When I began practicing law, clients created irrevocable trusts with caution because the trust was then set in stone. Now, clients are creating irrevocable with more frequency and considerably less caution because changing irrevocable trusts became commonplace. Trusts and Estate practitioners have numerous options to consider if they want to change an irrevocable trust. The first part of this three-part series explored changes to irrevocable trusts using judicial or nonjudicial modification Are Irrevocable Trusts Really Irrevocable – Part I. This second part examines decanting, and the final part in the series reviews the use of a Trust Protector to modify an otherwise irrevocable trust.
Unlike judicial and nonjudicial modification or the use of a Trust Protector, decanting relies upon powers that already exist in the trust. When the Trustee decants, the Trustee exercises their power to distribute trust assets and moves the assets from the existing trust with unfavorable terms to a new trust containing more favorable terms, much like pouring wine from the bottle into a decanter brings better flavor to the wine.
State laws differ considerably in the changes permitted in the new Trust. The new trust could provide the opportunity to correct a drafting mistake, clarify ambiguities, correct and update trust provisions, remedy problems in administration, change trust situs, expand or limit trustee powers, restrict beneficiaries’ rights to information, provide asset protection, adjust trustee succession, appoint a trust protector, alter distributions, or adapt trust provisions to address changes in beneficiaries’ circumstances depending upon the laws of the state in which decanting occurs. Over half of all states have enacted statutes authorizing decanting. Each state’s statutes regarding decanting vary widely, although most recognize that if a trustee has discretionary power to distribute trust corpus to the beneficiaries, such power constitutes a special power of appointment enabling the trustee to appoint the trust corpus to a new trust for the benefit of those same beneficiaries. That’s not the end of the inquiry, though.
Even if your state statutes do not specifically authorize decanting, you may still have options. Some states recognize a common law right to decant. Others allow inclusion of the authority to decant in the terms of the trust itself. Finally, even if none of the foregoing apply, you could consider changing the situs of the trust. The trustee or another authorized party can utilize a change in situs provision to move administration of the trust to a state that allows decanting. Once the trustee changes situs, then the trustee can take advantage of the new state’s decanting statutes. Most states that allow decanting have adopted some form of the Uniform Trust Decanting Act. Note that experts tend to cite South Dakota as the state with the most favorable decanting statute.
This article begins to scratch the surface of the issues involved with decanting. Decanting adds another option to solve trust troubles, although it’s vital to consult with me regarding applicable statutes, trust provisions, both in the original trust and the new trust, tax implications, notice, consent, and Trustee powers and fiduciary duties. Note that if a Trustee occupies the dual role of Trustee and beneficiary, that complicates things.
Decanting provides a great estate planning opportunity in the current environment. Clients are encouraged to review their plans, especially irrevocable trusts created many years ago to confirm that those trusts accomplish the goals of the grantor and properly protect the needs of the beneficiaries. If the trust fails to properly address beneficiary needs or otherwise could use some tweaking, decanting provides a great opportunity to re-write the trust with more favorable terms.
The final article in this series will explore using a Trust Protector to remedy defects in an irrevocable trust or provide more favorable terms.