On April 4, 2012, Governor McDonnell signed into law Senate Bill 110 which permits a trustee to exercise a discretionary distribution power by appointing the trust principal or income to the trustee of a second trust. Virginia has now joined at least fourteen other states with so-called “decanting” statutes that recognize this power in trustees. Virginia’s statute takes effect on July 1, 2012 and, unless expressly prohibited by the terms of the trust’s governing instrument, will be available to any trust administered under Virginia law.
A decanting power allows a trustee, generally without the approval of a court or the beneficiaries, to appoint the income or principal, or both, of a trust to a second trust that may have different terms. For example, a trustee could use this power to appoint the assets of an older trust to a new trust with modern administrative provisions. Other examples of common uses of a decanting power include adding a trust advisor or trust protector, changing the trust situs, or changing the trustee or trustee succession provisions.
Virginia’s statute limits the trustee’s decanting power by requiring that the beneficiaries of the second trust include only beneficiaries of the original trust and prohibiting the addition of beneficiaries. Also, where the trustee’s power to distribute income and principal is subject to an ascertainable standard, the distributions from the second trust must be limited by the same ascertainable standard and such distribution power must be exercisable in favor of the same current beneficiaries, unless a court approves otherwise, with an exception being made for distributions to a special needs trust. The second trust may not accelerate the interest of a beneficiary who has only a future interest in the original trust. Virginia’s decanting statute also includes several tax savings provisions addressing the application of the Rule against Perpetuities and preserving marital and charitable deductions.
In order to exercise the decanting power, a trustee must give sixty days’ written notice of the trustee’s intention to exercise the power to the grantor of the original trust, to the original trust’s qualified beneficiaries as defined in the Virginia Uniform Trust Code (other than the Attorney General), and to any person serving as an advisor or protector of the original trust. If accounts for the original trust are filed with a Virginia commissioner of accounts, such as for a trust under a will that does not waive accountings, the accounts must be filed for the second trust unless a court orders otherwise.
The statute protects Virginia trustees who do not use this new power by providing that there is no duty to exercise the power and no inference of impropriety where the power is not exercised.
The full text of the law is available here.
Fiduciary Advisory Services and Private Wealth Services
McGuireWoods’ Fiduciary Advisory Services and Private Wealth Services Teams stand ready to advise individuals, financial institutions, and other clients about planning, tax, and fiduciary matters. McGuireWoods’ Private Wealth Services Group has been ranked by Chambers, the international rating service for attorneys, as one of the top wealth management legal practices in the country for several years. Please click here for a full listing of our lawyers and their locations.