2021 Colorado Code
Title 15 - Probate, Trusts, and Fiduciaries
Article 16 - Trust Administration
Part 9 - Colorado Uniform Trust Decanting Act
§ 15-16-920. Duration of Second Trust
- Subject to subsection (2) of this section, a second trust may have a duration that is the same as or different from the duration of the first trust.
- To the extent that property of a second trust is attributable to property of the first trust, the property of the second trust is subject to any rules governing maximum perpetuity, accumulation, or suspension of the power of alienation which apply to property of the first trust.
History. Source: L. 2016: Entire part added,(SB 16-085), ch. 228, p. 888, § 1, effective August 10.
COMMENT
To implement the public policy of the state law applicable to the first trust, subsection (2) requires that any maximum perpetuity, accumulation, or suspension-of- the-power-of-alienation period (collectively referred to as a “perpetuities rule”) applicable to the first trust apply to the second trust to the extent its assets are attributed to the first trust. This rule is also supported by pragmatic considerations. An exercise of a decanting power could inadvertently violate a perpetuities rule applicable to the first trust if the second trust does not comply with the same perpetuities rule. Even in states that have abolished the maximum perpetuity rule, the state may still impose another perpetuities rule (e.g., a suspension-of-the-power-of-alienation rule), the first trust may still be subject to a rule against perpetuities under prior law or the first trust may be subject to a rule against perpetuities under the law of a different state. Further, if a trust is grandfathered from generation-skipping transfer (“GST”) tax or has an inclusion ratio less than one, decanting to a trust that does not comply with the same rule against perpetuities period (or a federal rule against perpetuities period) may have adverse GST consequences.
Thus if the first trust was created in a state with a traditional rule against perpetuities, the authorized fiduciary may not exercise the decanting power to change the governing law to a state with no rule against perpetuities and to eliminate the rule against perpetuities applicable to the first trust.
Where the maximum term of the first trust is measured by reference to lives in being on the date the first trust became irrevocable, Section 15-16-920 does not preclude the second trust from using an expanded class of measuring lives so long as the expanded class were in being on the date the first trust became irrevocable. For example, assume the first trust is subject to State A's trust duration rule, which is a traditional rule against perpetuities that requires that an interest in a trust vest within twenty-one years of the last to die of lives in being when the trust became irrevocable. The first trust contains a perpetuities savings clause that requires the trust to terminate twenty-one years after the death of the survivor of the settlor's descendants living when the first trust was created. The second trust may replace the perpetuities savings clause with a provision that requires the trust to terminate twenty-one years after the death of the survivor of the descendants of any grandparent of the settlor who were living when the first trust was created.
As another example, assume the first trust is subject to State A's trust duration rule, which is a traditional rule against perpetuities, but which permits a trust to opt out of the rule against perpetuities. The first trust does not opt out of the rule against perpetuities. The second trust may opt out of the rule against perpetuities if the first trust could have done so.
If the first trust and the state law applicable to the first trust permitted the springing of the “Delaware Tax Trap” of Code Section 2041(a)(3), the second trust may also permit the springing of the Delaware Tax Trap.
The second trust may terminate earlier than the trust duration rule applicable to the first trust would require. Assume Trust A and Trust B are both subject to State Z's trust duration rule, which is a traditional rule against perpetuities. Both trusts were created by the same settlor and contain a perpetuities savings clause that requires the termination of the trust twenty-one years after the death of the survivor of the settlor's descendants living on the date the trust was created. Trust A was created on June 6, 1966. Trust B was created May 5, 1955. Trust A may be decanted into Trust B because Trust B will terminate prior to the rule against perpetuities applicable to Trust A. Trust B may be decanted into Trust A if Trust A is modified to provide, or the decanting instrument provides, that the portion of Trust A attributable to the addition of the assets of Trust B must vest within the rule against perpetuities period applicable to Trust B. The trustee could segregate the assets Trust A receives from the decanting of Trust B. Alternatively, the trustee could determine the fractional share of the total assets attributable to Trust B, based upon values at the time of decanting, and such fractional share of Trust A will be subject to the rule against perpetuities period applicable to Trust B.
If the authorized fiduciary attempts to decant Trust B into Trust A without providing either in Trust A or the decanting instrument that the portion of the trust attributable to Trust B must vest within the rule against perpetuities period applicable to Trust B, the decanting may still be valid. First, the statutes of State Z may contain a rule against perpetuities savings clause that will cause the trust to vest or terminate within the applicable rule against perpetuities period. Second, if there is no statutory savings clause, Section 15-16-922 of this act may apply to read into Trust A an appropriate savings clause with respect to the portion of the trust attributable to Trust B.
Section 15-16-920 does not address whether, if the decanting changes the place of administration for the trust or the law governing the trust, and the new jurisdiction has a more restrictive trust duration rule, the new jurisdiction may impose its maximum perpetuity, accumulation or suspension-of-the-power-of-alienation period on the second trust. The new jurisdiction may do so if the rule of the first jurisdiction is contrary to a strong public policy of the new jurisdiction. Thus if the first jurisdiction has no rule against perpetuities, and the second jurisdiction has a traditional rule against perpetuities, the second jurisdiction may but need not determine that its rule expresses a strong public policy against perpetual trusts.
Subsection (1) provides that, except as provided by subsection (2), the second trust may have a term that is the same as or different from the term of the first trust. Thus the term of the second trust may be longer than or shorter than the term of the first trust.
