USA – CALIFORNIA Law and Practice Contributed by: Jennifer Jordan McCall, Ashley Huh and Matthew Perotti, Pillsbury Winthrop Shaw Pittman LLP
notice of the decanting and have an opportunity to object), and of revocable trusts where revocation requires the consent of a trustee or third person with a right contrary to the interest of the settlor. Trusts often used in California for estate and tax planning purposes include intentionally defective grantor trusts (IDGT), a qualified personal residence trust (QPRT), a grantor retained annuity trust (GRAT) and a spousal lifetime access trust (SLAT). 3.3 Tax Considerations: Fiduciary or Beneficiary Designation California imposes an income tax on a trust where a trustee or non-contingent beneficiary is a resident of California. Thus, for settlors who do not reside in California, care is often taken to ensure the fiduciary is not a resident of California. Conversely, California resident Settlors often establish non-grantor trusts in other states such as Wyoming or Delaware to take advantage of the zero income tax rate in those states on the income of the trust. Similarly, planning may be done, with experienced California tax advice, for an owner of a business to relocate to another state prior to the sale of a business. 3.4 Exercising Control Over Irrevocable Planning Vehicles The California Uniform Trust Decanting Act (2018) (California Probate Code, Section 19501) allows trus - tees and authorised fiduciaries to modify the terms of certain California trusts without the consent of the beneficiaries, and of revocable trusts where revoca - tion requires the consent of a trustee or third person with a right contrary to the interest of the settlor. A California trust which could take advantage of these decanting provisions must have its principal place of administration in or changed to California, and contain a provision that the trust is governed by the laws of California. (California Probate Code, Section 190501, 19505.) The ability of a trustee or authorised fiduciary to exer - cise the decanting power depends on the terms of the trust and the trustee’s power to make distribu - tions to the beneficiaries. A trustee needs to have “expanded distributive discretion”, which includes the ability to modify administrative (which requires only “limited dispositive discretion”) and dispositive terms,
such as changing a beneficiary’s interest, in the first trust to exercise the decanting power. In exercising the decanting power, a trustee may not (i) include as a current beneficiary a person that is not a current beneficiary of the first trust, (ii) include as a presump - tive remainder beneficiary or successor beneficiary a person that is not a current beneficiary, presumptive remainder beneficiary, or successor beneficiary of the first trust, or (iii) reduce or eliminate a vested interest. (California Probate Code, Section 19511.) Generally, a trustee may decant to change the situs and governing law of the trust out of California as long as there is sufficient nexus to the new jurisdiction. For example, bypass marital trusts can be decanted by giving the surviving spouse a power of appoint - ment over the trust property after the death of the first spouse to step up the value of the property, thereby reducing capital gains tax. An irrevocable trust may be decanted to improve administrative provisions, or modify outdated provisions. Decanting is an opportu - nity to add significant protections, such as expanded trustee discretion, to California special needs trusts. Further, the ability to decant and modify a provision to convert a mandatory distribution to a discretionary distribution enhances protection of the trust’s assets from creditors. Although consent and court approval are not required, the trustee or authorised fiduciary must give notice of the intent to exercise the decanting power to each settlor, qualified beneficiaries, holders of presently exercisable powers of appointment, persons with a current right to remove or replace the fiduciary, all fiduciaries of the first and second trusts, and, in cer - tain cases, the Attorney General. Separately, most estate planning includes opportuni - ties for the grantor and/or his or her spouse to receive some financial benefit from the transferred assets, should unforeseen circumstances mandate a need for this. For example, in an IDGT, the spouse of one gran - tor may receive some trust assets as a discretionary beneficiary; a GRAT includes a specified return to the grantor, and a sale of an asset for a note to an IDGT provides a deferred return to the grantor, and many corporate arrangements may include indirect control in the grantor over assets transferred to a trust, tak -
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