Decanting Assets of an Irrevocable Trust in Minnesota

In common usage, decanting refers to pouring the contents of one container into another vessel. In the Minnesota Trust Code revisions that took effect 2016, trust decanting has an analogous meaning. It refers to moving assets from one irrevocable trust to another irrevocable trust. For trustees and beneficiaries, the complex trust decanting provisions create a new legal landscape to navigate, as well as the potential for trust litigation relating to a trustee’s actions in decanting assets of an irrevocable trust.

Trust disputes are a core part of my litigation practice at Dave Burns Law Office, LLC. In this article, I provide an informational overview of the trust decanting provisions in Minnesota law. If you are a trustee or beneficiary with questions about these provisions and their impact on a specific situation, you should discuss your concerns with an experienced trust law or trust litigation attorney.

Trust Decanting Provisions in Minnesota Law

Adopted as part of the Trust Code revisions in 2016, Section 502.851 of the Minnesota Statutes addresses Trust Decanting. The section establishes rules for and limitations on exercise of a trustee’s decanting power.

Under the statutory provisions, the power to invade trust principal to decant assets is considered exercise of a special power of appointment by a trustee. That is the reason for inclusion of the new section under Powers of Appointment in Chapter 502 rather than in Chapter 501C, which contains the primary provisions of the Minnesota Trust Code.

Before enactment of the trust decanting provisions, the legal remedy available to the trustee of an irrevocable trust that became unworkable or obsolete was to request the court for modification or reformation of the terms of the trust. Section 502.851 now may provide the trustee of an irrevocable trust with an alternative course of action. However, the complex statutory framework for decanting assets requires a trustee to use caution and care in exercising the power to decant.

Section 502.851 includes a number of definitions that apply specifically to the section. Trust decanting involves moving assets from an original irrevocable trust, defined as the invaded trust in the statute, to a new irrevocable trust that receives the decanted assets, defined as the appointed trust. The section provides that the power to decant is valid to the extent authorized by the original trust instrument. Consistent with the standards that apply generally to trustee conduct, the fiduciary duty standard applies to decanting assets of an irrevocable trust.

The law distinguishes between trustees with unlimited discretion and those without unlimited discretion. The extent of the power to decant differs for the two categories of trustees. The law defines unlimited discretion as the “unlimited power to distribute principal.” The definition specifically states that use of words like “best interests, welfare, comfort, or happiness” are not limitations on the power to distribute principal. The language of the original trust instrument determines the nature of a trustee’s authority.

Procedure For Decanting Assets of an Irrevocable Trust

Subdivision 11 of the statute establishes specific procedures for exercising the trust decanting power. They include the requirement for a written instrument evidencing the transfer of assets.

The trustee must deliver the written document, along with copies of the invaded trust and appointed trust, to persons interested in the original trust and persons with the right to remove or replace the trustee. Consent of the grantor or approval by a court is not required, but a trustee may request court approval. The trustee requesting court approval must comply with specific notification requirements.

Any person entitled to notice may object to exercise of the power. If a person objects, the trustee or any person entitled to notice may petition the court for a ruling on whether the power can be performed as proposed, modified, or denied.

In a court proceeding, a person objecting to exercise of the power has the burden of proof as to whether decanting should not be performed. Any person entitled to notice also may petition the court to have the decanting performed. In that event, the person requesting performance has the burden of proof as to whether it should be performed.

Limitations on a Trustee’s Power to Decant

Subdivision 15 of the law articulates a number of prohibitions that limit a trustee’s decanting authority. The limitations forbid a trustee from decanting assets if the action:

• Reduces, limits, or modifies the current right of a beneficiary to receive a mandatory distribution or to withdraw from the trust, with an exception relating to supplemental needs trusts
• Decreases or indemnifies against a trustee’s liability or exonerates a trustee from liability for failure to exercise reasonable care, diligence, and prudence
• Alters or eliminates a provision relating to removal or replacement of the trustee, with a limited exception
• Makes a binding and conclusive fixation of the value of a trust asset
• Extends the term of the appointed trust and trustee beyond specified limitations
• Jeopardizes specified tax benefits under the Internal Revenue Code, including those relating to income, gift, estate, and generation‐skipping taxes

Litigation Relating to Irrevocable Trust Decanting

The detailed, precisely written provisions in Section 502.851 provide the framework for the trustee of an irrevocable trust to exercise the power of decanting in appropriate circumstances. As explained above, the statute also gives interested persons (as defined in the law) the right to initiate a court challenge to the trustee’s exercise of the power or advocate in support of the trustee’s proposed decanting.

Any court action relating to a trust dispute or authority of a trustee involves complex provisions of Minnesota law as well as technical procedural rules. Representation by an experienced trust litigation attorney is absolutely essential for all parties in such actions. In some cases, a court has authority under Minnesota law to award attorney’s fees to parties in trust litigation.

Schedule a Consultation With a Minnesota Trust Litigation Lawyer

At the Dave Burns Law Office, a focus of my practice is trust disputes and probate litigation, including claims relating to a trustee’s exercise of the decanting power. I work with trustees, trust beneficiaries, and others with an interest in a trust.

If you wish to discuss a concern that may require trust litigation, please contact me at (612) 677-8351 or by emailing dave@daveburnslaw.com. I work with clients throughout the Twin Cities metro area and am available to meet with clients in both Minneapolis and St. Paul. I welcome inquiries from clients and referring attorneys throughout the State of Minnesota.