A significant tool in estate planning is the irrevocable trust. Irrevocable trusts can facilitate lifetime gifts and remove assets from one’s estate while providing creditor protection and asset management for the beneficiaries. However, with very limited exception, irrevocable trusts cannot be amended or revoked. This can lead to problems in administering an irrevocable trust where changed circumstances may make modifications to the irrevocable trust desirable.
In order to effectuate changes to an irrevocable trust, estate planners often employ a technique commonly referred to as “decanting,” in which the trustees of the existing trust (referred to as the “invaded trust”) transfer the assets of the invaded trust to a new trust that incorporates the desired changes. There are limitations on the changes which can be made through decanting, and not every trust may be decanted.2 It is also critical that the potential tax consequences of decanting be considered. Notwithstanding these limitations, decanting remains an important and effective technique in estate planning. The following are a few examples of the reasons why an irrevocable trust might be decanted:
- To extend the term of the trust.3
- To remove beneficiaries.
- To change the governing law.
- To change administrative provisions.4
- To consolidate two or more trusts or create separate trusts.
- To correct drafting errors.
- To segregate assets subject to state income tax.
Sometimes, the trust agreement will include a provision specifically authorizing the trustees to decant the trust. Absent such a provision, a trust may be decanted if the trust is governed by the law of a state which has enacted a statute authorizing decanting.
New York was the first state to enact a decanting statute. The New York decanting statute (Estates, Powers and Trusts Law § 10-6.6), enacted in 1992, was substantially amended this past August. The amendments clarify and broaden the application of the statute. The following is a summary of some of the more significant changes:
- Unlimited discretion to distribute principal is no longer required.5
- A power of appointment may be granted to a current beneficiary of the invaded trust.
- Makes the decanting subject to a fiduciary duty.
- Eliminates the court filing requirement for inter-vivos trusts.
- Notice must be given to all those interested in the invaded trust and the appointed trust, as well as the grantor, if living, and any person who has the power to remove or replace the trustee.
- The decanting is not effective until 30 days after notice is given, unless all persons entitled to notice consent to an earlier date, and any interested person may object to the decanting by serving notice on the trustee prior to the effective date.