In the past, once an irrevocable trust was created, there was no way to change it. This created significant issues for those whose life circumstances had changed unexpectedly. Now, there’s a solution. Trust decanting allows people to amend irrevocable trusts for specific reasons, such as to address unexpected changes in circumstances or trust laws.
What Does Trust Decanting Mean?
The term definition was derived from the concept of decanting wine, which involves pouring the liquid into another container to separate out the sediment, pouring off the good parts of the wine, and leaving the bad parts behind.
Decanting a trust works in more or less the same way. The assets are moved from one trust with outdated terms into another one, leaving those problematic terms behind.
How to Decant a Trust
There are two ways to decant a trust:
- Creating a new trust and distributing the assets held in the old one to it.
- Distributing the assets of the old trust to a pre-existing one with better terms.
Not all trusts can be decanted. Currently, only those that include a provision for decanting in the trust terms or are held in jurisdictions where trust law authorizes the process can be decanted. There are around 25 jurisdictions that allow trust decanting.
For those who live in states where trust decanting is not allowed, there may be an alternative. Move the trust to a state that allows decanting, or appoint a co-trustee from that state to move and decant the trust.
Reasons to Decant a Trust
There are plenty of reasons to want to decant a trust. The most common of them include:
- Amending the terms
- Correcting errors
- Avoiding adverse tax situations
- Extending the trust’s lifespan
- Adding or eliminating spendthrift provisions
- Changing the situs
- Avoiding local or state taxes
- Protecting assets
Who Can Decant a Trust?
The only person who can decant a trust is usually the trustee, who is still subject to all legally required fiduciary duties. The trustee must take all of the terms and purpose of the original trust into account prior to decanting and the potential consequences that it will have before deciding that the process is necessary or will provide a better outcome.
Restrictions on Decanted Trusts
Some types of trusts cannot be decanted, especially if the terms of the new trust reduce one or more beneficiaries’ income interest. These trusts cannot be decanted:
- Marital Trusts for tax or estate planning
- Charitable Remainder Trusts
- Grantor Retained Annuity Trusts
- Qualified Subchapter “S” Trusts
In most cases, trustees can only decant trusts if the initial beneficiary has a right of withdrawal. However, assigning the same right of withdrawal to the second trust can get around this issue. There are also restrictions on if the trustee is also the beneficiary.
How to Hire a Lawyer for a Decanting Trust
The process of trust decanting can be complex. The best way to begin is to find a trust and estate planning lawyer who can help. Trust decanting is simply not a do-it-yourself project. It requires the assistance of an experienced lawyer.