How to Decant to a Special Needs Trust

by Heidi Isenhart | Jul 22, 2019 | Blog, Estate Planning & Probate | 0 comments

In 2018, Florida revised the ability to more easily modify existing trusts.  Basically, now there are three separate ways that a trustee may engage in a decanting, a general term used to describe the trustee of an existing trust creating a new, second trust, and moving all assets of the old trust into the new trust.

1. A trustee may decant if they are given “absolute power” over distributions in the trust instrument. This method of decanting provides the most flexibility for all parties.

2. A trustee without “absolute power,” such as a distribution power limited by the ubiquitous health, education, maintenance and support, or “HEMs,” standard may decant. This method must comply with a more rigid standard.

3. A trustee may decant from any trust that does not qualify as a “supplemental needs trust” to a trust that does qualify as such. There are important limitations for this type of decanting as well. 

You can read more about the ways a trustee may decant a trust in our other article: Decanting Trusts In Florida.

New statutes in Florida for special needs trusts

The new statute provides that a trustee who has the power “to invade the principal of the first trust to make current distributions to or for the benefit of a beneficiary with a disability may instead exercise such power by appointing all or part of the principal of the first trust in favor of a trustee of a second trust that is a supplemental needs trust.”  A “beneficiary with a disability” is defined as “a beneficiary of the first trust who the authorized trustee believes may qualify for government benefits based on disability, regardless of whether the beneficiary currently receives those benefits or has been adjudicated incapacitated.”  A “supplemental needs trust” is defined as “a trust that the authorized trustee believes would not be considered a resource for purposes of determining whether the beneficiary who has a disability is eligible for government benefits.”  That provides a great deal of flexibility in the trustee being able to create a second trust that qualifies as a supplemental needs trust, however, there are requirements specific to this type of decanting.

There are many situations where decanting to create a supplemental needs trust will be desirable.  For example, what if mom and dad create a trust that is irrevocable after their death and this trust benefits their three children?  The trust lasts for the life of the beneficiaries and allows the trustee to distribute from income or principal to the beneficiaries for their health, education, maintenance, and support. 

If after the death of their parents, one of the children is involved in an accident or suffers a brain injury with permanent damage, then the terms of the trust will no longer be the best structure.  Through decanting, an authorized trustee could create a second trust that is a supplemental needs trust for the benefit of the child with the disability and move one-third of the first trust’s assets to it through decanting.  Another second trust could be created for only the other two children who have no disability (with all other terms being the same as the first trust) and two-thirds of the first trust’s assets moved to it through decanting.  After the decantings, the disabled beneficiary may qualify for government benefits because the first trust would have been “counted” as a resource while the second trust will not.  Additionally, the beneficial interests of the other children in their new trust are substantially the same as before the decantings occurred.

Questions to consider before decanting a special needs trust in Florida

When considering decanting in the context of special needs trusts, ask these initial questions:

• Is there a compelling reason to decant? (Will the exercise of the power further the purposes of the trust?) Perhaps the existing trust terms will prevent a beneficiary with a disability from qualifying for government benefits.

• Is the trustee an authorized trustee (not a settlor or beneficiary)?

• Does the trustee have the power to invade the principal of the trust?

• Is the beneficiary under a legal disability or does the trustee reasonably believe the beneficiary is incapacitated?

• Is the proposed supplemental needs trust one that the trustee believes would not be considered a resource for purposes of determining whether the beneficiary who has a disability is eligible for government benefits?

• Does the supplemental needs trust benefit the beneficiary with a disability?

• Is the second trust’s beneficial interest substantially similar to the beneficiary’s interest under the first trust? In other words, you cannot substantially change the interests of any beneficiary; the only exception being that the interests of the beneficiary with the disability need only qualify as a supplemental needs trust would normally provide and likely their interests will be changed very substantial in order to qualify.

• Are the beneficiaries of the second trust also beneficiaries of the first trust? In other words, you cannot add new beneficiaries.

If you have answered yes to any of the above questions and are interested in learning more about the expanded opportunities for fixing your special needs trust, please feel free to contact us.  

Decanting Trusts in Florida – When and How

by Daniel Harris | Jul 22, 2019 | Blog, Estate Planning & Probate | 0 comments

Is that irrevocable trust you created, or somebody created for your benefit, really set in stone? Prior to 2007, the answer would mostly be yes, but between 2007 and now, the answer became more complex.  Modifications without going to court are now more easily done, with certain limitations. One of the easiest methods of modifying an irrevocable trust is to use a doctrine called decanting. Decanting is a general term used to describe the trustee of an existing trust creating a new trust (also referred to as the “second trust”) and moving all assets of the old trust into the new trust. The result is that the old trust is terminated, and the new trust provisions govern use of the trust property.

A trustee may have various reasons to decant. It may be to convert a trust to a supplemental needs trust, to correct drafting mistakes, to make needed clarifications, or to adapt to changes in circumstances or in the law. Decanting can transform an irrevocable trust without the need for judicial modification. The catch with decanting, has always been that under prior Florida law, very few trusts contained the appropriate powers to allow a trustee to decant.

Florida has allowed decanting since 1940, but it was limited to a trustee who has the “absolute power” to invade the principal of the trust.  In other words, if the trustee has sole and absolute discretion regarding their distribution power over the principal of a trust and that discretion was not tied to any ascertainable standard (i.e. health, education, maintenance and support of the beneficiary), then that trustee has “absolute power.” Due to that limited framework, and changes in estate planning practice over the years, the number of trusts for which decanting was even possible was quite small.

The 2018 Florida decanting statute revision

However, in 2018, Florida revised the decanting statute in many significant ways. Now, there are three separate ways that a trustee may engage in a decanting:

1.  A trustee may still decant if they are given “absolute power” in the trust instrument. This method of decanting provides the most flexibility for all parties.
2. A trustee without “absolute power” may decant; such as a distribution power limited by the ubiquitous health, education, maintenance and support, or “HEMs,” standard. In this scenario, the trustee’s ability to have different provisions in the new trust will be limited, as discussed below.
3. A trustee may decant from a trust that does not qualify as a “supplemental needs trust” to a trust that does qualify as such. There are important limitations for this type of decanting as well. 

One very important concept for clients and attorneys to discuss is whether the client would be opposed to a future trustee engaging in decanting. Decanting is now a default power of all trustees.  If the client does not want changes made to their plan in the future, then the drafting attorney may include a broad prohibition against decanting to effectively prevent the trustee from being able to effectuate that type of transaction.

In order to exercise the decanting power, the trustee must be an “authorized trustee.”  Generally, that will be a trustee who is not the grantor of the trust or who is not also a beneficiary of the trust.  If decanting is something that the grantor would like available as an option to deal with the unknown future, but they will only be naming trustees who are also beneficiaries, then a power should be included to allow that trustee to appoint a special co-trustee to exercise the decanting power granted in the trust (or by Florida statute). 

What are the different types of decanting?

If a trustee may distribute trust property in any amount and at any time in that trustee’s sole discretion, then they have “absolute power.”  While there are limits on how the second trust may differ, the trustee has the broadest authority in this situation. They may divide up interests of multiple beneficiaries, add additional guidance on trust distributions, change trustee succession, and more. Thus, the trustee can change substantive and administrative provisions.

If a trustee does not have “absolute power” because, for instance, they may distribute only for a beneficiary’s health, education, maintenance and support, then the changes in the second trust are much more limited. The changes in this situation are more likely to be limited to administrative issues, i.e. trust succession, investment powers, etc.

A trustee who has the power “to invade the principal of the first trust to make current distributions to or for the benefit of a beneficiary with a disability may instead exercise such power by appointing all or part of the principal of the first trust in favor of a trustee of a second trust that is a supplemental needs trust.” That provides a great deal of flexibility in the trustee being able to create a second trust that qualifies as a supplemental needs trust (also called a “special needs trust”). However, there are requirements specific to this type of decanting which you can learn more about in another article we wrote: How to Decant to a Special Needs Trust.

It is important to note, the exercise of the decanting power may not: (i) increase the authorized trustee’s compensation beyond the compensation specified in the first trust instrument or (ii) relieve the authorized trustee from liability for breach of trust or provide for indemnification of the authorized trustee for any liability or claim to a greater extent than the first trust instrument.  However, the exercise of the power may divide and reallocate fiduciary powers among fiduciaries and relieve a fiduciary from liability for an act or failure to act of another fiduciary as otherwise allowed under law or common law. 

Also, there are many other important tax considerations when it comes to decanting and it is important to ensure you are receiving the appropriate level of advice for this sophisticated area of trust and tax law.  First, the topic of decanting is on the “no rule” list for the IRS.  This means that it is not possible to request a private letter ruling and receive the IRS’s stamp of approval before engaging in a decanting.  Further, there are many tax traps for the unwary and each situation is unique, requiring special attention to tax issues.

Considerations before decanting in Florida

1. The “absolute power” requirement in the prior statute is no longer a strict absolute requirement. Even if the trustee’s powers to invade principal are limited to an ascertainable standard, the power to decant can still exist.
2. Although the new statute requires that a beneficiary be disabled to decant into a supplemental needs trust, decanting does not depend upon whether the beneficiary is currently eligible for government benefits or has been adjudicated incapacitated. Rather, a trustee must believe that the beneficiary may qualify for governmental benefits based on his/her disability or the trustee reasonably believes the beneficiary is incapacitated.
3. While decanting rules have expanded, the notification rules have become stricter. There is a 60-day written notice requirement and the statute carefully outlines who must be notified of a trustee’s intent to decant and what documentation must be sent and received to satisfy its requirements. It does allow for a written waiver of the notice period to shorten the time frame to allow the trustee to act immediately. It is important to note that the 60-day notice require does not limit the right of any beneficiary to object.

In conclusion, Florida has greatly expanded the opportunities for a trustee to decant a problem trust.  The decanting process should include the trustee consulting with competent legal and tax advisors as well as the beneficiaries and interested parties to ensure the outcome is beneficial to all parties and complies with the law.  If you are a trustee of beneficiary and would like to know more about your options with decanting, please feel free to contact us.