You have probably heard that an irrevocable trust cannot be changed or amended. But, what do you do if significant circumstances in your life have changed and you need to amend the trust?
Traditionally, once you create an irrevocable trust, there is nothing you can do to change it. Now, however, there is a method, referred to as decanting, that you can use to make changes to an irrevocable trust in order to address changes in your personal circumstances, trust law, etc.
What Does it Mean to Decant a Trust?
Decanting, in the context of a bottle of wine, means to pour wine from the original bottle into another container in order to separate the wine from the sediment that has formed within it. Essentially, you pour off the good part and leave the bad part behind.
In the same way, you can pour the assets from one trust with undesirable or out-dated terms into another trust, leaving the unwanted terms behind. This effectively allows you to set up a new trust for one or more of the same beneficiaries of the original trust and fund it with assets from the old trust.
How to Decant a Trust
You can decant a trust in one of two ways:
1. By creating a brand new trust with new terms and distributing the assets of the old trust to the new trust—the most common method; or
2. By simply distributing the assets of the old trust to a pre-existing trust with more favorable terms.
The power to decant a trust can be provided by the trust terms or authorized by trust law. Currently, about 25 jurisdictions allow for decanting a trust.
Decanting has also been allowed by common law cases, such as:
If state law does not allow you to decant, the terms of the trust may permit you to move the trust to a state that does allow decanting. Also, you may be able to appoint a co-trustee from a state where decanting is allowed. He or she could then move the trust and decant.
Why Decant a Trust?
Some of the most common reasons why you may want to decant a trust include:
- To amend the terms of the trust
- To correct drafting errors
- To avoid adverse tax consequences
- To extend the life of the trust
- To add or eliminate spendthrift provisions
- To change the situs (governing jurisdictions) of the trust
- To avoid state or local taxes
- For Asset protection
Who are the Parties Involved in Decanting a Trust?
Decanting a trust usually only involves the trustee, subject to all fiduciary duties required by local law.
As a general rule, the trust must have discretionary power under the terms of the trust to make distributions of income or principal to (or for) the benefit of one or more beneficiaries of the trust.
Furthermore, the trustee must first take into account the terms and purpose of the original trust, the terms and purpose of the second (or new) trust, as well as, the consequences decanting will have on these before deciding that decanting the trust is necessary or desirable.
Restrictions on Decanting a Trust
There are several different types of trusts where decanting cannot be done if the second trust will reduce the income interest of any beneficiary. Among these are:
- A Marital Trust for estate or tax planning purposes
- A Charitable Remainder Trust
- A Grantor Retained Annuity Trust
- A Qualified Subchapter “S” Trust
Furthermore, in most cases, a trustee cannot make a transfer to a second trust if the beneficiary has a present right of withdrawal, unless the second trust contains the same right of withdrawal.
Lastly, there are some restrictions on decanting a trust where the beneficiary is also the trustee or has the ability to change the trustee to a related or subordinate party.
Contact an Experienced Trust & Estate Planning Attorney
Decanting a trust will enable to modify the terms of an existing irrevocable trust to reflect your current needs and objectives. However, it is certainly not a do-it-yourself project. You will need the assistance of an experienced attorney.
To learn more about how you can modify a trust through decanting, contact us to arrange a consultation with an experienced trust & estate planning attorney.