An irrevocable trust is usually created to take assets out of the estate of the grantor mostly to:
When a trust is first created, the terms may seem sound and reasonable. However, over the years, there may be reasons why the trust no longer works or the circumstances have changed. In order to change the terms of the trust, the trustee usually has to go to court. However, there may be one option to modify a trust that doesn’t require court approval — it’s called decanting.
Trust decanting, which is allowed in some states, is a method for modifying an irrevocable trust. What is beneficial is that you would not have to obtain court approval to modify the trust, which is what usually would have to happen to modify an irrevocable trust. With decanting, the trustee can distribute part or all of the trust principal to another irrevocable trust (called the “appointed trust”). In other words, you pour the assets from one trust to another trust that has different terms.
A list of some of the reasons why decanting might be desired, depending on the trust language and state law:
1. To extend the trust’s term
2. To fix drafting errors or makes ambiguous terms clear
3. To move a trust to a state with more favorable laws
4. To adjust powers of appointment
5. To change trustee provisions
6. To combine multiple trusts
7. To separate trusts
8. To convert a support trust to a discretionary trust
9. To convert a trust to a special needs trust
10. To qualify a trust to own stock in an S corporation
One caveat and something that should be considered when creating an original trust is that it must give the trustee the power to distribute trust principal. If there is no power to invade trust principal, the trustee cannot decant the trust.
What state is the best state for decanting a trust? It depends on various regulations and your specific needs. One state or another may be a better jurisdiction to create your trust or attempt to use decanting methods.
In states without a decanting statute, common law may provide the power to decant if the trustee has authority to invade the trust for the benefit of the beneficiaries. However, a trustee may find him or herself in court if an interested party believes the trustee did not have the authority to decant the trust.
In addition, there is a need to consider tax consequences that may stem from:
If decanting a trust seems right for you, discuss the option with your attorney. This is generally a complex strategy but may allow a trustee additional flexibility.
Not All States Allow Decanting: Questions to Ask
The strategy of decanting a trust is only permitted in some states. Even if states do allow it, there are certain restrictions. Here are some questions that should be answered if you are interested in decanting:
1. Does your state have a decanting statute?
2. Does your state statute allow a trust with an ascertainable standard? (An ascertainable standard is one that restricts the trustee to make distributions to the beneficiary based on health, education or support needs.)
3. Does your state statute require the trustee to send notice to the beneficiaries of the trust? (Not all states do.)
4. Does the state statute allow a trust with an ascertainable standard to be decanted into a discretionary trust? (A discretionary trust is one that allows a trustee to determine when and if principal and income distributions should be made.)
5. Does the state statute allow the trustee to remove a mandatory income interest?
6. Does the state statute allow the trustee to decant a trust that gives a beneficiary the power to appoint assets to someone who is not a beneficiary of the first trust?
7. Is the state a favorable dynasty trust jurisdiction? (A dynasty trust can grow for generations and provide tax benefits. However, state laws vary.)
8. Is the state a favorable domestic asset protection trust (DAPT) jurisdiction? (This is an irrevocable, sprendthrift trust that can be established in certain states and provides creditor protection.)