Trusts are one of the most commonly utilized tools in estate planning. A significant benefit of a trust is that it can last for many generations depending on how it is drafted. However, that can also be a downside. Sometimes, due to the evolution of laws and other changes, the terms of a trust may no longer align with the intentions of its creator or the needs of its beneficiaries. If that happens, what can be done? In many cases, decanting is an option, subject to the terms of the trust and the trust jurisdiction. This is true even if the trust is irrevocable.
Decanting Defined
Decanting a trust involves transferring the assets of an existing trust into a new trust with different terms. Think of it as pouring the contents of one vessel into another, hence the term “decanting.” This process is typically governed by state law and involves a trustee exercising discretionary authority to make changes to the trust instrument.
Reasons for Decanting
There are various reasons why trustees or beneficiaries may consider decanting a trust:
- Outdated Provisions: Older trusts may contain provisions that are no longer relevant or effective due to changes in tax laws, family circumstances, or financial goals. Decanting allows trustees to adapt trusts to new circumstances.
- Administrative Concerns: Decanting can simplify administrative processes, reduce administrative burdens and costs for trustees and beneficiaries, clarify ambiguous language, or enhance trustee powers to better manage and distribute trust assets.
- Beneficiary Needs: Decanting can also be used to provide better protection for vulnerable beneficiaries, such as minors or individuals with special needs, or to adjust distribution schedules to better meet the needs of beneficiaries.
- Asset Protection: Trusts can be decanted to strengthen asset protection provisions, shield assets from creditors or divorce settlements, or adapt to changes in a beneficiary’s financial situation.
- Tax Consequences: By updating trust provisions, decanting can be used strategically to minimize certain tax liabilities, such as income taxes.
The Decanting Process
Decanting a trust involves several key steps:
- Evaluation: Before decanting, it is critical to assess the current trust terms, beneficiaries’ needs, and the reasons for decanting as discussed above.
- Selection of Jurisdiction: It may be possible to move the trust. An appropriate jurisdiction should be chosen considering factors such as state laws, tax implications, and flexibility in trust administration. Note that the trust cannot be moved to another state if the terms of the trust or the state laws don’t allow it. Note also that the governing jurisdiction or “situs” of the trust is not necessarily the same state in which the trust is deemed a “tax resident”.
- Drafting the Decanting Document: An experienced attorney should draft the new trust instrument, ensuring that it achieves the desired changes while complying with relevant laws and regulations.
- Notice to Beneficiaries: All interested parties must be notified, including beneficiaries and potential contingent beneficiaries, as required by the applicable law of the jurisdiction of the trust.
- Execution: Assets from the original trust must be transferred to the new trust according to the terms outlined in the decanting document.
Considerations Before Decanting
Before proceeding with decanting, it’s essential to carefully evaluate the legal and tax implications with the guidance of legal and financial professionals. Further, the impact on the interests of current and future beneficiaries should be considered. It is advisable to communicate openly with beneficiaries throughout the process.
To minimize problems, trustees should consult legal counsel to ensure they have the proper authority to decant. For example, recently, our firm successfully defended a decanting of a trust. In this case, the trustee decanted the assets of a trust which originally benefited four siblings, to three separate trusts for the benefit of three of the siblings, leaving nothing to the fourth sibling. This was a carefully drafted trust, and the trustee acted within his discretion and authority to decant the trust assets in a manner that excluded one of the original beneficiaries. The excluded beneficiary challenged the decanting, lost in the trial court, and lost in the appellate court as well, with the actions of the trustee being upheld unanimously.
Decanting a trust offers trustees and beneficiaries a valuable tool for adapting trusts. In the right situation and with the proper guidance, they can take advantage of opportunities to preserve and protect their wealth for the future.
If you are considering executing an irrevocable trust or want to discuss how to alter an existing trust to better meet your needs, contact us for a consultation.
