701.0418 Trustee's power to appoint assets to new trust.

(1) Definitions. In this section:

(a) “Absolute power" means a power to invade trust assets for the benefit of a beneficiary that is not limited by a specific or ascertainable standard, whether or not the term “absolute" is used in the trust instrument. “Absolute power" includes a power to invade trust assets for the best interests, welfare, comfort, or happiness of a beneficiary.

(b) “First trust" means the trust from which assets are or may be appointed under sub. (2).

(c) “Second trust" means the trust or trusts to which assets are or may be appointed under sub. (2).

(2) Power to appoint.

(a) Except as otherwise provided in this subsection and in subs. (3) and (5), a trustee who has the power to invade the principal of a first trust for the benefit of a beneficiary who is eligible to receive or entitled to the income of the first trust or entitled to an annuity or unitrust payment from the first trust may exercise the power by appointing part or all of the assets of the first trust in favor of a trustee of a 2nd trust if all of the following apply:

1. The appointment of assets does not reduce any fixed income, annuity, or unitrust interest of a beneficiary.

2. If the trustee's power to invade income or principal of the first trust is limited by a specific or ascertainable standard, the appointment of assets does not result in the trustee of the 2nd trust or any other person having a power to invade the income or principal of the 2nd trust that is broader than the trustee's power to invade income or principal of the first trust. This subdivision does not apply if the 2nd trust is a trust for an individual with a disability.

3. One of the following applies:

a. The beneficiaries of the first trust are the same as the beneficiaries of the 2nd trust.

b. If the first trust grants the trustee the absolute power to invade principal, the 2nd trust includes only all or some of the beneficiaries of the first trust.

(b) Paragraph (a) applies to a trustee whether or not the trustee has an absolute power to invade principal and whether or not there is a current need to invade principal under the terms of the first trust.

(3) Limitations on exercise of power. A trustee may not appoint assets to a 2nd trust under sub. (2) if any of the following applies:

(a) The trust instrument creating the first trust expressly prohibits the trustee from appointing assets of the first trust to a 2nd trust by reference to this section or by using the term “decanting."

(b) A contribution to the first trust qualified for a marital or charitable deduction for federal income, gift, or estate tax purposes under the Internal Revenue Code and one of the following applies:

1. The 2nd trust contains a provision that, if included in the first trust, would have prevented the first trust from qualifying for the deduction or would have reduced the amount of the deduction.

2. The 2nd trust does not contain a provision that was contained in the first trust that, if omitted from the first trust, would have prevented the first trust from qualifying for the deduction or would have reduced the amount of the deduction.

(c) The trustee has a beneficial interest in the first trust unless the 2nd trust is a trust for an individual with a disability, the trustee's only beneficial interest in the first trust is as a remainder beneficiary, and the trustee's beneficial interest in the 2nd trust is not greater than the trustee's beneficial interest in the first trust.

(d) The appointment of assets to a 2nd trust would impair currently exercisable withdrawal rights of a beneficiary of the first trust and one of the following applies:

1. The withdrawal rights were granted to the beneficiary in a manner designed to allow contributions subject to the withdrawal rights to qualify for the federal gift tax annual exclusion.

2. The terms of the 2nd trust would impair gifts previously made to the first trust from qualifying for the federal gift tax annual exclusion under section 2503 of the Internal Revenue Code.

(e) The appointment of assets to the 2nd trust would violate a rule against perpetuities applicable to the first trust or suspend a trustee's power of alienation over assets of the first trust in a manner that would cause all or a portion of the 2nd trust to be void.

(f) The appointment of assets to the 2nd trust under sub. (2) would impair the essential purpose of a trust for an individual with a disability.

(4) Permissible terms of 2nd trust.

(a) Subject to pars. (b) to (d) and subs. (2), (3), and (5), the trustee of the first trust may create a 2nd trust instrument that includes terms that are intended to achieve any purpose, including terms that are intended to do any of the following:

1. Correct a drafting error in the first trust.

2. Clarify potentially ambiguous terms contained in the first trust.

3. Change the age of distribution to a beneficiary of the first trust.

4. Extend the duration of the first trust.

5. Protect a beneficiary of the first trust, including protecting the beneficiary from self-destructive behavior.

6. Allow the trustee of the 2nd trust to transfer trust assets to a community trust. In this subdivision, “community trust" means a master trust that is established and managed by a nonprofit organization that maintains sub-accounts for individual beneficiaries that each satisfy the definition of a trust for an individual with a disability.

7. Add or remove a spendthrift trust provision to the first trust.

8. Modify investment provisions contained in the first trust, including those relating to permissible investments, use of investment advisors, or self-dealing transactions.

9. Change a present or future trustee of the first trust, including by defining the method by which a trustee or cotrustee may be appointed or removed and replaced.

10. Appoint a trust protector of the 2nd trust and define the powers of the trust protector.

11. Appoint a directing party of the 2nd trust and define the powers of the directing party.

12. Change the principal place of administration of the first trust.

13. Change the governing law of the first trust.

14. Allow for the division of the first trust into 2 or more trusts.

15. Allow for the merger of the first trust with one or more trusts.

16. Add or modify an exculpatory provision for a trustee, trust protector, or directing party.

17. Obtain desirable tax treatment, as determined by the trustee of the first trust, or to avoid adverse tax consequences, as determined by the trustee of the first trust, including provisions relating to grantor trust status under sections 671 to 679 of the Internal Revenue Code.

18. Modify a power in the first trust to invade income and principal.

19. Modify or eliminate a general or special power of appointment in the first trust.

(b) The trust instrument of the 2nd trust may include terms granting a beneficiary a general or special power of appointment only if the trustee of the first trust has the absolute power to invade income and principal.

(c)

1. The trust instrument of the 2nd trust may include terms that are intended to change terms of the first trust that are applicable to a beneficiary who is an individual with a disability only if the purpose of the change is to allow the beneficiary to qualify or continue to be qualified to receive public assistance.

2. Subdivision 1. applies regardless of whether the first trust includes specific or ascertainable standards for distribution.

(d) The trust instrument of the 2nd trust may include a term that adopts or expands an exculpatory provision relating to the trustee only if one of the following applies:

1. Any trustee of the first trust who would benefit from the adoption of the term in the 2nd trust abstains from the consideration and adoption of the term and the trustees of the first trust who would not benefit from the adoption of the term adopt the trust instrument of the 2nd trust.

2. A court approves the trust instrument of the 2nd trust.

(5) Procedural matters.

(a) A trustee shall appoint assets to a 2nd trust under sub. (2) by an instrument in writing that is signed and acknowledged by the trustee and shall include the written instrument with the records of the first and 2nd trusts. A trustee may appoint assets to a 2nd trust under sub. (2) upon notice, without court approval, under the procedure described in par. (b), or with court approval, under the procedure described in par. (c).

(b)

1. If a trustee chooses to proceed without a court order, the trustee shall give notice of the manner in which the trustee intends to appoint assets to a 2nd trust under sub. (2) to all of the following:

a. The qualified beneficiaries of the first trust.

b. Each trust protector appointed under the terms of the first trust.

c. Each directing party appointed under the terms of the first trust.

d. The settlor of the first trust, if living.

2. To satisfy the trustee's notice obligation under this paragraph, a trustee shall provide each person entitled to receive notice under subd. 1. all of the following:

a. A copy of the proposed written instrument under which the trustee will appoint assets to a 2nd trust.

b. The proposed effective date of the appointment.

c. A copy of the trust instrument of the first trust.

d. A copy of the trust instrument of the 2nd trust.

3. A trustee may not appoint assets to the 2nd trust until 30 days after the trustee provides notice as required under this paragraph unless every person who is entitled to receive notice under subd. 1. waives the 30-day notice period by delivering a signed written instrument to the trustee. A person's waiver of the 30-day notice period does not constitute that person's consent to the trustee's appointment of assets to a 2nd trust.

4. If a person entitled to receive notice under subd. 1. delivers a written objection to the trustee before the effective date of the appointment of assets to a 2nd trust, the trustee may not appoint the assets to a 2nd trust, as specified in the trustee's notice, without obtaining court approval under par. (c) unless the written objection is withdrawn.

5. If the trustee does not receive a written objection from any person entitled to receive notice under subd. 1. before the effective date of the appointment of assets to the 2nd trust or all written objections to the proposed appointment of assets to the 2nd trust are withdrawn, the trustee may appoint the assets to a 2nd trust, as specified in the notice.

(c)

1. If a trustee chooses to proceed with court approval, including after receiving a written objection to a proposed appointment of assets, the trustee shall petition a court to approve a proposed appointment of assets to a 2nd trust under sub. (2). The trustee shall provide notice of the petition to all qualified beneficiaries of the first trust, each trust protector appointed under the first trust, each directing party appointed under the first trust, and to the settlor of the first trust, if living. The trustee shall include in the notice of the petition the proposed effective date of the appointment of assets to a 2nd trust. The trustee shall also provide to each person who is entitled to receive notice under this paragraph a copy of the proposed instrument under which the trustee will appoint assets to a 2nd trust, the proposed effective date of the appointment, a copy of the trust instrument of the first trust, and a copy of the trust instrument of the 2nd trust.

2. If a person who is entitled to receive notice under subd. 1. files an objection with the court, in determining whether to grant or deny a petition under subd. 1., the court shall consider all of the following:

a. The purpose of the proposed appointment of assets under sub. (2).

b. The reasons for any objection made by a person entitled to receive notice under subd. 1.

c. Changes in circumstances that have occurred since the creation of the first trust.

d. Whether the appointment of assets under sub. (2) complies with the requirements of this section.

3. If no person who is entitled to receive notice under subd. 1. files an objection with the court or any objection that has been filed with the court is withdrawn, the court shall enter an order approving the appointment of assets under sub. (2) as set forth in the trustee's notice unless the court determines that the appointment of assets does not comply with the requirements of this section.

(6) Subsequently discovered assets.

(a) The appointment of all of the assets of the first trust in favor of the trustee of the 2nd trust includes subsequently discovered assets otherwise belonging to the first trust and assets paid to or acquired by the first trust subsequent to the appointment in favor of the 2nd trust.

(b) Except as otherwise provided by the trustee of the first trust, the appointment of part but not all of the assets of the first trust in favor of the 2nd trust does not include subsequently discovered assets belonging to the first trust or assets paid to or acquired by the first trust subsequent to the appointment in favor of the 2nd trust, which remain the assets of the first trust.

(7) Liability.

(a) This section does not create or imply a duty on a trustee to appoint assets to a 2nd trust under sub. (2). A trustee that does not appoint assets to a 2nd trust under sub. (2) is not liable for the failure to do so.

(b) A trustee who appoints assets to a 2nd trust under sub. (2) is not liable to any beneficiary for any loss related to the appointment unless the trustee did not appoint the assets in good faith.

(8) Miscellaneous provisions.

(a) The appointment of assets to a 2nd trust under sub. (2) is not an exercise of a general power of appointment.

(b) A trustee may appoint assets to a 2nd trust under sub. (2) even if the first trust includes a spendthrift clause or a provision that prohibits amendment or revocation of the trust.

(c) This section does not limit a trustee who has a power to invade principal to appoint property in further trust to the extent the power arises under the terms of the first trust or under any other section of this chapter or under another provision of law or under common law.

(d) The restriction relating to a trustee under sub. (3) (c) does not preclude a cotrustee who does not have a beneficial interest in the first trust from appointing assets to a 2nd trust under sub. (2) even if the terms of the first trust, applicable law, or other circumstances would otherwise require the majority or unanimous action of the trustees of the first trust.

(e) For purposes of this section, if beneficiaries of a first trust are defined as a class of persons, the class shall include any person who falls within the class of persons after the trustee appoints assets to the 2nd trust.

(f) Notwithstanding s. 701.0103 (23), a trustee of a first trust who appoints assets to a 2nd trust under sub. (2) or creates a 2nd trust instrument under sub. (4) is not the settlor of the 2nd trust.

(g) To the extent a directing party or trust protector has the power to invade the principal of a first trust, as described in sub. (2), this section applies to the directing party or trust protector as if the directing party or trust protector is a trustee.

History: 2013 a. 92.