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March 27, 2017 at 12:06 AM
They say that even the best laid plans can go awry, and many clients who meticulously planned for the future by establishing irrevocable trusts may now regret the terms of those trusts—or the asset allocations that they chose. ortunately for these clients, irrevocable no longer really means that the trust terms are set in stone because half of the states now allow a process called “decanting” that can provide a method for clients to change the terms of their irrevocable trusts.
Clients who wish to take advantage of these laws must be aware of the intricate variations between the laws of each state and carefully evaluate those rules to determine whether their particular trust can benefit from the decanting process.
Trust Decanting Defined
Essentially, decanting a trust means distributing the property from an old trust into a new trust (with new and presumably more favorable trust terms) for one or more of the old trust beneficiaries. Assets that remain in the old trust will continue to be governed by its terms (if the old trust is emptied, it can simply terminate). It is the trustee who executes the trust decanting process, using powers either granted by the old trust itself, state law or common law rules.
There are a variety of reasons why a client may wish to decant an old trust. For example, the old trust may provide distribution terms that are no longer advantageous because of either the growth rate of the trust assets or the personal situation of the beneficiary (who may have divorced, become financially irresponsible, etc.). The client may simply wish to change the governing law of the trust to a more tax-friendly state or combine several similar trusts established for the same beneficiaries.
The trust need not be established in one of the states that allows for trust decanting, because the old trust can simply be “decanted”—moved from—the original governing state to a state that allows decanting.
Importantly, the decanting process takes place outside of the judicial process that is required for reformation of trusts—providing the client with a level of privacy that cannot otherwise be obtained through the judicial process.
Decanting’s Fine Print
Trust decanting is allowed in 25 states, and 13 of the states that allow trust decanting passed the laws governing the process within the last five years. As a result, the process is relatively new and comprehensive IRS guidance has not yet been issued. Further, only two states have adopted a uniform law that has been developed on trust decanting, so the rules governing the process will vary from state to state.
