Decanting is pouring liquid from one container to another. When decanting wine, the process is supposed to be done carefully to avoid disturbing any sediment or impurities that may have settled at the bottom of the container. Wine exposed to oxygen, over time, becomes vinegar.
So, how does this apply to an irrevocable trust? Typically, the terms of an irrevocable trust are set in stone. Decanting a trust provides an option to make appropriate trust amendments.
What is decanting a trust?
An irrevocable trust may have been established decades ago. The terms of the trust may no longer apply to current daily life.
Decanting an irrevocable trust is the process of transferring some or all of the accounts or property in an existing trust to a new one that has terms that better apply to the current situation.
The existing trust’s outdated terms and provisions are left behind while preserving the original intent and purpose of the trust.
Decanting an irrevocable trust makes it possible to modify or update the terms of an irrevocable trust. Typically, it is very challenging to change or revoke an irrevocable trust while keeping it in its current form. Decanting makes it possible to add flexibility to irrevocable trusts, resolve ambiguities, or clarify trust language.
When should you consider decanting a trust?
Decanting a trust should be considered when you need to make any of the following changes:
- Expand or limit the trustee’s powers.
- Clarify who can or cannot serve as a trustee.
- Update or change successor trustees.
- Convert a trust that terminates upon reaching a specific event into a lifetime trust.
- Merge similar trusts for a specific beneficiary into a single trust.
- Provide for and protect a beneficiary with special needs using a special needs trust.
- Change ambiguous language in a trust document.
- Repair any drafting errors in the existing trust.
- Move the trust situs or governing law to a state with more favorable laws.
- Address changes in governing laws.
- Extend the distribution date to protect assets from creditors and estate taxes.
- Amend the provisions of the trust so it can fulfill its original purpose.
How do you decant a trust?
There are many laws and restrictions on when and how an irrevocable trust may be decanted. A state’s statute or case law can allow decanting, and the trust agreement must contain specific instructions for how and when the trust may be decanted.
If the trust can and should be decanted, the trustee will create a new trust document with the desired provisions. As with decanting wine, the trustee will transfer some or all of the accounts and property from the current irrevocable trust into the newly formed trust, leaving behind unfavorable components or language.
If the trust is empty after it has been decanted, it will be terminated. If property and accounts remain in the original trust, they will continue to be administered under the terms of the original trust instructions.
Not all states allow for trust decanting. However, in states that do allow it, trust decanting is a powerful estate planning tool that enables trustees to remedy issues with an irrevocable trust.
Talk with your estate attorney if you are the trustee or beneficiary of an irrevocable trust that does not meet the intent of the trust. Learn whether decanting an irrevocable trust is an option and how to go about the process so it does not trigger any negative tax or legal problems for any involved party.
Speak to a trusted advisor to help you develop your estate plan. Contact us and schedule a call with us at 855.631.3457 to learn more about how to protect those most important to you.