04.11.2016

Decanting and Related Issues as to Trustee Liability

In re 2008 Trust for the Benefit of Stefanidis-Perez , 2016 N.J. Super. Unpub. LEXIS 636 (Ch. Div, Essex County, Mar. 22, 2016)

Plaintiff was the beneficiary of two trusts, one created in 1997 and the other in 2008.

Plaintiff filed suit against her mother, who was also the trustee of the trusts.  Plaintiff was the settlor and sole beneficiary of the trusts.  The parties agreed that her mother initiated the formation of the trusts.

Plaintiff filed a motion for partial summary judgment, to remove he mother as trustee of both trusts.  The trustee cross-moved for summary judgment, seeking advice and direction from this Court with respect to the 1997 Trust.

The trial court denied summary judgment on removal of the trustee.  First, the court found that there were issues of fact as to the claim that the trustee had engaged in self-dealing by allegedly selling real property she owned personally to the 2008 Trust.

Next, the court determined that the trustee appeared to be empowered by the trusts and the New Jersey Prudent Investor Act to make investment decisions, and genuine issues of material fact existed as to the suitability of the certain trust investments.

The court then addressed plaintiff’s assertion that the trustee breached her fiduciary duties by decanting funds from the 1997 Trust into the 2008 Trust.  The judge explained, “In a trust context, decanting is the term generally used to describe the distribution of trust property to another trust pursuant to the trustee’s discretionary authority to make distributions to, or for the benefit of, one or more beneficiaries.”  Id. at *12.  The court continued:

Decanting may be authorized by the common law, a state statute, or the terms of the instrument may expressly allow a trustee to decant trust property to another trust….  Under the common law in New Jersey and other jurisdictions, a trustee who has the ability to distribute principal outright from a trust to or for a beneficiary may instead exercise such authority by distributing the assets in further trust for the beneficiary.  See Wiedenmayer v. Johnson, 106 N.J. Super. 161 (App. Div. 1969); Phipps v. Palm Beach Trust Company, 142 Fla. 782 (1940);  In re:  Estate of Spencer, 232 N.W.2d 491 (Iowa 1975).  The Second and Third Restatements of Property also recognize a trustee’s power to appoint trust property in further trust pursuant to the trustee’s discretionary power.  See Restatement (Second) of Property: Donative Transfers § 11.1 cmt.(d) (1986); Restatement (Third) of Property: Wills & Other Donative Transfers § 19.14 (Tentative Draft No. 5, 2006).

Id. at *13.

The court recognized that New Jersey does not have a decanting statute, unlike other states such as New York and Delaware.  Nevertheless, decanting is generally recognized in New Jersey under decisions such as Wiedenmayer v. Johnson.  In the case, the court found that, because the terms of the original trust provided that the corpus could be completely distributed to the beneficiary, then the trustees had a right to change the terms of the trust by creating a new trust and transferring funds from the original trust therein.

Under the common law in New Jersey, therefore, the trustee permissibly decanted from the 1997 Trust into the 2008 Trust.

Next, the trial judge found issue of fact as to the allegation of hostility between the trustee and the beneficiary.   Summary judgment was thus denied:

The general rule is that mere friction or hostility between a beneficiary and a trustee is not necessarily a sufficient ground for removal.  For friction or hostility to form the basis for removal, the relationship must be shown to materially interfere with the trust, especially if the hostility arises out of the misconduct of the trustee.  Wolosoff v. CSI Liquidating Trust, 205 N.J. Super. 349, 361 (App. Div. 1985).  The mere fact that a beneficiary disagrees with a fiduciary’s proper exercise of discretionary powers or is resentful of the fiduciary’s authority or is antagonized by his personality is not sufficient to cause his removal.  In re Koretzky, 8 N.J. 506, 530 (1951).  The court must determine not only the existence of hostility, animosity, friction or malice, but whether such a relationship has either resulted in actual acts of misconduct or has created a conflict of interest which appears likely to endanger the trust or the welfare of the beneficiary.  Wolosoff, 205 N.J. Super. at 362.

Id. at *17.

The court did determine that plaintiff was entitled to an updated accounting and granted summary judgment on that issue.

Finally, the court also granted the trustee’s cross-motion for summary judgment, finding that there were no issues of fact with respect to the trustee’s authority under the 1997 Trust to withhold mandatory income distributions to plaintiff.