Ferri v. Powell-Ferri: Expansion of Common Law “Trust Decanting” in MassachusettsPosted: August 9, 2017
by Marc J. Bloostein
Trust decanting is a method by which the trustee of an irrevocable trust distributes trust assets into a new trust with revised terms. In Ferri v. Powell-Ferri, 476 Mass. 651 (2017), the Supreme Judicial Court (SJC) held that trust property in a Massachusetts irrevocable trust may be decanted into a new trust even if doing so would remove the trust assets from the beneficiary’s marital estate during his divorce. The SJC left open, however, whether decanting solely to deprive the beneficiary’s spouse of marital assets would be invalid as contrary to public policy. Id. at 664 (Gants, C.J., concurring). Although Ferri provides needed guidance to trustees on decanting, it leaves some unanswered questions that should be addressed by the legislature.
Common law decanting pursuant to language in an irrevocable trust was first recognized in Massachusetts in Morse v. Kraft, 466 Mass. 92 (2013). In Morse, the Court interpreted the trust instrument to authorize the trustees to distribute the trust assets to a new trust. Morse, 466 Mass. at 96-98. The key factors that allowed the trustees to decant assets into a new trust were: (1) the trustees’ unlimited discretion over distributions; (2) the trustees’ power to apply property for the benefit of a beneficiary; and (3) the broad grant of powers to the trustees. Id. at 98-99. To determine the settlors’ intent with respect to decanting, the SJC considered the post-execution affidavits of the settlor, draftsperson and disinterested trustee. Id. at 97. The Court declined to adopt a rule that any trustee with broad distribution power has the inherent power to decant, and instead opted for a case-by-case determination taking into account the terms of the trust instrument. See Ferri, 476 Mass. at 658 (citing Morse, 466 Mass. at 97).
In Ferri, the irrevocable trust at issue had been established for the benefit of Paul Ferri, Jr., the settlor’s son. Beginning at age 35, Paul could withdraw an increasing portion of the trust property; at the time of the decanting he could withdraw about 75% of the principal. Shortly after Paul’s wife filed for divorce in Connecticut, the trustees effectively eliminated Paul’s power to withdraw by decanting the assets into a new trust (without informing Paul or obtaining his consent). There is no question that the decanting was an effort by the trustees to remove the trust property from Paul’s marital estate. Id. at 653.
The Connecticut Supreme Court certified three questions to the SJC, including whether the trust instrument, which was governed by Massachusetts law, authorized the trustees to decant. 476 Mass. at 652. Unlike in Morse, the trustees were not waiting for court approval—they had already decanted (indeed, they had done so even before the SJC decided Morse).
The SJC answered that the Ferri trust instrument allowed decanting. The trust instrument gave the trustees broad discretionary distribution powers “virtually identical to provisions in the Morse trust,” along with discretion even more expansive than that afforded in the Morse instrument. Consequently, the settlor’s intention to authorize decanting “would seem to follow necessarily.” Id. at 657-58. In particular, the SJC found that the trustees’ explicit authority to “segregate irrevocably [net income and principal] for later payment to” the beneficiary “indicate[d] the settlor’s intention to allow decanting.” Id. at 658. Thus, the SJC held that decanting was proper if done in the beneficiary’s best interest, unless and until all the trust assets had been withdrawn by the beneficiary. Id. at 662.
The Court rejected Powell-Ferri’s counter-argument that decanting was not allowed because it would render the beneficiary’s power to withdraw nugatory. First, all trust provisions must be read consistently, and if “withdrawable” property could not be decanted, then there would be no point to the trust after the age of full vesting with the beneficiary. Id. at 660. Second, because the trustees hold full legal title to all trust property, that property remains subject to their full stewardship and power, including the authority to decant. Id. at 660-61. Third, the two methods of distributing trust property—the beneficiary’s withdrawal power and the trustee’s power of distribution—are not mutually exclusive and decanting is consistent with the trustees’ power to irrevocably sequester for “’[s]o long as [the beneficiary] is living.’” Id. at 661. The SJC also found that the settlor’s affidavit could evidence the settlor’s intent if the settlor’s intent were otherwise ambiguous at the time he created the trust, and so long as the affidavit did not contradict or attempt to vary the terms of the trust. Id. at 663.
In short, although Ferri, like Morse, affirmed the importance of considering the trust instrument as a whole in determining the settlor’s intent regarding decanting, the Ferri Court nevertheless favored the trustees’ decanting power despite the trusts’ potentially conflicting withdrawal right provisions. In so deciding, the SJC expressly did not consider whether, in some circumstances, the existence of a withdrawal power might override trust provisions that allow decanting as a matter of public policy, as the Connecticut trial court had decided. See Ferri v. Powell-Ferri (SC 19317), 2013 Conn. Super. LEXIS 1938. As Chief Justice Gants pointed out in his concurrence, Ferri did not answer “whether Massachusetts law will permit trustees in Massachusetts to create a new spendthrift trust and decant to it all the assets from an existing non-spendthrift trust where the sole purpose of the transfer is to remove the trust’s assets form the marital assets that might be distributed to the beneficiary’s spouse in a divorce action.” 476 Mass. at 664 (Gants, C.J., concurring) (noting the Massachusetts prohibition against trusts that violate public policy in the Massachusetts Uniform Trust Code, G.L. c. 203E, § 404).
Notably, the Ferri Court also did not consider the ramifications of the provision of the Massachusetts Uniform Trust Code which provides that the holder of a non-lapsing withdrawal power under the terms of a trust (whether revocable or irrevocable) is treated as if he were the settlor of a revocable trust with respect to the property subject to the power, and the rights of the other beneficiaries are subject to his control and the duties of the trustee are owed exclusively to him. G.L. c. 203E, § 603. Nor did Ferri articulate any fiduciary limits to decanting, although there must be limits. See, e.g., Old Colony Trust Co. v. Silliman, 352 Mass. 6, 10 (1967) (“[E]ven very broad discretionary powers are to be exercised in accordance with fiduciary standards and with reasonable regard for usual fiduciary principles.”). Ferri raised additional questions by suggesting—without explaining—that a “duty to decant” may exist. 476 Mass. at 661.
Consequently, Ferri leaves trustees to ponder the limits of their power to decant, whether they might have a duty to decant and, if so, under what circumstances. The Massachusetts legislature should adopt a decanting statute to provide a path for trustees to decant with clear limits and safeguards.
Marc J. Bloostein is a partner in Ropes & Gray LLP’s private client group and focuses on estate planning and fiduciary law. He was co-chair of the BBA’s Trusts and Estates Section from 2011 to 2013, he played a key role in the 2012 enactment of the Massachusetts Uniform Trust Code, and he teaches a course on estate planning at Harvard Law School.