Morse v. Kraft

• Decision Date: 29 July 2013
• Citation: 466 Mass. 92,992 N.E.2d 1021
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court
• Parties: Richard MORSE, trustee, v. Jonathan A. KRAFT & others.

466 Mass. 92

992 N.E.2d 1021

Richard MORSE, trustee,¹

v.Jonathan A. KRAFT & others.²

Supreme Judicial Court of Massachusetts, Suffolk.

Submitted April 1, 2013.

Decided July 29, 2013.

Daniel L. Goldberg (Charles L. Solomont with him), Boston, for the plaintiff.

Andrew D. Rothstein, for Boston Bar Association, amicus curiae, submitted a brief.

Present: IRELAND, C.J., SPINA, CORDY, BOTSFORD, GANTS, DUFFLY, & LENK, JJ.

SPINA, J.

Richard Morse, the trustee of The Kraft Irrevocable Family Trust (1982 Trust), commenced this action before a single justice of this court pursuant to G.L. c. 231A, § 1, and G.L. c. 215, § 6, and the single justice reserved and reported the case to the full court.³ See Hillman v. Hillman, 433 Mass. 590, 590, 744 N.E.2d 1078 (2001), and cases cited; Walker v. Walker, 433 Mass. 581, 581–582, 744 N.E.2d 60 (2001), and cases cited. “We have regularly recognized the appropriateness of granting declaratory relief to fiduciariesseeking instructions concerning the manner in which an instrument ... should be construed in connection with the possible application of Federal estate tax provisions.” First Agric. Bank v. Coxe, 406 Mass. 879, 882, 550 N.E.2d 875 (1990). See Walker v. Walker, supra at 582 & n. 5, 583, 744 N.E.2d 60. All of the parties have stipulated to the relevant facts, and each of the defendants, with the exception of the Commissioner of Internal Revenue,⁴ has assented to the relief sought.

1. Background. By declaration of trust dated January 4, 1982, the 1982 Trust was established, and each of four separate subtrusts were created therein, for the benefit of the four sons of Robert and Myra Kraft (the Krafts). ⁵ Each of the four sons is an income beneficiary of his subtrust, and also is a potential object of the powers of appointment held by each son as the income beneficiary of his respective subtrust. The sons' children (the Krafts' grandchildren) are the contingent remainder beneficiaries of the subtrusts, and also are the potential objects of the sons' powers of appointment. The 1982 Trust permits only “Disinterested Trustee[s]”—defined in the 1982 Trust as “all those trustees who are not transferors of property to [the] trust and who are not eligible, and who are not legally obligated to support any person who is eligible, to receive current distributions of income or principal from any trust”—to participate in decisions regarding the making of distributions from the subtrusts. Thus, under the 1982 Trust, the sons cannot serve as disinterested trustees because they are “eligible to receive current distributions” from their respective subtrusts. The 1982 Trust was drafted to preclude the sons from serving as disinterested trustees because, at the time of its creation, the sons were minors and it was impossible to know whether they would develop the skills and judgment necessary to make distribution decisions concerning their respective subtrusts.

Since the creation of the 1982 Trust, the plaintiff has served as the sole and disinterested trustee of the 1982 Trust and the four separate subtrusts. The plaintiff is now eighty-one years old, and is nearing retirement. He proposes to transfer all of the property of the subtrusts into new subtrusts, established in accordance with the terms of a new master trust (2012 Trust), for the benefit of each of the Kraft sons. Although we express no opinion on the form of the 2012 Trust or the subtrusts created therein, we note that the beneficiaries of the original subtrusts pursuant to the 1982 Trust (the Kraft sons and their children) are the beneficiaries of the new subtrusts pursuant to the 2012 Trust. See Phipps v. Palm Beach Trust Co., 142 Fla. 782, 783–784, 786–787, 196 So. 299 (1940)( Phipps ) (beneficiaries of second trust limited to class of beneficiaries under original trust). We also are aware that the 2012 Trust is unlike the 1982 Trust in that the sons can serve as trustees with distributive powers over their respective subtrusts. The plaintiff believes the transfer of assets to the new subtrusts to be in the best interests of the 1982 Trust beneficiaries from a management perspective: each of the Kraft sons is now in his forties, and is well qualified to manage the assets in his subtrust and to appreciate the needs of the income and remainder beneficiaries.⁶ The plaintiff contends, however, that the transfer will only be in the beneficiaries' best interests from a financial perspective if the transfer will not cause the property or distributions therefrom to be subject to the generation skipping transfer tax (GST).⁷ Whether the transfer of the assetsfrom the old subtrusts (established in the 1982 Trust) to the new subtrusts (established in the 2012 Trust) triggers the GST depends, in relevant part, on whether “[t]he terms of [the 1982 Trust] authorize distributions to the new trust ... without the consent or approval of any beneficiary or court.” See 26 C.F.R. § 26.2601–1(b)(4)(i)(A)(1)(i) (2012). Thus, the plaintiff asks us to interpret the 1982 Trust to determine whether it authorizes such distributions. We conclude that it does.

2. Discussion. “Decanting is the term generally used to describe the distribution of [irrevocable] 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 [of the original trust]. Potentially, common law provides authority for decanting, but a [S]tate statute or the terms of the trust instrument may expressly authorize a trustee to decant trust property to another trust. Trustees may decant to achieve a variety of favorable tax or nontax results or to address changes in [S]tate law or in other circumstances affecting management or administration of the trust after it has become irrevocable.” Culp, Trust Decanting: An Overview and Introduction to Creative Planning Opportunities, 45 Real Prop. Tr. & Est. L.J. 1, 2–3 (2010) (Culp). See Zeydel, Tax Effects of Decanting—Obtaining and Preserving the Benefits, 111 J. Tax'n 288, 288–289 (2009) (Zeydel). In effect, a trustee with decanting power has the authority to amend an unamendable trust, in the sense that he or she may distribute the trust property to a second trust with terms that differ from those of the original trust. See Culp, supra at 2; Zeydel, supra. A trustee can only exercise a decanting power, however, in keeping with fiduciary obligations. See Culp, supra at 6–7; Restatement (Third) of Property: Wills and Other Donative Transfers § 17.1 comment g, at 205 (2011) (Restatement [Third] of Property).

A trustee's decanting power was first recognized in Phipps, supra at 784, 786, 196 So. 299, where the court determined that the terms of the trust—which authorized the trustee, “in his or her sole and absolute discretion,” id. at 784, 196 So. 299, to distribute the trust property to one or more trust beneficiaries—authorized the trustee to create a second trust for beneficiaries of the original trust. Because the terms of the trust vested the trustee “with unlimited discretion as to time, amount, manner, and condition any sums should be paid,” the court applied what it termed “[t]he general rule [of trust construction] ... that the power vested in a trustee to [make distributions] in fee includes the power to create or appoint [trust property in] less than a fee unless the donor clearly indicates a contrary intent.” Id. at 786, 196 So. 299. See In re Estate of Spencer, 232 N.W.2d 491, 495, 498 (Iowa 1975). Similarly, in Wiedenmayer v. Johnson, 106 N.J.Super. 161, 164–165, 254 A.2d 534 (App.Div.), aff'd sub nom. Wiedenmayer v. Villanueva, 55 N.J. 81, 259 A.2d 465 (1969)( Wiedenmayer ), the court found the trustee's authority to transfer property in further trust in the broad discretion afforded the trustee under the trust agreement, which gave him “absolute and uncontrolled discretion” to distribute the trust property for the beneficiary's “best interests.” As in Phipps, supra, the court in Wiedenmayer, supra, reasoned that, where a trustee has the power to make an outright distribution to a beneficiary (limited only by the beneficiary's “best interests”), the trustee has the power to distribute assets in further trust for the beneficiary's benefit. See Culp, supra at 4–13. Although Massachusetts courts have never addressed a trustee's (fiduciary's) authority to distribute trust assets in further trust, we prospectively adopted a rule permitting donees of a (nonfiduciary) special power of appointment to distribute trust assets in further trust in Loring v. Karri–Davies, 371 Mass. 346, 354–355, 357 N.E.2d 11 (1976)( Loring ). There, we held that a donee of a special power of appointment may distribute assets in further trust on behalf of the objects of the special power, provided the donor manifest no intent to the contrary.⁸Id. See Restatement (Third) of Property, suprafiduciary distributive power may be subject to same general rules as special power of appointment).

Although we look to precedent for interpretative guidance, it is nevertheless clear that a trustee's decanting authority “turn[s] on the facts of the particular case and the terms of the instrument creating the trust. There is no fixed rule by which all are determined.” Phipps, supra at 785, 196 So. 299. See In re Estate of Spencer, supra at 497. Thus, we turn to the language of the 1982 Trust. In relevant part, the 1982 Trust states:

“Article III.B. The Trustees shall pay to [the] child [for whose benefit a subtrust is held] from time to time such portion or portions of the net income and principal thereof as the Disinterested Trustee shall deem desirable for the benefit of such child....

“Article VI.A. Whenever provision is made hereunder for payment of principal or income to a beneficiary, the same may instead be applied for his or her benefit....

“Article VII. The Trustees shall have full power to take any steps and do any acts which they may deem necessary or proper...