Decanting a Trust: Why and How to Revise a Trust

Gabriel Katzner - January 4, 2022 - Asset Protection
Estate Planning Attorney Talking about Trust Decanting

Estate planning documents are carefully considered plans. For this reason, it is important to balance the desire for flexibility with the concern that changes may be made without considering the potential implications of those changes.

When a trustmaker dies, their revocable living trust becomes irrevocable. Other trusts are irrevocable from inception. But, what happens if personal circumstances or tax laws change, new unforeseen scenarios develop, or the documents are poorly drafted? In that case, the trust documents need to be amended, and decanting is one tool used to amend the trust document.

What is Trust Decanting?

Trust decanting is the process of pouring the assets of one irrevocable trust into another one. Just like decanting a bottle of wine, the part of the trust document that is inaccurate or needs to be changed is left behind, while the rest is moved to the new trust. However, not all states allow for trust decanting.

Potential Reasons for Decanting a Trust

There are many potential reasons for trust decanting, including:

  • Correcting errors such as misspelled names or incorrect dates
  • Updating in response to changing laws to avoid adverse tax consequences
  • Extending the duration of the trust
  • Avoiding or reducing state or local tax liability
  • Moving a trust to a state with more favorable laws
  • Adjusting powers of appointment
  • Combining or separating multiple trusts
  • Amending the terms of the trust
  • Resolving any ambiguities in the trust language
  • Converting a trust from one form to another

If the trustee has the authority and the trust is in a state where decanting is permitted, the trustee may use trust decanting to ensure that the way the trust assets are being distributed to the beneficiaries is in line with the intent of the trust funder. For example, suppose a trust agreement states that a beneficiary should receive three equal distributions of their trust at age 30, 35, and 40. Suppose further that the beneficiary is in the midst of a nasty divorce. The trustee knows that the trustmaker would never have wanted the trust assets to go to their daughter-in-law. The trustee may use trust decanting to protect the trust accounts and property from being distributed to the beneficiary while they are going through the divorce process.

Another potential scenario is that an irrevocable trust is in a state that has recently had a change in state tax laws that would affect the trust income. Trust decanting may allow the trustee to move the trust to another state with more favorable laws, allowing them to protect the trust assets for the beneficiaries.

How are Trusts Decanted?

The steps in decanting a trust are as follows:

  1. The trustee of the current trust must have the authority to determine whether trust decanting is appropriate and whether it should be initiated.
  2. The state governing the trust must have laws that allow trust decanting, or the trust is able to be moved to a state that allows it.
  3. The trustee must notify the parties of the trust as per the state’s laws.
  4. A new trust is drafted that addresses the areas of the current trust document that need revision.
  5. The trust is designed and signed.
  6. After meeting all requirements, the trustee can decant the trust accounts and property from the old trust to the new one.

Trust decanting is a powerful estate planning tool that can be used to remedy problems in irrevocable trusts, as long as state law permits it. However, the tool must be used carefully, as it can inadvertently cause harm instead of rectifying a problem. Speak with your estate planning attorney about decanting a trust to ensure that it will not trigger any negative tax consequences to any parties involved.

You can schedule a call with us or reach us directly at 855.631.3457 to learn more about how best to plan today to protect those most important to you.

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