Chancery Applies Unclean Hands Doctrine to Prevent a Trustee from Rescinding the Decanting of a Trust

Morris James LLP

In the Matter of: The Niki and Darren Irrevocable Trust and the N and D Delaware Irrevocable Trust, C.A. No. 2019-0302-SG (Del. Ch. Feb. 4, 2021)

Delaware’s decanting statute allows a trustee to “decant” a trust by “pouring” the corpus out into a new modified trust. But, to do so, a trustee must have been able to invade the trust principal under the original trust’s terms, and the second trust’s terms must be substantially the same in its treatment of beneficiaries.

A trustee decanted a trust in 2014. Both the original trust and the new trust benefited the trustee’s daughter and son-in-law, and also benefited the trustee during her lifetime. Yet the new trust was more favorable to the son-in-law in the event of a divorce, and less favorable to the trustee, who would no longer have an income interest in half of the trust after a divorce. Several years later the trustee’s daughter and son-in-law divorced, and the trustee sought to rescind the earlier decanting, asserting it violated the then-applicable decanting statute.

The Court of Chancery concluded that the original decanting’s compliance with the statute did not matter; nor did the trustee’s state of mind in undertaking that decanting. Characterizing the trustee as suffering from “an attack of late-onset settlor’s remorse,” the Court applied the doctrine of unclean hands to bar the claim by the trustee that her prior, purportedly illegal, act should now be set aside through equity, where that outcome would benefit the fiduciary and harm the interests of a beneficiary. 

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