<b><i>Ferri v. Powell-Ferri</i></b>: A Critical Planning Case for Practitioners

Too many clients (and non-matrimonial practitioners) assume erroneously that an irrevocable trust is inviolate and that with tax laws in flux no planning is necessary. However, just because assets are in an irrevocable trust does not mean the assets are completely untouchable in a divorce scenario. Modifying old, inefficient trusts can be about much more than tax planning considerations, as the Ferri case illustrates.

The Ferri case also suggests an important point that should not be overlooked: Decanting is a process, unless the governing instrument provides to the contrary, to be carried through by the trustees, not by the beneficiary. Practitioners and clients alike should be cautious to monitor communications and the process to assure that the beneficiary seeking protection is not directing the decanting process, or the favorable result achieved in Ferri may not be replicated. It should also be noted that the Massachusetts court did not have a state decanting statute to influence the outcome of the decision. If there is applicable state law — and more than 20 states now have decanting statutes — the contents of that statute might be critical to the outcome.

Facts in the Ferri Case

The key time events in Ferri included:

• 1983 — Creation of a trust for child/beneficiary.
• 1995 — Child/beneficiary's marriage.
• 2010 — Child/beneficiary's divorce starts.
• 2011 — Decanting of trust.

A parent created a trust for the sole benefit of his child in 1983. The trustee had the discretion whether or not to pay trust assets to the child/beneficiary or to instead set them aside for the child/beneficiary. In addition, the child/beneficiary could demand increasing percentages of trust corpus at specified ages beginning with 25% of trust corpus at age 35 and increasing in increments up to 100% of trust corpus after age 47. The child/beneficiary's spouse filed for divorce in Connecticut in October 2010. Prior to the divorce, the child/beneficiary had not exercised his withdrawal rights.

At the time of the divorce proceeding, the child/beneficiary had the right to demand 75% of the corpus of the old trust based on the trust terms. This made the trustees concerned that the child/beneficiary's ex-spouse might reach trust corpus.

Decanting the Old Trust

To endeavor to reduce the risk that the ex-spouse might reach the trust corpus, the trustees decanted the trust assets into a newly created trust. While the decanting was in process, the child/beneficiary's right to withdraw principal blossomed to 100% of corpus.

The specific process of the decanting was that the trustees of the old trust created a new trust naming themselves as trustees and maintaining the child as its sole beneficiary. Then they distributed assets from the old trust to the new trust in a decanting. The decanting was done without the consent of the child/beneficiary. The new trust, as would be anticipated, eliminated the child/beneficiary's right to demand trust corpus at specified ages. Both trusts were governed by Massachusetts law.

The Connecticut court requested that the Massachusetts court determine whether the trustees of the old trust validly distributed trust corpus from the old trust to the new trust. The court determined that because there is no specific decanting power under Massachusetts law, the trustee's power to decant depended on the governing instrument and the facts.

The rationale justifying decanting in the Ferri case was based on the fact that, since the trustees had the discretion to distribute trust property to or for the benefit of the beneficiary, the power of the trustee to distribute the property to another trust for the benefit of the same beneficiary should be subsumed under the broader distribution power. The court noted broad discretion afforded the trustees in the old trust, the anti-alienation provision, the beneficiary's withdrawal rights, and the settlor's affidavit regarding his intent in creating the trust. The Massachusetts court concluded that the terms of the old trust and the facts involved corroborated the parent/trustor's intent to permit decanting.

Accordingly, the Connecticut court permitted the decanting. Further, the court rejected the argument made by the child/beneficiary's spouse that the decanting resulted in a self-settled trust.

Planning Considerations for Practitioners

Query whether the same result would have been realized if the child/beneficiary had requested that the trustees decant, or if he was actually involved in the process (e.g., by consent to a non-judicial modification of the trust — as permitted, for example, under Delaware law). This could make the success of the decanting in similar situations very fact-sensitive as to the child/beneficiary's involvement. Practitioners should caution beneficiaries to remain out of the process entirely. Stray emails or other documentation might well have resulted in a different conclusion in the Ferri case.

The application of decanting in the Ferri case suggests that matrimonial practitioners should make inquiring about the status of any irrevocable trusts a standard part of any client intake interview, whether in connection to a prenuptial agreement, postnuptial agreement, support matter or divorce. In particular, practitioners should recommend having any irrevocable trust of which the client is a beneficiary reviewed, perhaps by trusts and estates counsel, to ascertain if a decanting may increase the protection that the trust affords. Whatever the client might opt to do, practitioners should be alert to at least consider putting the client on notice as to the possibilitly of Ferri-like planning.

Beware that divorce laws vary from state-to-state. It is important to consider not only where the trustor resides, but also where the beneficiaries reside, as residency determines the forum of a divorce. We also live in an increasingly transitory society; people move all the time. When a move takes place, it is advantageous for clients to check in with their advisers to see if any updates are necessary, to optimize planning. Trust laws also vary markedly from state to state and it may be feasible to move an old irrevocable trust to a different or new state in order to take advantage of the decanting or other laws of that new state. The combination of all of these variables makes planning more complex than it had been.

Conclusion

Irrevocable trusts are not as ironclad as many clients might presume. The Ferri case outcome is a valuable reminder of the possibility of decanting prior to a divorce. Even during the pendency of a divorce, benefit might be achieved, although practitioners might warn clients of the possible negative perceptions decanting might create. However, the real lesson to be learned from the Ferri case is to adopt a more proactive approach, and timely meet with your advisers to make sure the trust structure is in fact set up to function in the most advantageous way possible.

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Martin M. Shenkman, CPA, MBA, PFS, AEP, JD, a member of this newsletter's Board of Editors, is an attorney in private practice in Fort Lee, NJ, and New York City. He concentrates on estate and closely held business planning, tax planning, and estate administration. Rebecca A. Provder is a partner in the Matrimonial and Family Law practice group at Moses & Singer LLP.