In the not so distant past, creating an irrevocable trust was a final and permanent act. It meant that the trust could not be changed or cancelled, except possibly with costly judicial action and consent of beneficiaries. In recent years, however, with the passage of so-called “decanting” statutes in a growing number of states (now 25), the concept of tinkering with the provisions of an irrevocable trust agreement has gained significant traction.
What is Trust Decanting?
The term “decanting” often brings to mind the concept of pouring a bottle of wine into a decanter. Figuratively speaking, trust decanting is a similar act in which the trustee of an irrevocable trust (the Original Trust) decants the assets of the Original Trust by pouring (or rather appointing) them to a Second Trust (the Second Trust) with modified terms. The Second Trust is created by the trustee of the Original Trust by exercise of powers granted to the trustee under the Original Trust Agreement, state decanting statute, and/or common law.
When to Decant
Irrevocable trusts are a common tool used by individuals and families to shift wealth to descendants or other beneficiaries while mitigating the impact of transfer taxes for multiple generations. However, when an individual creates an irrevocable trust, he or she relinquishes most, if not all control over the trust assets in exchange for tax benefits. Although most irrevocable trust agreements are drafted with flexible terms intended to withstand changing circumstances, certain terms may become unfavorable for any number of reasons. For example, a trust agreement may provide for mandatory outright payments of trust principal to a beneficiary at a certain age, yet due to significant growth of trust assets and/or the personal situation of the beneficiary (e.g., divorce, substance abuse, bankruptcy), such payments may no longer align with the best interest of the beneficiary or the original intent of the grantor. Under these circumstances, the trustee may decant to create a multi-generational “dynasty” trust with wholly discretionary payment provisions.
Decanting also may be used to implement a directed trusteeship with Investment Advisors and/or Business Advisors, grant powers of appointment to beneficiaries, combine or separate trusts, incorporate favorable administrative or special needs provisions, and/or correct errors or ambiguities in a trust agreement.
Privacy also may be a concern when it comes to an irrevocable trust. While a trust reformation or modification may require both judicial approval and consent of beneficiaries, decanting is a non-judicial procedure (although judicial approval may be sought) and, depending on the jurisdiction, sometimes may be accomplished without notice to beneficiaries.