice loses their right to do so.
Compliance with the notice requirements of the new statute does not guarantee a trustee will not be subjected to liability claims upon exercising the decanting power. Even though 60 days passes between service of the required notices and the exercise of the power, the law permits court challenges grounded upon a failure of the trustee to fully comply with the procedural requirements of the law or because the exercise of the decanting power represented a breach of the trustee’s fiduciary duties or constituted a breach of discretion.
The new statute provides a procedure for trustees to minimize their risk of liability for exercising the decanting power. A decanting petition can be filed with the court asking it to determine in advance of the decanting if it is permitted under the trustee’s fiduciary duties. If the court determines that it is, a court order approving the decanting would be issued.
The Uniform Trust Decanting Act significantly changed the state’s Probate Code, so trustees, beneficiaries and others with questions or concerns about the application of the law should seek legal advice from a knowledgeable and skilled trust and estates attorney. The professionals at NM Law, APC, have more than fifty years of collective experience providing trusted advice and representation to trustees, settlors, beneficiaries and others with questions or concerns about California estate and trust laws. Contact NM Law, APC, by calling today at (949) 253-0000 to schedule an appointment.
Disclaimer: This article is intended to provide a general summary of laws in the State of California and should not be construed as a legal opinion nor a complete legal analysis of the subject matter. Noelle Minto is an attorney at NM Law, APC in Tustin, California, a law firm specializing in Trusts & Estates and Business Transactions.