Decanting & Fiduciary Risk: Just Because You Can, Does Not Mean You Should

November 2022 • Nevada Lawyer

Decanting

& Fiduciary Risk:

Decanting

& Fiduciary Risk:

Just Because You Can,

Does Not Mean You Should

Just Because You Can,

Does Not Mean You Should

Decanting a bottle of wine is designed to make a good bottle better. The same is true when

decanting a trust. Nevada is a leading jurisdiction for decanting trusts to produce a more effective

trust with its broad and powerful decanting statute.

But despite the broad authority and benets,

there are risks to the duciaries who decant. The concerns are often directed at tax issues, but

with duciary litigation on the rise, trustees around the country are facing increased challenge

at the state level from beneciaries, grantors, creditors, and other duciaries.

15 Tips to Minimize Fiduciary Risk for A Successful Trust Decanting

Accordingly, the following tools

seek to mitigate duciary risk when

contemplating a trust decanting.

1. Identify Decanting

Objectives: Decanting is one,

but not the only, tool to update or

modify terms of a trust. Before

decanting, identify the problem

to be solved, and consider the

decanting option as well as other

options such as reformation,

modication, revocation, merger,

and use of available powers

of appointment. Decanting is

undertaken by a trustee subject

to duciary risks while other

techniques may be available to

accomplish the objective without

the same level of duciary risk.

For example, there may be a

non-duciary trust protector who

can act to accomplish the end

goal without the same duciary

obligations.

2. Review the Trust Instrument:

Start with a thorough review of

the trust instrument for authority

and limits. Trust instruments may

specically authorize, restrict,

or prohibit decanting, and may

contain statements of the grantor’s

intent that limit the scope of what

can be accomplished through

decanting. Restrictions and

grantor intent can be buried in a

variety of places within the trust

instrument and, accordingly, the

instrument should be reviewed in

its entirety.

BY MICHAELLE D. RAFFERTY, ESQ.

CONTINUED ON PAGE 11

November 2022 • Nevada Lawyer

3. Trust Validity: In order to be

decanted, the trust must be a

valid irrevocable trust. Trustees

must identify the governing law

determining issues of validity

and construction. While Nevada

counsel may be able to assist, if

validity will be determined by

the law of another jurisdiction,

the trustee may need to seek

the opinion of counsel in the

applicable jurisdiction to conrm

validity.

4. Conrm Distribution

Authority: Decanting is

premised on the trustee having

broad discretion to distribute

principal and/or income to a

beneciary. Accordingly, if the

trustee lacks discretion, decanting

may not work (i.e., consider

a Qualied Terminal Interest

Property [QTIP] Trust as to

mandatory income). Where a

trustee’s discretion will arise in

the future (i.e., upon occurrence

of an event), the trustee should be

cautious. Anticipatorily decanting

is not prohibited under Nevada

law but may not be eective until

the discretionary power vests.

5. Importance of Form and

Substance: Decanting is one

technique where the “form” of

the decanting is just as important

as the “substance” of the

action. Form and timing are not

irrelevant.

For example, it may

be necessary to relocate the trust

situs to Nevada before utilizing

Nevada’s decanting statute.

Merely appointing a Nevada

trustee may be insucient where

the trust instrument is inexible

and contains notice requirements

before a change in trustee, situs,

and place of administration is

eective. Sucient time should

be provided to avoid inadvertent

mistakes in the process.

6. Acting on the Advice of

Counsel: Decanting can be

a collaborative process. It is

not uncommon for counsel for

one or more of the grantors,

beneciaries, resigning trustee,

or trust protector to prepare

draft instruments necessary for

the decanting. Regardless of the

drafter, the trustee should consider

obtaining advice of counsel for

its own compliance. Relying on

the good advice of others may

be sucient to conrm legalities

of the process, but the trustee

will not have the ability to claim

reliance on such counsel due to

lack of privity. Where one lawyer

is representing various parties

including the trustee, evaluation

of engagement terms, conicts of

interest, and obtaining waivers

may be appropriate to conrm

representation.

7. Tax Implications: Decanting a

trust may trigger income, estate,

and gift tax implications. For

example, the original trust may be

exempt from generation-skipping

taxes, may be a non-grantor trust

for income tax purposes, and may

involve gift tax implications due

to negotiated modications and

consents. Accordingly, trustees

should consult with qualied

tax advisors before decanting.

In some circumstances, it may

be appropriate to seek (or oer

to seek) an advance ruling from

the Internal Revenue Service

prior to decanting. Although this

request can delay the decanting

process and increase costs, it

can also provide a shield for the

trustee and beneciaries to avoid

unintended consequences. Even

where a tax ruling is not sought,

documenting the evaluation

of tax issues can be important

should a challenge later arise.

8. Notice of Proposed Action:

Nevada does not require a trustee

to issue a Notice of Proposed

Action (NPA) to decant. Issuing

an NPA may not be appropriate

in all cases, and the decision rests

with the trustee. For example,

a silent trust that mandates

condentiality may indicate the

grantor’s intent was to forego

such notices. But a NPA can be

a trustee’s best friend due to the

release from personal liability it

provides.

When notice is coupled

with disclosure of the new trust

terms, identication of risks and

rewards, and tax implications, the

NPA can signicantly eliminate or

minimize duciary risk. NPAs can

also facilitate discussions between

the trustee and beneciaries.

9. Grantor Participation:

Involving a living grantor can

be helpful. Grantors add insight

through extrinsic evidence and

can coordinate communications

with beneciaries. But use

caution. A grantor may have a

self-serving memory. Further,

taxing authorities may view the

grantor’s involvement as an act

of control in violation of Section

2036 of the Internal Revenue

Code of 1986, as amended.

10. Identifying Interested

Persons: The Doctrine of

Virtual Representation is codied

under Section 164.038 of the

Nevada Revised Statutes and

allows a beneciary to represent

those who would subsequently

take after the beneciary. This

provision can eliminate the

need for guardian ad litem

for minors or unborn and can

signicantly reduce the time and

cost. Nevertheless, if a decanting

provides a benet that places

the beneciary in a conict with

subsequent beneciaries, then

virtual representation will not

work. Trustees should evaluate

whether all beneciaries and

benecial classes are represented

for NPA and Non-Judicial

Settlement Agreement (NJSA)

purposes.

11. Non-Judicial Settlement

Agreements: Nevada

recognizes the ability of

indispensable parties to enter a

NJSA as part of the decanting

process.

A NJSA can be used to

modify a trust so long as it does

not violate the grantor’s intent,

and so long as the court could

take that same action. Coupling

a decanting with an NPA and

NJSA can document the trustee’s

due diligence through recitals

and conrm beneciary consent.

However, while NJSAs solve

state law issues, NJSAs do not

eliminate tax concerns. Taxing

CONTINUED FROM PAGE 9

November 2022 • Nevada Lawyer

Decanting

Fiduciary Risk

Decanting

Fiduciary Risk

authorities may view the NJSA as

a waiver of rights and therefore

a gift between parties. For

example, termination of a QTIP

trust by NJSA may trigger gift

tax complications.

While state

law provisions may permit a trust

termination by agreement, trustee

must monitor the impact of a such

an agreement in relation to the tax

implications.

12. Court Approval: NRS 164.010

provides an ecient means

of admitting a trust to the

jurisdiction of a Nevada court,

and NRS 164.035 permits the

court to instruct the trustee.

Court proceedings in Nevada are

relatively ecient compared to

most other states and Nevada’s

judiciary has been supportive

to the petition process in trust

matters. Court review provides

a forum for disputes, disclosure,

and notice to all interested

persons. The court can conrm

that the NPA and NJSA are valid.

The benets should be weighed

against lack of privacy, cost

and whether it will be binding

on taxing authorities.

It may

be necessary where virtual

representation is not available.

13. E&O Coverage and

Limitations of Self-Serving

Releases: Fiduciaries should

review duciary coverage and

understand its limits. Lack of

coverage may be a reason to

use an NPA/NJSA, and/or court

review, even if not required under

Nevada law. Trustees should also

be cautious when a decanting

will alter the duciary’s liability

standard, or release and indemnify

the trustee moving forward. Absent

disclosure, a court may later

strike the release and indemnity

provisions where undisclosed self-

dealing is found to have occurred.

14. Provisions Warranting

Further Consideration:

Decanting that attempts to (1)

extend the perpetuities vesting

period of the original trust; (2)

alters the dispositive provisions

in a manner that eliminates

distribution standards (i.e.,

removing a Health, Education,

Maintenance, and Support

(HEMS) standard); (3) alters

governing law; (4) alters the

prudent investor standards; (5)

eliminates a beneciary; and

(6) grants powers to persons

other than the trustee (i.e., trust

protectors) may be permissible

but can create conicts. A detailed

review of these items is beyond

the scope of this article. But

these areas tend to be the focus

of reported litigation surrounding

decanting.

15. Combining Techniques &

Multiple Decantings: When

one technique or decanting

will not solve all desired

issues, consider combining risk

management techniques and

addressing issues through multiple

decantings.

Decanting is a powerful tool,

and its benets continue to make it

the tool of choice for trust and estate

advisors. But even if permitted, trustees

should conduct due diligence for tax

implications, grantor intent, and duciary

standards, and they should document

such eorts in order to minimize risk

of challenge and further to increase

probability of a successful decanting.

CONTINUED ON PAGE 12

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November 2022 • Nevada Lawyer

ENDNOTES:

1. Section 163.556 of the Nevada Revised

Statutes authorizes a trustee to decant a

trust that has a Nevada situs, is governed

by Nevada law, or that is administered

under Nevada law.

2. Smaldino v. Commissioner, No. 5437-18

(USTC Nov. 10, 2021)

3. The IRS has continued to take no position

on the tax consequences of decanting. See

PLR 108363-19 for an example of such

declination. However, the IRS has issued

numerous PLRs on trust modications and

exercises of powers of appointment.

4. NRS 163.556(7); NRS 164.725

5. NRS 164.940 et. seq.

6. See Kite v. Commissioner, Rule 155

CONTINUED FROM PAGE 11

Decanting

Fiduciary Risk

Decanting

Fiduciary Risk

Order and Decisions (Cause No. 672-08)

unpublished opinion October 25, 2013);

and Letter Rulings 201932001-201932010

for examples of negative tax implications

of early termination of trusts through

settlement.

7. Commissioner v. Bosch, 387 US 456

(1967)

MICHAELLE DIGRAZIA

RAFFERTY is a

shareholder Of Maupin,

Cox & LeGoy. She is a

regent and the Nevada

state chair of the

American College of Trust and

Estate Counsel, former chair of

the Nevada State Bar’s Probate

and Trust Section and current co-

chair of the section’s legislative

subcommittee. She has been

named by Best Lawyers as

Northern Nevada’s 2023 Lawyer

of the Year for both Trusts and

Estates and Trust and Estate –

Litigation. She is a regular

presenter and writer on Nevada

trust and estate law.