Colorado § 15-16-818 - Relation to electronic signatures in global and national commerce act.

§ 15-16-818. Relation to electronic signatures in global and national commerce act.

This part 8 modifies, limits, or supersedes the federal "Electronic Signatures in Global and National Commerce Act", 15 U.S.C. sec. 7001 et seq., but does not modify, limit, or supersede section 101 (c) of that act, 15 U.S.C. sec. 7001 (c), or authorize electronic delivery of any of the notices described in section 103 (b) of that act, 15 U.S.C. sec. 7003 (b).

Source: L. 2019: Entire part R&RE, (SB 19-105), ch. 51, p. 173, § 1, effective August 2.

PART 9

COLORADO UNIFORM TRUST DECANTING ACT

Law reviews: For article, "Modifying Irrevocable Trusts under the New Colorado Uniform Trust Decanting Act", see 45 Colo. Law. 55 (Nov. 2016); for article, "Is the Irrevocable Trust Really Irrevocable?" see 47 Colo. Law. 56 (Oct. 2018); for article, "Decanting in Connection with Divorce: A Case Study", see 48 Colo. Law. 62 (Oct. 2019).

PREFATORY NOTE

The Uniform Trust Decanting Act is promulgated in the midst of a rising tide of state decanting statutes. These statutes represent one of several recent innovations in trust law that seek to make trusts more flexible so that the settlor's material purposes can best be carried out under current circumstances. A decanting statute provides flexibility by statutorily expanding discretion already granted to the trustee to permit the trustee to modify the trust either directly or by distributing its assets to another trust. While some trusts expressly grant the trustee or another person a power to modify or decant the trust, a statutory provision can better describe the power granted, impose limits on the power to protect the beneficiaries and the settlor's intent, protect against inadvertent tax consequences, provide procedural rules for exercising the power and provide for appropriate remedies. While decanting may be permitted in some situations under common law in some states, in many states it is unclear whether common law decanting is permitted, and if it is, the circumstances in which it is permitted and the parameters within which it may be exercised.

Need for Uniformity. Trusts may be governed by the laws of different states for purposes of validity, meaning and effect, and administration. The place of administration of a trust may move from state to state. It often may be difficult to determine the state in which a trust is administered if a trust has co-trustees domiciled in different states or has a corporate trustee that performs different trust functions in different states. As a result it may sometimes be unclear whether a particular state's decanting statute applies to a trust and sometimes more than one state's decanting statute may apply to a trust. A uniform statute can eliminate conflicts between different state statutes. It can also protect a trustee who decants under one state's statute when more than one state's statute might apply and protect a trustee who reasonably relies on a prior decanting.

Currently there is limited guidance on the income, gift, and generation-skipping transfer ("GST") tax implications of decanting. A uniform statute also may provide common ground for the promulgation of tax guidance.

What Trusts May Be Decanted. Generally, the Uniform Trust Decanting Act permits decanting of an irrevocable, express trust in which the terms of the trust grant the trustee or another fiduciary the discretionary power to make principal distributions. See Section 15-16-903 and Section 15-16-902(3) (defining "authorized fiduciary"). The act does not apply to revocable trusts unless they are revocable by the settlor only with the consent of the trustee or an adverse party. Section 15-16-903(1). The act does not apply to wholly charitable trusts. Section 15-16-903(2). With one exception, if no fiduciary has discretion to distribute principal, the act does not apply unless the court appoints a special fiduciary and authorizes the special fiduciary to exercise the decanting power. See Section 15-16-909. The exception is that a fiduciary who is responsible for making trust distributions may decant a trust to create a special-needs trust even if the fiduciary does not have discretion over principal if the decanting will further the purposes of the first trust.

Who May Decant. As discussed below, the decanting power is a fiduciary power, and thus must be entrusted to one of the fiduciaries of the first trust. The act entrusts the "authorized 2 fiduciary" with the decanting power. The "authorized fiduciary" generally is the fiduciary who has discretion to distribute principal, although a more expansive definition is needed in the case of a special-needs trust. Generally, the authorized fiduciary will be the trustee. Where there is a divided trusteeship that gives the power to make or direct principal distributions to another fiduciary, such as a distribution director, such other fiduciary will be the authorized fiduciary.

Discretion Over Principal. Except in the case of special-needs trusts, the decanting power is granted only to an authorized fiduciary who by definition must have the discretion to distribute principal. The extent of the decanting authority depends upon the extent of the discretion granted to the trustee to distribute principal. When the authorized fiduciary has "limited distribution discretion" that is constrained by an ascertainable or reasonably definite standard, the interests of each beneficiary in the second trust must be substantially similar to such beneficiary's interests in the first trust. Thus when the authorized fiduciary has limited distributive discretion, an exercise of the decanting power generally can modify administrative, but not dispositive, trust provisions. When the authorized fiduciary has "expanded distributive discretion," the authorized fiduciary may exercise the decanting power to modify beneficial interests, subject to restrictions to protect interests that are current, noncontingent rights or vested remainder interests, to protect qualification for tax benefits and to protect charitable interests.

Sometimes a trust may have two or more authorized fiduciaries, some of whom have limited distributive discretion and some of whom have expanded distributive discretion. The authorized fiduciaries with limited distributive discretion may exercise the decanting power under Section 15-16-912 and the authorized fiduciaries with expanded distributive discretion may exercise the decanting power under Section 15-16-911.

Fiduciary Power. The Uniform Trust Decanting Act does not impose any duty on the authorized fiduciary to exercise the decanting power, but if the authorized fiduciary does exercise that power, the power must be exercised in accordance with the fiduciary duties of the authorized fiduciary. See Section 15-16-904. A fiduciary must administer a trust in good faith, in accordance with its terms (subject to the decanting power) and purposes, and in the interests of the beneficiaries. An exercise of decanting power must be in accordance with the purposes of the first trust. The purpose of decanting is not to disregard the settlor's intent but to modify the trust to better effectuate the settlor's broader purposes or the settlor's probable intent if the settlor had anticipated the circumstances at the time of decanting.

As a fiduciary power, the decanting power may be exercised without consent or approval of the beneficiaries or the court, except in the case of a few specific modifications that may benefit the fiduciary personally. Nonetheless, qualified beneficiaries are entitled to notice and may petition the court if they believe the authorized fiduciary has breached its fiduciary duty. Further, the authorized fiduciary, another fiduciary, a beneficiary, the settlor or, in the case of a trust with a charitable interest, the Attorney General or other official who may enforce the charitable interest, may petition the court for instructions, appointment of a special fiduciary who may exercise the decanting power, approval of an exercise of decanting power, a determination that the authorized fiduciary breached its fiduciary duties, a determination that the savings provisions in Section 15-16-922 apply or a determination that the attempted decanting is invalid.

Decanting Procedure. Initially, the power to decant was often considered a derivative of 3 the power to make a discretionary distribution to a beneficiary. Under this construct the decanting power was exercised by making a distribution from one trust to another, and a second trust, separate and distinct from the first trust, was required.

The Uniform Trust Decanting Act views the decanting power as a power to modify the first trust, either by changing the terms of the first trust or by distributing property from the first trust to a second trust. While the act generally modulates the extent of the authorized fiduciary's power to decant according to the degree of discretion granted to the authorized fiduciary over principal, the power to decant is distinct from the power to distribute.

Thus the authorized fiduciary may exercise the decanting power by modifying the first trust, in which case the "second trust" is merely the modified first trust. The decanting instrument can, when appropriate, merely identify the specific provisions in the first trust that are to be modified and set forth the modified provisions, much like an amendment to a revocable trust. If the decanting power is exercised by modifying the terms of the first trust, the trustee could either treat the second trust as a new trust or treat the second trust as a continuation of the first trust. If the second trust is treated as a continuation of the first trust, there should be no need to transfer or retitle the trust property. Further, subject to future tax guidance, if the second trust is a continuation of the first trust, there may be no need to treat the first trust as having terminated for income tax purposes and no need to obtain a new tax identification number.

Innovations. The Uniform Trust Decanting Act contains a number of innovations, in addition to borrowing concepts from existing state decanting statutes.

The act, like some state statutes, intentionally applies broadly to trusts that have their principal place of administration in the state, trusts that are governed by the law of the state for administration and trusts that are governed by the law of the state for purposes of construction or determining meaning or effect. See Section 15-16-905. By casting a wide net for applicability, questions about whether a state's uniform statute applies to a particular trust may be minimized.

Further, the act permits a trustee to reasonably rely on a prior decanting under the law of the enacting state or a different state. See Section 15-16-906.

The Uniform Trust Decanting Act also addresses in detail the extent to which charitable interests may be modified by decanting. The act does not permit decanting of wholly charitable trusts. See Section 15-16-903. With respect to charitable interests within trusts, the act protects any charitable deduction that may have been taken. See Section 15-16-919(2)(b). The act also balances protecting the settlor's charitable intent with the need to permit decanting of trusts that include contingent charitable interests. If the first trust contains a charitable interest, the second trust cannot diminish the charitable interest, change an identified charitable organization or change the charitable purpose. To ensure that these protections are respected, the Attorney General must receive notice of any decanting of a trust with a charitable interest. Further, the act prohibits changing the governing law of trusts containing determinable charitable interests without court approval if the Attorney General objects. See Section 15-16-914.

The act also delineates the role of the court in greater detail than in existing state statutes. See Section 15-16-909. While decanting generally does not require court approval, the authorized fiduciary may wish to seek instructions or approval from the court to confirm that the decanting is not an abuse of discretion. A fiduciary may also wish to seek court instructions as to the effect of a prior decanting, particularly if the prior decanting may be in some way flawed. A few state statutes permit a special fiduciary to be appointed to exercise decanting power where the statute does not permit the acting trustee to decant. The act borrows the concept of a special fiduciary but does not restrict its use to cases in which the acting trustee is not permitted to decant.

The Uniform Trust Decanting Act provides a remedy for an imperfect attempted decanting, to avoid the uncertainty that would exist if an attempted decanting is later discovered to have failed to fully comply with the decanting statute. Section 15-16-922 of the act essentially reads out of the second-trust instrument any impermissible provision and reads into the second-trust instrument any required provision. This gives authorized fiduciaries exercising decanting power greater comfort that their intent will be implemented and not subject to challenge for an inadvertent misstep or technicality.

The act borrows from some of the state statutes a provision that deals with the disposition of later discovered property. See Section 15-16-926. This provision ensures that if property was not retitled at the time of the decanting, it will be owned by the trust that most likely was intended to receive it. The act also includes a provision that recognizes that the liabilities of the first trust pass with the trust property to the second trust. See Section 15-16-927.

Overview of the Act. Sections 15-16-901 through 15-16-906 of the act deal with the scope and application of the act, fiduciary duty and definitions. Section 15-16-901 names the act. Section 15-16-902 contains definitions. Definitions of terms used only in one Section are found within that Section. Section 15-16-903 addresses the types of trusts to which the act applies (or does not apply) and Section 15- 16-905 describes the connections to the adopting state that are sufficient for a trust to utilize the act. Section 15-16-904 addresses fiduciary duty in exercising or not exercising the decanting power. Section 15-16-906 addresses reliance on prior decantings, including decantings performed under other states' laws.

Sections 15-16-907 through 15-16-910 of the act deal with the procedures for exercising the decanting power. Section 15-16-907 sets forth the notice requirements for decanting. Section 15-16-908 is an optional provision dealing with representation of beneficiaries, including the representation of certain charitable interests by the state's Attorney General or other appropriate official. Section 15-16-909 describes the authority of the court with respect to decanting. Section 15-16-910 describes the formalities for decanting.

Sections 15-16-911 through 15-16-923 contain the heart of the decanting power and describe what modifications can be made by decanting. Section 15-16-911 delineates the decanting power when the authorized fiduciary has expanded distributive discretion and Section 15-16-912 delineates the decanting power when the authorized fiduciary has limited distributive discretion.

Section 15-16-913 contains special rules to facilitate decanting into a special-needs trust for a beneficiary with a disability. The Uniform Trust Decanting Act permits a trust to be decanted to modify the interest of the beneficiary with a disability even if the trustee does not have expanded distributive discretion. When a trust has a beneficiary with a disability, it may not be in the beneficiary's interest to make mandatory distributions to the beneficiary. Further, it may be in the beneficiary's interest to restructure the trust as a special-needs trust so that the trust does not adversely affect the beneficiary's qualification for governmental benefits. This carries out the settlor's probable intent if the settlor had known of the beneficiary's disability.

Section 15-16-914 provides special rules to protect charitable interests.

Sections 15-16-915 through 15-16-920 generally provide limitations on the exercise of the decanting power. Section 15-16-915 addresses how express restrictions contained within the first-trust instrument may limit the decanting power. Sections 15-16-916, 15-16-917, and 15-16-918 impose limitations on an authorized fiduciary exercising the decanting power in ways that might be considered self-dealing. Section 15-16-916 restricts decanting to increase the authorized fiduciary's compensation. Section 15-16-917 restricts decanting to increase the authorized fiduciary's protection from liability. Section 15-16-918 restricts the modification or elimination of a provision permitting a person to remove or replace the authorized fiduciary. Section 15-16-919 imposes limitations on the decanting power that may be necessary to avoid disqualifying a trust for a particular tax benefit. Section 15-16-920 addresses limits on the duration of a trust, such as the rule against perpetuities.

Section 15-16-921 makes clear that even though the extent of the authorized fiduciary's power to decant is generally determined based upon the degree of discretion over principal distributions, the authorized fiduciary may exercise the decanting power even if the authorized fiduciary would not have made a discretionary distribution at such time.

Section 15-16-922 contains the remediation provision that is intended to salvage imperfect decantings. Section 15-16-923 authorizes under certain circumstances decanting of trusts for the care of a nonhuman animal.

Sections 15-16-924 through 15-16-932 contain miscellaneous provisions. These provisions include Section 15-16-925, which recognizes that when a trust has been decanted it may no longer be obvious who is the settlor for different purposes and addresses who should be treated as the settlor for different purposes. Section 15-16-926 provides a default rule for determining whether the first trust or second trust owns later-discovered property. Section 15-16-927 makes clear that liabilities of the first trust are also liabilities of the second trust to the extent it received property from the first trust.