USA – TEXAS Trends and Developments Contributed by: Perrin Clark and Meredith McIver, Ytterberg Deery Knull LLP
The breadth of a trustee’s power to decant depends on whether the trustee has “limited discretion” or “full discretion”. Limited discretion means the power to distribute principal according to mandatory distribu - tion provisions or the power to distribute principal to or for the benefit of one or more beneficiaries of a trust that is limited by an ascertainable standard, such as for health, education, maintenance and support. Full discretion means discretion that is not limited. A trustee with limited discretion may decant from the existing trust (the “first trust”) to another trust (a “second trust”), provided the beneficiaries (current, successor and remainder) remain the same and the provisions authorising distributions remain the same. If beneficiaries are defined by a class that is subject to open, the same definition of class must be used in the second trust, and any power of appointment found in the first trust must be replicated in the second trust in terms of the powerholder and permissible appointees. In light of these limitations, the utility of decanting with respect to limited discretion trusts is generally limited to changing administrative provisions (eg, provisions regarding non-dispositive trustee rights, powers and duties, and provisions regarding trustee succession). A trustee with full discretion may decant from the first trust to a second trust that is “for the benefit of one, more than one, or all of the current beneficiaries of the first trust and for the benefit of one, more than one, or all of the successor or presumptive remain - der beneficiaries of the first trust”. If beneficiaries are defined by a class that is subject to open, one or more persons who become members of that class after the decanting may be included among the beneficiaries of the second trust. The second trust “may... grant a power of appointment, including a currently exercisa - ble power of appointment... to one or more of the cur - rent beneficiaries of the first trust who, at the time the power of appointment is granted, is eligible to receive the principal outright under the terms of the first trust”. Importantly, “the class of permissible appointees in whose favour the beneficiary may appoint under [such] power may be broader or different than the current, successor, and presumptive remainder ben - eficiaries of the first trust”. In light of these powers, the utility of decanting with respect to full discretion trusts is significant, with decanting frequently being used
to address estate planning and trust administration problems that previously could not have been fixed in the absence of a court order, if at all. With respect to both a limited discretion decanting and a full discretion decanting, the trustee will exer - cise such power “in good faith, in accordance with the terms and purposes of the trust, and in the interests of the beneficiaries”. Trustees are not authorised to decant a trust to limit their fiduciary duties, decrease their liability, indemnify themselves, or limit another’s ability to remove or replace them. Only non-settlor trustees may exercise authority to decant a trust. The trustee does not need the consent of the settlor or any beneficiary to decant, nor does the trustee need court approval, as long as the trustee provides written notice of their decision to exercise the decanting pow - er to current and presumptive remainder beneficiaries, determined as of the date of the notice. The Texas Attorney General also needs to receive notice if cer - tain charitable interests exist. Notice is not required to be given to beneficiaries who cannot be located, are unknown, or can be virtually represented in accord - ance with the statute. A beneficiary can waive notice, as can the Texas Attorney General. The notice must: “(1) include a statement that: (A) the authorized trustee intends to exercise the [decanting] power; (B) the beneficiary has the right to object to the exer - cise of the power; and (C) the beneficiary may petition a court to approve, modify, or deny the exercise of the trustee’s power to [decant]; (2) describe the manner in which the trustee intends to exercise the power; (3) specify the date the trustee proposes to [decant] the first trust to the second trust; (4) include the name and mailing address of the trus - tee;
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