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general / Estate Planning

A brief overview of the California Uniform Trust Decanting Act

Bratt jenny web

Jenny Hill Bratt

Partner, Withersworldwide

Email: jenny.bratt@withersworldwide.com

Swafford catherine web

Catherine M. Swafford

Associate, Withersworldwide

Email: catherine.swafford@withersworldwide.com

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The California Uniform Trust Decanting Act became effective Jan. 1, 2019, and is located in Probate Code Sections 19501 et seq. It is long and complex, adding 28 new sections to the Probate Code. This article is intended to provide practitioners with a brief overview of the procedural and potential litigation aspects of the Decanting Act.

APPLICABILITY OF THE DECANTING ACT

The Decanting Act applies to trusts created before, on or after Jan. 1, 2019, that have their principal place of administration in California, or provide they are governed by California law for administration or construction. Prob. Code Section 19505(a), (b). The Decanting Act applies to irrevocable trusts, and trusts that are revocable by the settlor only with the consent of the trustee or an adverse party. Prob. Code Section 19503(a).

PROCEDURE FOR DECANTING

When modifying a trust, practitioners must obtain the consent of the settlor and beneficiaries, and in many circumstances, a court order. In contrast, the trustee can decant without approval by the settlor, beneficiaries or court. Prob. Code Section 19507(b). The trustee must follow the specific steps in Probate Code Section 19507 by serving notice of the proposed decanting exercise, and exercising the decanting power in writing.

Notice of the Proposed Decanting Exercise

Not later than 60 days before exercising the decanting power, the trustee shall give written notice to the settlors, qualified beneficiaries, holders of presently exercisable powers of appointment, persons who currently have the right to remove or replace the trustee, each trustee of the first and second trust, and the attorney general with respect to charitable interests. Prob. Code Sections 19507(c)(1)-(7).

For qualified beneficiaries who are minors, or unborn or unascertained persons, the trustee must give notice to a guardian ad litem. Prob. Code Section 19507(d). For persons who the trustee knows, or has reason to know, are substantially unable to manage their financial resources or resist fraud or undue influence, the trustee must give notice to that person, and to an individual appointed to act on that person's behalf, such as an agent. Prob. Code Section 19507(e). If no person is appointed, the trustee must file a petition seeking the appointment of such individual, or a guardian ad litem. Id.

In other probate proceedings, many courts require a party to file an underlying petition for relief before filing a second petition to appoint a guardian ad litem. This causes the parties to incur unnecessary legal fees, and results in delays, extra filings, and unnecessary hearings.

Recognizing this problem, Probate Code Section 19507, subdivisions (d) and (e), expressly allow the courts to appoint a guardian ad litem where the only matter before the court is the guardian ad litem's appointment in a decanting matter. Therefore, where a guardian ad litem is needed to receive notice and represent the interests of minors, unborn or unascertained persons, and persons unable to manage their own financial resources or resist fraud and undue influence, the trustee does not need to file an underlying decanting petition. Prob. Code Sections 19507(d)-19507(e). The trustee can proceed by filing only the petition to appoint a guardian ad litem, and thereafter conduct the decanting exercise outside of court.

Contents of the Notice

Written notice of the proposed decanting exercise must contain a description of the manner in which the trustee intends to exercise the decanting power, the reason for the decanting exercise, and an explanation of the differences between the first and second trust instruments. Prob. Code Section 19507(g)(1). The notice must include the proposed effective date of the decanting exercise, and copies of the first and second trusts. Prob. Code Sections 19507(g)(2)-19507(g)(4). Finally, the notice must include a warning, set out in a separate paragraph in not less than 10-point bold type font, stating: "If you do not bring a court action to contest the proposed trust decanting (the proposed changes to the trust) within 59 days of this notice, you will lose your right to contest the decanting." Prob. Code Section 19507(g)(5).

Exercise of the Decanting Power

Upon expiration of the notice period, the trustee shall exercise the decanting power in a signed writing. Prob. Code Section 19510. This writing must identify the first trust and second trust or trusts, and describe the property being distributed to the second trust or trusts, as well as the property remaining in the first trust, if any. Id.

DECANTING PETITIONS

Are Trustees Protected From Litigation?

Even though the bold warning notice described in Probate Code Section 19507, subdivision (g)(5), states that a person receiving notice will lose his or her right to contest the decanting exercise if he or she fails to timely bring a court action, subdivision (i) of Section 19507 suggests the person receiving notice has the continued ability to bring an action against the trustee.

Probate Code Section 19507, subdivision (i), provides: "The receipt of notice, waiver of the notice period, or expiration of the notice period does not affect the right of a person to file an application under Section 19509 that asserts either of the following: (1) An attempted exercise of the decanting power is ineffective because it did not comply with this part or was an abuse of discretion or breach of fiduciary duty. (2) Section 19522 applies to the exercise of the decanting."

Therefore, if the trustee is concerned the decanting could give rise to liability, it may be advisable to file a decanting petition. The trustee could also file a petition for instructions or approval under Probate Code Section 17200. Prob. Code Section 19529.

Decanting Petitions

There are numerous grounds for filing a decanting petition under Probate Code Section 19509, including to (i) instruct the trustee whether a proposed decanting exercise is permitted and consistent with his or her fiduciary duties; (ii) appoint a special fiduciary and authorize the special fiduciary to determine whether the decanting power should be exercised, and if so to exercise the decanting power; (iii) approve of an exercise of the decanting power; (iv) determine that a proposed or attempted decanting exercise is ineffective because it would be or was an abuse of discretion or a breach of fiduciary duty; (v) determine the extent to which Probate Code Section 19522 applies to a prior decanting exercise; (vi) instruct the trustee regarding the application of Section 19522; or (vii) determine that a proposed or attempted decanting exercise is ineffective because after applying Section 19522 the proposed or attempted exercise does not or did not comply with the Decanting Act. Prob. Code Sections 19509(a)(1)-(6). Additionally, a petition may be filed for any other relief to carry out the purposes of the Decanting Act. Prob. Code Section 19509(a)(7).

As the case law evolves, a key issue will be determination of the settlor's intent, i.e., would the settlor want the trust decanted? The settlor of the first trust is deemed to be the settlor of the second trust. Prob. Code Section 19525(a). In determining the settlor's intent with respect to the second trust, the court may consider the intent of the settlor of the first trust, the settlor of the second trust, and the trustee. Prob. Code Section 19525(b). Courts will also likely look to the Comment to Section 4 of the Uniform Trust Decanting Act, which provides the decanting exercise "must be in accordance with the purposes of the first trust," and the purpose of the decanting "is not to disregard the settlor's intent but to modify the trust to better effectuate the settlor's broader purposes or the settlor's probable intent if the settlor had anticipated the circumstances in place at the time of the decanting."

FINAL THOUGHTS

The Decanting Act is a significant development in California probate law and provides a great alternative to traditional trust modifications. When considering modifying an irrevocable trust, practitioners should now consider decanting. As discussed above, the scope of this article is limited to an overview of the procedural and potential litigation aspects of the Decanting Act. The Decanting Act contains detailed provisions regarding the circumstances as to when and how a trustee may decant and such provisions require meticulous review prior to advising a trustee on the ability to decant.

#448

Ben Armistead


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