Florida Trust Decanting: Phipps v. Palm Beach Trust Co., 196 So. 299 (Fla. 1940) and Florida Statute §736.04117
“Decanting” is the legal term used to describe the distribution of trust property from one trust to another trust pursuant to the trustee’s discretionary authority to make distributions to or for the benefit of one or more beneficiaries. Common law provides authority for trust decanting, but several states – including Florida – have codified the common law. Florida Statute §736.04117 became effective on July 1, 2007.
Under common law, a trustee with absolute power to invade principal is the equivalent of a donee of a special power of appointment. Restatement (Second) of Prop.: Donative Transfers §11.1 Absent a contrary provision in the governing document, a donee of a power of appointment may exercise such power in a manner which is less extensive than authorized by the instrument creating the power. Thus, “the rationale underlying decanting is that if a trustee has the discretionary power to distribute property to or for the benefit of one or more current beneficiaries, then the trustee, in effect, has a special power of appointment that should enable the trustee to distribute the property to a second trust for the benefit of such beneficiaries.” William R. Culp, Jr. & Briani Bennett Mellen, Trust Decanting: An Overview and Introduction to Creative Planning Opportunities, Real Property, Trust and Estate Law Journal, Spring 2010, p. 3. The theory is that if there is authority to distribute outright, then there is authority to distribute in further trust. Alan Halperin and Michelle R. Wandler, Decanting Discretionary Trusts: State Law and Tax Considerations, 29 Tax Management Estates, Gifts & Trusts Journal, 219, 221 (2004).
In 1940, the Supreme Court of Florida considered whether a trustee, who was specifically authorized by the trust document to appoint the trust property among beneficiaries in whatever proportions he desired in his sole discretion, could create a second trust for the benefit of the beneficiaries funded with property distributed from the first trust. Phipps v. Palm Beach Trust Co., 196 So. 299 (Fla. 1940). In Phipps, the settlor, Margarita Phipps, created a trusts for the benefit of her four children. She named Palm Beach Trust Company and her husband as co-trustees. Her husband was given a personal power of appointment, exercisable during life by written instrument delivered to the corporate trustee or at death in his Last Will & Testament, in favor of the four children and/or their descendants in whatever proportions as he shall determine. In compliance with the express terms of the trust, Mr. Phipps provided written directions to the corporate trustee to create a second trust for the descendants. The corporate trustee, in an abundance of caution, brought a suit in equity praying for construction of the original trust.
The Phipps court held that the creation of the second trust was permissible because the trustee had both a lifetime and a specific testamentary power to direct distributions to trust beneficiaries. Ergo, the trustee’s power was a power of appointment instead of a discretionary power to distribute trust property. The Phipps holding does not provide authority for the position that a trustee with a purely discretionary power held in a fiduciary capacity can transfer assets to a new trust. Florida Statute §736.04117 codifies the principal holding in Phipps. 12 Fla.Prac., Estate Planning §6:41 (2010-2011 ed.). In summary, the statute provides that a trustee who has absolute power under the terms of the trust to invade principal may make distributions to a second trust if those beneficiaries include only those beneficiaries of the first trust without reducing any fixed income interest. The exercise of the decanting power is to be done by an instrument in writing, signed and acknowledged by the trustee and filed with the records of the first trust. Additionally, the trustee shall notify all qualified beneficiaries of the first trust, in writing, at least 60 days prior to the effective date of the trustee’s exercise of the power to invade the principal and must set forth the manner in which the trustee is planning to exercise the power. The trustee’s notice under this section shall not limit the right of any beneficiary to object to the exercise of the trustee’s power to invade the principal. Fla.Stat. §736.04117.
Procedurally, the documents employed for a trust decanting should be similar to those used with respect to a resolution to distribute property. A written document providing the terms of the trustee’s discretionary exercise of the power to decant should set forth the terms of the exercise of the power to appoint trust property further in trust. It should set forth background information or recitals identifying (1) the current trustees of the original trust and the trustees that are exercising the decanting power (2) when the original trust was formed and by whom (3) the relevant terms of the original trust (4) the trustee’s authority for the decanting, whether pursuant to statute or the trust instrument, and (5) the appointee trust that will receive trust property from the original trust. The decanting document should also include trustee resolutions designating and appointing assets of the original trust to the appointee trust and directing the appointed assets be held in accordance with the appointee trust. William R. Culp, Jr. & Briani Bennett Mellen, Trust Decanting: An Overview and Introduction to Creative Planning Opportunities, Real Property, Trust and Estate Law Journal, Spring 2010, p. 43.