DECANTING: A PRACTICAL ROADMAP FOR MODERNIZING TRUSTS IN SOUTH
DAKOTA
MARY AKKERMAN†
As trust laws continue to evolve and modernize, trustees and beneficiaries
sometimes face a challenging dilemma. Situations arise where, over time, the
terms of an irrevocable trust no longer fit a family’s needs. Families are often
advised that they have few options, but some jurisdictions, including South
Dakota, allow reformation or decanting to improve problematic or outdated
trusts.1 This article provides an overview of what is involved in reforming or
decanting an irrevocable trust.2
I. INTRODUCTION
Sometimes an irrevocable trust needs modification to improve the trust’s administrative
provisions. These modifications can include: replacing a trustee; clarifying or streamlining
trustee succession; allowing a beneficiary to serve as trustee; moving the trust’s situs to or from
another jurisdiction; or terminating a small trust. This article is intended to provide an overview
of what South Dakota law permits in circumstances where a trust instrument does not provide a
mechanism for reformation.
Commonly, trustees or beneficiaries wish to: change the governing law if the trust does
not allow such a change; take advantage of another state’s favorable trust laws; change
dispositive provisions allowing for a trustee to make a distribution not clearly within the
standards set forth in the trust; adjust trustee powers; adjust restrictions on beneficiaries; benefit
Copyright © 2016. All Rights Reserved by Mary Akkerman and the South Dakota Law Review.
† A partner at Linquist & Vennum LLP, in Sioux Falls, South Dakota. Akkerman is an American College of Trust
and Estate Counsel (“ACTEC”) Fellow and serves on the ACTEC Asset Protection Committee. In both 2014 and
2015, she was recognized as one the “Great Plains Super Lawyers.” She is Martindale Hubbell “AV” Rated, and a
member of the Thomas Sterling Honor Society.
1
See generally S.D.C.L. ch. 55-3 (2012 & Supp. 2015).
2
This article is intended to provide a brief, practical summary of the statutory authority and procedure for
reformation, modification, termination, or decanting of trusts in South Dakota. For a comprehensive study of the
history and background of these concepts and a detailed discussion of statutory schemes in South Dakota (in 2010, a
partnering of which has been changed subsequently by legislation) and other states, along with alternative tools for
problematic trusts, see Thomas E. Simmons, Decanting and Its Alternatives: Remodeling and Revamping
Irrevocable Trusts, 55 S.D. L. REV. 253 (2010).
new, unanticipated beneficiaries; modernize or update a trust; divide a trust to separate
generation-skipping transfer (GST) tax-exempt property from other property; divide the trust into
separate trusts; consolidate trusts; adjust trustee compensation provisions; adjust outdated
distribution caps or formulas to account for inflation and cost-of-living increases; or adjust
against antiquated social conventions (example: allowing for beneficiaries to be adopted children
or children born out of wedlock). Sometimes trust modification becomes necessary to achieve
tax goals, such as to qualify for the marital deduction, obtain a charitable deduction, meet
qualified domestic trust (QDOT) requirements, or correct ambiguous or poorly drafted
documents.
II. MODIFICATION, REFORMATION, OR TERMINATION
Modification or amendment of an irrevocable trust is often referred to as either
modification or reformation, depending upon the rationale for the change needed.3 How and
when reformation is permitted is a matter of state law.4 Trusts are often governed by either a
choice of law provision in the trust instrument or if the trust instrument is silent as to governing
law, the law where the trust is being administered.5 If the trust being modified is governed by
substantive law in one jurisdiction but is being administered in another jurisdiction, the
procedural laws of the state of administration will typically apply.6
Accordingly, for trusts administered in states with difficult trust laws or slow court
systems, it is often desirable to transfer the trust situs to a jurisdiction where reformation is
3
S.D.C.L. §§ 55-3-24 to -28 (2012) (discussing the requirements for modification versus reformation).
In re Estate of Amundson, 2001 SD 18, ¶ 25, 621 N.W.2d 882, 890 (recognizing the primacy of state law in
adjudicating trust matters).
5
See S.D.C.L. § 55-3-48 (2012).
6
Id.
4
2
available and expedient under state procedural laws.7 In most cases, transferring a trust’s situs
can be done either by the trust instrument’s terms or under the governing state law.8
Once the trust is sitused in a jurisdiction with flexible and favorable trust laws, it is
typically easier to achieve the desired result. Along with certain other states, South Dakota law
allows an irrevocable trust to be modified or terminated upon the consent of all the beneficiaries
if the trust’s continuance on its existing terms is not necessary to carry out a material purpose.9
An irrevocable trust may also be modified or terminated upon the consent of the grantor and all
of the beneficiaries, regardless of the necessity of its material purpose.10 Furthermore, South
Dakota courts may reform trusts to “conform to the trustor’s intention if the failure to conform
was due to a mistake of fact or law and the trustor’s intent can be established.”11
The process is simple. Beneficiaries may consent to modification and termination if
continuation “is not necessary to carry out a material purpose” of the trust.12 A written
agreement among beneficiaries or written consents to a proposed modification or termination
may be obtained to allow for such modification.13 All interested parties (i.e., the trustee and
beneficiaries) may enter into an agreement setting forth the terms of the modification or
termination of the trust in other situations.14 A written agreement among all interested parties or
written consents to a proposed modification or termination should be obtained.15 Judicial
approval is not required if all interested parties consent and if no interested party is unable to
7
See Daniel G. Worthington & Mark Merric, Which Situs is Best in 2016?, TRUSTS & ESTATES, Jan. 2016,
http://wealthmanagement.com/asset-protection/which-situs-best-2016.
8
See generally S.D.C.L. ch. 21-22 (2012) (providing an overview of trust procedural rules in South Dakota).
9
S.D.C.L. § 55-3-24 (2012).
10
S.D.C.L. § 55-3-26 (2012).
11
S.D.C.L. § 55-3-28 (2012). South Dakota Codified Laws differentiate between the terms “modify” and “reform”
as set forth above.
12
S.D.C.L. § 55-3-24.
13
Id.
14
Id.
15
Id.
3
contract or is unable to consent through virtual representation.16 Even though court approval
may not be required, it may be sought upon the petition of any interested party.17
If a trust is so terminated, “the trustee shall distribute the trust property in accordance
with the grantor’s probable intention or in any other manner as agreed by all the beneficiaries.”18
If the interested parties cannot agree on a method to reform the trust or if the above provisions
are not met, South Dakota law allows a trustor, trustee, or beneficiary to petition the court to
affirm a proposed modification or termination of a trust.19 If a beneficiary does not consent, the
court may approve a requested modification or termination if the rights of the non-consenting
beneficiaries “are not significantly impaired or adversely affected.”20
A trustee or beneficiary may petition the court to “modify the administrative or
dispositive terms of the trust or terminate the trust if, because of circumstances not anticipated by
the trustor, modification or termination of the trust would substantially further the trustor’s
purpose in creating the trust.”21 A trustee or beneficiary may also petition the court for
modification or termination of a non-charitable trust or appoint a new trustee if the court
“determines that the value of the trust property is insufficient to justify the cost of administration
involved.”22
In such cases, the court must examine whether it is feasible to appoint “a new trustee to
continue the trust.”23 “On petition by a trustee or beneficiary, the court may reform the trust’s
terms to conform to the trustor’s intention if the failure to conform was due to a mistake of law
16
Id.; see also S.D.C.L. §§ 55-3-32 to -38 (2012).
S.D.C.L. §§ 21-22-7 to -9 (2012 & Supp. 2015); S.D.C.L. §§ 55-3-25 to -26 (2012).
18
S.D.C.L. § 55-3-24 (2012).
19
S.D.C.L. § 55-3-25 (2012).
20
Id.
21
S.D.C.L. § 55-3-26 (2012).
22
S.D.C.L. § 55-3-27 (2012 & Supp. 2015).
23
Id.
17
4
or fact and the trustor’s intent can be established.”24 This law may also be used to achieve
favorable tax objectives as long as the trustor’s intent is not defeated.25
South Dakota law allows a trustee to “combine two or more trusts into a single trust or
divide a trust into two or more separate trusts, if the combination or division does not impair the
rights of any of the beneficiaries or substantially affect the accomplishment of the trust purposes”
without approval of the court if such action is not prohibited by the terms of the trust.26 On
petition, “the court may affirm or prevent a proposed combination or division; and, if the terms
of the trust instruments creating the trusts are inconsistent, the court shall resolve such
inconsistencies in its order by establishing the terms of the trust that will survive the combination
or division.”27
The process for court approval is generally simple, cost effective, and expedient.28 Any
trustee or beneficiary may petition for court supervision.29 Interested parties may also petition
for the requested modification or for a court order for directions regarding “any matter relevant
to the administration of the trust.”30
Notice of the petition must “be served on trustees, beneficiaries, and attorneys of record,
either personally, or by mail addressed to each at his or her last known post office address as
shown by the records and files in the proceeding, . . . at least fourteen days prior to the hearing
unless the court for good cause shown directs a shorter period.”31 The court may allow service
by publication (once a week for three weeks prior to the hearing in a legal newspaper in the
24
S.D.C.L. § 55-3-28 (2012 & Supp. 2015).
Id.
26
S.D.C.L. § 55-3-29 (2012).
27
Id.
28
See S.D.C.L. § 21-22-18 (2012 & Supp. 2015) (requiring fourteen days’ notice); S.D.C.L. § 21-22-21 (2012)
(dispensing with notice by consent of all interested parties).
29
S.D.C.L. § 21-22-7 (2012 & Supp. 2015).
30
S.D.C.L. § 21-22-9 (2012 & Supp. 2015).
31
S.D.C.L. § 21-22-18.
25
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county of the hearing) if the number of persons to be served, and the expense involved, “would
be burdensome.”32 If all beneficiaries join in the petition in writing or waive notice and a
hearing in writing, notice will not typically be required.33
Any interested party may object to a petition.34 If such objections are brought, the court
may order them to be filed and may adjourn the hearing and continue it to a contested calendar.35
Further, the court may require or allow witnesses or the production of evidence.36 If no
objections are made and proper notice has been given or has been waived, the court will typically
grant the requested relief at the hearing.37
III. DECANTING
While reformation is a relatively easy way to modify an irrevocable trust, it does provide
an avenue for disgruntled beneficiaries to object to the requested relief.38 Decanting, on the
other hand, gives the trustee certain abilities to move the trust assets to a new trust at the trustee’s
discretion.39 If the criteria for decanting can be met, it is often the easier and simpler method to
modify an irrevocable trust.40
Decanting involves the idea that a trustee with authority to make discretionary
distributions may appoint trust property in further trust instead of making distributions outright.41
32
S.D.C.L. § 21-22-19 (2012).
S.D.C.L. § 21-22-21.
34
S.D.C.L. § 21-22-16 (2012 & Supp. 2015).
35
Id.
36
S.D.C.L. § 21-22-25 (2012).
37
S.D.C.L. § 21-22-13 (2012 & Supp 2015).
38
S.D.C.L. § 21-22-16.
39
S.D.C.L. §§ 55-2-15 to -20 (2012 & Supp. 2015).
40
Id.
41
S.D.C.L. § 55-2-15 (discussing the appointment and distribution of trust assets “to a second trust”).
33
6
A trustee may “decant” trust funds from one trust into a different trust.42 This principle existed
at common law but has now been codified in South Dakota and certain other jurisdictions.43
Decanting is appropriate where the trustee has discretionary authority and wishes to
“pour” funds from one trust to another trust with terms more favorable for current needs.44
South Dakota allows a trustee with discretionary authority to make income and/or principal
distributions to a beneficiary to, instead, exercise that authority by appointing all or part of the
assets subject to that power to the trustee of a second trust.45
Beneficiaries of the second trust must be either proper entities with the power to receive
distributions, or one or more of those other beneficiaries of the first trust to or for “whom a
distribution of income or principal may be made in the future from the first trust at a time or
upon the happening of an event specified under the first trust.”46 The second trust may, within
certain limits, have different beneficiaries.47 For example, contingent beneficiaries of the first
trust may be named as primary beneficiaries in the second trust.48
South Dakota law also requires that the trustee take into account “the purposes of the first
trust, the terms and conditions of the second trust, and the consequences of the distribution.”49
The trustee may wish to decant to a second trust to preserve or promote the grantor’s primary
purpose in establishing the first trust. If more drastic changes are desired, it may be advisable to
seek reformation by beneficiary consent or court approval, as discussed above.
42
Id.
Simmons, supra note 2, at 256-63.
44
See Melissa J. Wilms, Decanting Trusts: Irrevocable, Not Unchangeable, 6 EST. PLAN & CMTY. PROP. L. J. 35,
54 (2013).
45
S.D.C.L. § 55-2-15.
46
S.D.C.L. § 55-2-15(1)(b).
47
Id.
48
Id.
49
S.D.C.L. § 55-2-15.
43
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Because it is authorized by statute, decanting does not require beneficiary consent or
court approval.50 However, decanting must be done by an instrument in writing, signed and
acknowledged by the trustee and filed with the records of the trust, and all beneficiaries of the
first trust may be notified in writing at least twenty days prior to decanting.51 Information in the
notice, if given, must include a copy of the proposed decanting and a copy of the second trust.52
South Dakota further allows that, if all beneficiaries entitled to notice waive notice, the trustee
may act immediately.53 Beneficiaries include anyone entitled to notice and a copy of the first
trust, and South Dakota’s virtual representations apply to such notice requirements.54
Decanting may be applied to testamentary trusts or irrevocable inter-vivos trusts.55 There
are, however, some limits to decanting in South Dakota. It may not result in the reduction of a
fixed income interest for which a marital deduction has been taken, to a charitable remainder
trust, or to a grantor-retained annuity trust.56 The power cannot be exercised to extend the IRC §
2503(c) vesting period.57 The power cannot be exercised over any portion of the trust to which a
beneficiary has current withdrawal rights (i.e., Crummey rights or 5x5 powers).58 The terms of
the trust must not prohibit exercise of the authority by a spendthrift clause or provision
prohibiting amendment of the trust.59 South Dakota law also limits the power to decant unless
held to an ascertainable standard if the trustee is also a beneficiary or if any beneficiary of the
first trust has the right to change the trustees of the first trust.60
50
S.D.C.L. § 55-2-18 (2012 & Supp. 2015).
Id. (stating that notice may be given but setting forth no requirement that it must be given).
52
Id.
53
S.D.C.L. § 21-22-21 (2012).
54
S.D.C.L. § 55-2-18 (2012).
55
See S.D.C.L. § 55-2-15 (2012).
56
Id. § 55-2-15(6)(a)-(c).
57
Id. § 55-2-15(5).
58
Id. § 55-2-15(7).
59
Id. § 55-2-15(8).
60
Id. § 55-2-15(2).
51
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IV. CONCLUSION
Although beneficiaries can feel trapped with their current trust due to a host of reasons,
there are ways to improve trusts and to streamline trustee succession, change situs, change
trustees, add directed trust provisions, or otherwise suit the family’s current needs. While
beneficiaries are sometimes reticent to hire legal counsel because they worry about lengthy and
costly procedures, the truth is that, in states with optimal trust laws and procedures such as South
Dakota, trust professionals, legal counsel, and the judiciary are highly experienced at reforming
and decanting trusts. Even the most well-drafted trusts may need modernization in some
situations.61
61
Tax implications as a result of changing an irrevocable trust are beyond the scope of this article. However, before
modifying, reforming, terminating, or decanting a trust, an examination should be done to determine the impact of
the proposed action on state, local, or federal taxes to ensure that no adverse tax effects occur as a result. For an
examination of tax aspects of changing irrevocable trusts, see Diana S.C. Zeydel, Developing Law on Changing
Irrevocable Trusts: Staying Out of the Danger Zone, 47 REAL PROP. TR. & EST. L.J. 1 (2012).
9