2021 Colorado Code
Title 15 - Probate, Trusts, and Fiduciaries
Article 16 - Trust Administration
Part 9 - Colorado Uniform Trust Decanting Act
§ 15-16-904. Fiduciary Duty

1. In exercising the decanting power, an authorized fiduciary shall act in accordance with its fiduciary duties, including the duty to act in accordance with the purposes of the first trust.
2. This part 9 does not create or imply a duty to exercise the decanting power or to inform beneficiaries about the applicability of this part 9.
3. Except as otherwise provided in a first-trust instrument, for purposes of this part 9 the terms of the first trust are deemed to include the decanting power.

History. Source: L. 2016: Entire part added,(SB 16-085), ch. 228, p. 874, § 1, effective August 10.

COMMENT

Except as noted below, in exercising the decanting power, the authorized fiduciary is subject to the same fiduciary duties as in exercising any other discretionary power. For example, Section 801 of the Uniform Trust Code provides that the trustee shall administer the trust in good faith, in accordance with its terms and purposes and the interests of the beneficiaries. Section 814(a) of the Uniform Trust Code provides that a trustee shall exercise a discretionary power in good faith and in accordance with the terms and purposes of the trust and the interests of the beneficiaries. Section 76 of the Restatement Third of Trusts provides that a trustee has a duty to administer the trust diligently and in good faith, in accordance with the terms of the trust and applicable law.

An exercise of the 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 in place at the time of the decanting. The settlor's purposes generally include efficient administration of the trust. The settlor's purposes may also include achieving certain tax objectives or generally minimizing overall tax liabilities. The settlor's purposes often include avoiding fruitless, needless dissipation of the trust assets should a beneficiary develop dependencies such as substance abuse or gambling, have creditor problems, or otherwise be unfit to prudently manage assets that might be distributed from the trust.

The exercise of the decanting power need not be in accord with the literal terms of the first-trust instrument because decanting by definition is a modification of the terms of the first trust. Therefore Section 15-16-904(3) provides that the terms of the first trust shall be deemed to include the decanting power for purposes of determining the fiduciary duties of the authorized fiduciary. Nonetheless, the other terms of the first trust may provide insight into the purposes of the first trust and the settlor's probable intent under current circumstances.

Section 802 of the Uniform Trust Code and Section 78 of the Restatement Third of Trusts impose a duty of loyalty on the trustee. Thus in exercising a decanting power the trustee cannot place the trustee's own interests over those of the beneficiaries. For example, an authorized fiduciary may breach its fiduciary duties if the authorized fiduciary decants to permit self-dealing. While Sections 15-16-916 , 15-16-917 and 15-16-918 expressly prohibit making certain changes that benefit the authorized fiduciary and are not likely to be in the beneficiaries' interests, these sections do not include all of the changes that may be breaches of the authorized fiduciary's fiduciary duties.

Section 803 of the Uniform Trust Code and Section 79 of the Restatement Third of Trusts impose a duty to treat the beneficiaries impartially. The duty to act impartially does not mean that the trustee must treat the beneficiaries equally. Rather the trustee must treat the beneficiaries equitably in light of the purposes and terms of the trust.

Section 804 of the Uniform Trust Code imposes a duty to administer the trust as a prudent person would and to exercise reasonable care, skill and caution. Restatement Third of Trusts: Prudent Investor Rule §: 90 (2007).

Decanting may be appropriate in many situations in which judicial modification would be appropriate such as (1) when modification, because of circumstances not anticipated by the settlor, would further the purposes of the trust (see Uniform Trust Code § 412(a) and Restatement Third of Trusts § 66); (2) when continuation of the trust on its existing terms would be impracticable or wasteful or impair the trust's administration (see Uniform Trust Code § 412(b)); (3) to replace the trustee if the value of the trust is insufficient to justify the costs of administration with the current trustee (see Uniform Trust Code § 414(b)); (4) to correct mistakes (see Uniform Trust Code § 415); (5) to achieve the settlor's tax objectives (see Uniform Trust Code § 416); and (6) to combine or divide trusts (see Uniform Trust Code § 417 and Restatement Third of Trusts § 68).

The Uniform Trust Decanting Act does not impose a duty on the authorized fiduciary to decant. To impose a duty on the authorized fiduciary to consider whether any possible decanting could improve the administration of the trust or further the trust purposes would create unfair risks and burdens for fiduciaries and also might, in some situations, present impartiality issues. A trustee cannot possibly consider all the possible ways in which a trust could be improved by decanting. While this act does not create a presumption in favor of the terms of the first trust, an authorized fiduciary generally should not be penalized for not modifying the terms of the trust.

There may be, however, circumstances in which the authorized fiduciary or trustee has a duty under general trust law to seek a deviation from the terms of the trust even if the authorized fiduciary or trustee does not have a duty to exercise a decanting power. Subsection 66(2) of the Restatement Third of Trusts provides: (2) If a trustee knows or should know of circumstances that justify judicial action under Subsection (1) with respect to an administrative provision, and of the potential of those circumstances to cause substantial harm to the trust or its beneficiaries, the trustee has a duty to petition the court for appropriate modification of or deviation from the terms of the trust.

While subsection 66(2) is literally limited to deviations involving administrative provisions, Comment e to subsection 66(2) extends the trustee's duty to distribution provisions when the trustee is actually aware that a purpose of the settlor would be jeopardized by adhering to the existing provision regarding distributions.

The Reporter's Note to Comment e to subsection 66(2) of the Restatement Third of Trusts notes that the situations that might result in a duty to seek a deviation if the trustee has actual knowledge of the circumstances include extraordinary needs of the life beneficiary or irresponsibility of a potential distributee. Illustration 2 in the Comments on subsection 66(1) of the Restatement Third of Trusts and the last paragraph of the Reporter's Note to Comment b to Section 66 of the Restatement Third of Trusts. In the Reporter's Notes to Comment b of Section 66 of the Restatement Third of Trusts, the Reporter notes that there may be a duty to seek deviation when there would be substantial distributions to beneficiaries who are legally competent to manage funds but practically at serious risk of squandering those distributions due, for example, to substance addiction or gambling. Although the Uniform Trust Decanting Act does not impose a duty to decant, an exercise of the decanting power would usually be an appropriate exercise of the authorized fiduciary's discretion in such circumstances. Restatement Third of Trusts § 87.

Where the trustee has a duty to seek a deviation and the appropriate deviation could be achieved by an exercise of the decanting power, the trustee could fulfill such duty by an exercise of the decanting power rather than seeking a judicial deviation.