Massachusetts’ highest court has held that if an irrevocable and unamendable trust gives the trustee the right, in its sole judgment, to pay any amount directly to one or more beneficiaries or to use any amount to indirectly benefit one or more beneficiaries (for example, paying a beneficiary’s rent), then that allows the trustee to transfer trust assets to a completely new trust to benefit at least some of the beneficiaries. The creator of the new trust may be the trustee, himself; or a beneficiary; or anyone else; and the trustee of the new trust does not have to be the trustee of the old trust. Also, the trustee is not required to seek court approval or the consent of the trust beneficiaries or the trust creator.
This kind of action is sometimes called “decanting” trust assets from one trust to another trust. The case is Morse v. Kraft, 466 Mass. 92 (July 29, 2013).
In Morse the new trust’s language did not change the beneficiaries, nor did it change the extent of the benefits. However, it is not clear from the court’s decision whether, as a matter of law, new trusts must provide the same benefits to the same beneficiaries as the old trusts or, instead, whether new trusts may limit the class of beneficiaries or change the nature or amounts of benefits.
Also in Morse, the court was impressed that both the old and new trusts were created by the same individual, and that the creator of the trusts, his lawyer, and the trustee of the original trust all submitted affidavits that the creator had intended that the original trust allow the trustee to transfer trust assets into new trusts in the future. However, the court’s opinion does not require that these same conditions be met in future instances of transferring trust assets into new trusts.
Why Is Morse Important? – Some trusts are written to be irrevocable and unchangeable as soon as they are signed. (Life insurance trusts, and some supplemental need trusts, are examples). But, most irrevocable trusts start out as “living trusts” – revocable and changeable by the trust’s creator while the creator remains alive. These “living trusts” typically become irrevocable and unchangeable when the trust creator dies. People who want to leave assets for their spouses, children, and other descendants commonly start out with “living trusts” which, at death, become irrevocable and unchangeable. Now, after Morse, for trusts that give the trustee broad discretion to make payments to beneficiaries or to indirectly benefit beneficiaries, it’s possible for trustees after the trust creator’s death – and without having to obtain permission from the court or from anyone else – to undo at least some of the plans that the trust creator had written into the original trust document. The implications of Morse for these kinds of trusts are potentially earth shifting.
Where does this leave everyone?
With a lot more thinking and decision making to do.
Creators of trusts that give trustees broad discretion to make payments to beneficiaries or to indirectly benefit beneficiaries – even creators of garden variety “living trusts” that contain such broad discretion – may now want to consider whether to expressly prohibit trustee transfers into new trusts; or, permit only certain kinds of transfers; or permit trustee transfers into new trusts in general with the hope that the trustee will exercise sound judgment and “do the right thing”.
The matter is made more complicated because the court did not make clear whether, or to what extent, “new” trusts may reduce the class of trust beneficiaries, change the benefits, change whether or how the trustee of the new trust is compensated, change the terms by which the trustee of the new trust may be removed, change the standards for holding a trustee to have violated his fiduciary duties, change the governing law – or, indeed, many other matters that go into designing a trust.
Also, it appears that the court’s ruling applies not just to irrevocable and unamendable trusts created after the decision in Morse, but, also, applies to already existing trusts that give their trustees broad discretion to make payments directly to beneficiaries or to indirectly benefit beneficiaries.
For example, many existing irrevocable and unamendable life insurance trusts have been written to give trustees very broad discretion to make payments directly to beneficiaries or to indirectly benefit the beneficiaries. It is unlikely that when such trusts were written – perhaps decades ago – anyone gave much thought to “decanting” because, until the Morse case, decanting was not part of Massachusetts trustees’ tool bag. But, after Morse, these trusts would seem to be exposed to decanting in the trustees’ discretion. The trust creator may be long dead and gone, or mentally incompetent, but decanting in the trustee’s discretion, into a trust the creator never imagined, may now be possible.
Another example – existing revocable and amendable “living trusts” whose creators are still alive but which are intended to benefit the creators’ spouses and descendants after the creators’ deaths. If an existing revocable and amendable living trust gives the trustee broad discretion, after the creator’s death, to make payments directly to beneficiaries or to indirectly benefit beneficiaries, should the creator who is still alive and mentally capable now execute a trust amendment, or at least a written statement, to make clear the creator’s intentions as to decanting after his or her death – even if, as is likely, the creator never gave decanting a thought when the trust was signed?
Looked at a bit differently, the court also seems to be saying that the burden of bringing a decanting to the attention of the courts will now fall on trust beneficiaries who oppose what the trustee wants to do, rather than on the trustee’s first seeking court permission; and, with that change, the burden of proof as to whether what the trustee is doing violates the trustee’s fiduciary obligations may also shift from the trustee to the trust beneficiaries. These shifts make a difference, since it is often economically difficult, and intellectually and emotionally intimidating, for beneficiaries to take the initiative and bring a dispute into court; and the change in burden of proof tilts the playing field in favor of the trustee who wants to make the change.
From a more philosophical perspective, Morse illustrates one of the problems of having courts make sweeping policy. A court must deal with the case before it, and the court is usually ill equipped to identify problems and create solutions for problems that lie outside the facts of the particular case. Legislatures are the better institutions for doing this. The Morse court recognized this by inviting the Massachusetts legislature to enact a statute (legislature-made law) that addresses the complexities created by the court’s decision. Certainly, the legislature is better equipped than the court to take on the task. Whether the legislature will actually do so – and will do a good job of it – remains to be seen.
This Article is intended only to provide generalized information. It is not intended to provide information or advice with respect to specific situations. To address real life, specific situations you should obtain appropriate professional assistance.
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