Trust Decanting: Changing the Unchangeable
Northeast Estate Planning Guide
Trust Decanting: Changing the Unchangeable
Trust decanting is a popular tool used to fix a broken trust. Irrevocable trusts that contain undesirable or outdated provisions can be mended through a method known best by wine enthusiasts. While wine decanting leaves behind unwanted sediment, trust decanting leaves behind unwanted planning in an otherwise unchangeable document. Irrevocable trust planning remains very effective for tax and asset protection, but oftentimes carries the bad rap of little to no flexibility to adapt to changing circumstances due to its permanent nature. Let’s face it, people change, times change, and laws change.
That is why more than half of the states in the US have enacted decanting legislation (NY, NH, and RI in the Northeast) that outlines the methods by which property from one (irrevocable) trust can be decanted, or transferred, into another trust as a means of amending the un-amendable. These laws contemplate, among other things, whether the existing trust beneficiaries must receive notice of the proposed revisions, whether certain beneficial interests can be removed from the old trust, and what additional powers can be granted to beneficiaries under the new trust. The states without decanting statutes often have a body of case law on the subject paving the way to decant. Many trusts are even drafted today with a built-in decanting provision to address future uncertainties.
Real-World Decanting Example | Case Study
When his father died, Greg received his inheritance in an irrevocable trust designed to protect the assets from “creditors and predators.” While his father’s plan was sound from an asset protection standpoint, it was unfavorable when considering which beneficiaries would be entitled to property upon Greg’s death. Since the time of the trust’s creation, Greg had remarried and grown very close to his wife’s children from a previous marriage, and wished to provide for them at his passing. Unfortunately, Greg’s irrevocable trust was written with “bloodline” language, meaning that upon his death, the trust assets would only pass to his children or grandchildren related by blood, thereby excluding his wife’s children.
Using the process of decanting, the inherited assets in Greg’s irrevocable trust were transferred into another irrevocable trust that retained the same asset protection but with different terms regarding the passage of property upon death. The new trust granted a power to Greg that allowed him to appoint, or redirect, a portion of the trust to include his wife’s children, thus leaving the unwanted bloodline planning of the old trust behind.
