In 2020, Nebraska’s legislative body, the Unicameral, introduced the Uniform Trust Decanting Act (Neb. Rev. Stat. §§30-4501 – 30-4529). This relatively new legislation offers solutions for those grappling with irrevocable trusts that have become cumbersome to administer.
What is Trust Decanting?
Trust decanting is a process that allows a trustee to transfer assets from an existing irrevocable trust (the "first trust") to a new trust (the "second trust"). The second trust can have different terms as long as certain requirements are met. Decanting becomes an option when the first trust proves ineffective, inapplicable, or unwieldy due to changes in circumstances or law. Some clients might be familiar with those hefty trust booklets that leave even lawyers and trustees puzzled. For such clients, trust decanting could be the ideal solution.
In this article, we'll explore the decanting process, delve into statutory guidelines, and discuss potential challenges to equip trustees with the necessary knowledge.
Procedure:
Under the Nebraska Trust Decanting Act, before a trustee can proceed with decanting, they must provide notice to all "qualified beneficiaries" of the first trust. Qualified beneficiaries include:
- Current beneficiaries – those presently entitled to distributions.
- First-line remainder beneficiaries – those entitled to distributions once the current beneficiary’s rights end.
- The settlor – the individual who established the first trust
Usually, this means both the current income recipient and those who will inherit the trust's remainder after the initial beneficiary's passing death.
The notice must include:
- A copy of the proposed second trust.
- A statement explaining the differences between the first trust and the proposed second trust.
- The decanting's proposed effective date.
- A statement that a qualified beneficiary has the right to object within 59 days of the notice.
If there are charitable beneficiaries, the trustee must also provide notice to the Nebraska Attorney General's office, which represents the public interest in charitable trusts. The notice should include the same information provided to the qualified beneficiaries.
Continuity Requirements Between First and Second Trust:
To comply with the Nebraska Trust Decanting Act, the second trust must have distribution provisions that are substantially similar to the first trust. This ensures that the beneficiaries' interests are protected, and the original purpose of the first trust is maintained. This does not mean that the distribution language needs to be a “copy and paste” from the first trust. Some changes in the terms of the second trust are allowed, as long as the distribution provisions remain consistent with the first trust.
A prime example is when a trust provides that a beneficiary may live for life in a home owned by the trust but does not expressly give the trustee the right to use the trust’s principal to pay the upkeep on the house. It may be appropriate to revise language in the second trust to clarify that the trustee may use trust principal to pay the taxes, maintenance, and insurance on a home owned by the trust.
Additionally, a second trust may not reduce the beneficiaries’ right to remove the trustee for breach of their fiduciary duty. Generally, the second trust may not change the trustee’s compensation, unless all beneficiaries agree in writing, or the court approves. Lastly, if the first trust expressly states that decanting is forbidden, then the trustee may not decant into a second trust.
Objections from Beneficiaries:
The beneficiaries have a right to object to the proposed decanting. If none of the qualified beneficiaries object to the proposed decanting within 60 days after notice is given, then trustee can proceed with the decanting. The second trust becomes effective on the date specified in the notice or, if no date was specified, on the day following the 60-day notice period.
If a qualified beneficiary does object, the trustee cannot proceed with the decanting without obtaining court approval. The court will consider whether the proposed decanting is in the best interest of the beneficiaries and whether it is consistent with the purposes of the first trust.
Conclusion
If you are the trustee of an overly burdensome and complex trust which has become difficult to manage, trust decanting may be a viable option for you. The estate planning attorneys at Carlson & Blakeman, LLP can help you decide whether trust decanting makes sense in your situation and can help guide you through the process. If you would like to learn more, give us a call at (402) 858-0996 or fill out our online contact form.