The Colorado legislature recently passed the Colorado Uniform Trust Decanting Act (the “Act”). The Act, which went into effect on August 10, 2016, allows a trustee to reform an irrevocable trust document to ensure that the trust fulfills the original intent of the person who created the trust.
The term “decanting” means the pouring of assets from one trust to another. The Act applies to irrevocable trusts that are not held solely for charitable purposes. Colo. Rev. Stat. § 15-16-903. This means that a trustee can create a new trust (with new terms) funded by the assets of an existing irrevocable trust to correct or accommodate changes in circumstances.
Without the use of decanting, it is difficult and expensive to modify the terms of an irrevocable trust because the process usually involves petitioning a Court for permission to modify the trust. Now, trustees in Colorado can use decanting to create a new trust for the benefit of the same beneficiaries without court approval, so long as the exercise complies with certain formalities and restrictions.
These restrictions require the trustee to provide notice to the beneficiaries at least sixty-three days prior to decanting, and the notice must include the manner and date for the exercise of the power, as well as a copy of the first and second trusts. Colo. Rev. Stat. § 15-16-907. Additionally, a trustee cannot decant a trust to benefit personally. Colo. Rev. Stat. § 15-16-916.
Trustees may use decanting to correct drafting errors, to deal with changes in applicable law, to alter administrative provisions, or for tax planning purposes. However, if a trustee uses decanting in a way that leads to adverse tax consequences, the trustee may be personally exposed to potential liability and costly litigation. Therefore, trustees must exercise this power with great caution and with the advice of an experienced trust attorney.
A trustee’s use of decanting must also be consistent with his or her fiduciary duties under the trust document and Colorado law. The trustee does not, however, have a duty to exercise the decanting power or to inform beneficiaries of its applicability. Colo. Rev. Stat. § 15-16-904. If a trustee wants to make sure that a decision to decant an irrevocable trust is consistent with his or her fiduciary duties, he or she can apply to the court for instructions as to whether decanting the trust is appropriate. Colo. Rev. Stat. § 15-16-909.
The new legislation is complex, but decanting can serve as a powerful estate planning tool. Talk to one of our attorneys if you have questions about the effect of this law on your trust.