by Joseph Fried
Unlike a fine wine, a trust agreement does not necessarily improve over time. In fact, the opposite is often true. For one thing, considering ever-changing tax laws, an outdated trust agreement may lack crucial tax provisions. Furthermore, a trust’s provisions may need to be amended or modified for non-tax related reasons, such as updating beneficiaries or including asset protection clauses.
While revocable trusts, true to their name, allow for modification, irrevocable trusts (also aptly named) do not. Until now, this has posed a disadvantage in Maryland for outdated irrevocable trusts, which had no clear, statutorily prescribed, path to modification. That is about to change.
What is the Maryland Trust Decanting Act?
Maryland has enacted the Maryland Trust Decanting Act (“the Act”), which is going into effect Oct. 1, 2023. Consequently, Maryland trusts, like wine, may now be “decanted.” The Commonwealth of Virginia and more than 25 other states already have decanting laws. Decanting a wine is the act of pouring the wine from its current bottle to another vessel, to remove any sediments from the wine, as well as to aerate it to improve its taste. Similarly, trust decanting is “pouring” the assets from a first trust (the trust being decanted) into a second trust, to remove any outdated provisions and to add updated clauses to improve the trust.
Maryland Law before the Act?
Before the Act, in Maryland there were common law (non-statutory) methods to modify an irrevocable trust. Moreover, Maryland law recognized that the terms of a trust’s agreement generally prevail, as long as the terms do not contradict a prohibition in the Maryland Trust Act. The Maryland Trust Act is silent as to the ability to decant an irrevocable trust, so some attorneys included terms allowing decanting in Maryland trust agreements under the theory that the Maryland Trust Act would allow those terms to prevail even though there was not a Maryland statute which expressly authorized it. Now, with the Act, there is a Maryland statute which authorizes decanting, and common law methods no longer must be used to decant trusts.
Some important features of the Act:
- It applies to trusts that have their principal place of administration in Maryland (including those whose administration has been moved to Maryland from another jurisdiction).
- The Act does not apply to a trust held solely for charitable purposes.
- The Act does not impose a duty on an “Authorized Fiduciary” (defined in the Act as Trustee, or other fiduciary, who has discretion to distribute the principal of the first trust) to exercise the decanting power.
- The Act expressly states that trust agreements may specifically restrict or prohibit the exercise of the decanting power, in which case the Authorized Fiduciary may not exercise the decanting power provided by the Act. However, a general prohibition in a trust agreement against amending or revoking a trust is not sufficient to restrict or prohibit decanting.
- An Authorized Fiduciary may exercise the decanting power without having to first obtain the consent of a court or any person, but the Authorized Fiduciary must give notice of any intended exercise of the decanting power at least 60 days before exercising it to the following:
- Each living settlor of the first trust;
- Each qualified beneficiary of the first trust and the Attorney General, if the Attorney General has the rights of a qualified beneficiary (i.e., if the first trust contains a determinable charitable interest, which is defined as a charitable interest that is a right to a mandatory distribution currently, periodically, on the occurrence of a specified event, or passage of specified time, and that is unconditional or will be held solely for charitable purposes);
- Each holder of a presently exercisable power of appointment;
- Each person with a right to remove or replace the Authorized Fiduciary; and
- Any other fiduciary of the first or second trust.
- Any exercise of the decanting power must be written, signed by an Authorized Fiduciary, and specify (1) the first trust, (2) the second trust, (3) any property being distributed to a second trust, and (4) any property remaining in the first trust after the decanting to the second trust.
- If an Authorized Fiduciary only has power over a certain portion of the first trust’s property, the Authorized Fiduciary may only exercise the decanting power over that portion of the property.
- If a first trust contains charitable provisions, the second trust may not:
- Diminish the charitable provisions or the interests of a charity named in the first trust, or
- Alter any charitable purpose, condition or restriction stated in the first trust.
- A second trust may not relieve an Authorized Fiduciary from liability for breach of trust to a greater extent than the first trust.
The Maryland Trust Decanting Act is a progressive legal development granting Authorized Fiduciaries the ability to modernize outdated irrevocable trusts in Maryland. Decanting a trust allows flexibility to respond to the changing desires of trust grantors and to the evolving needs of the beneficiaries, by incorporating tax law advantages, enhancing flexibility, and allowing a host of other adjustments. However, a trust decanting under the Act must comply with the procedures outlined in the Act, so we recommend that an experienced Estates & Trusts attorney should be consulted to assist in a successful decanting.