Decanting is the act of pouring assets from one trust into a different trust with more desirable terms. While a revocable trust can be amended freely while the grantor is alive, an irrevocable trust has more restrictions. To be sure, a trust protector would be the first line of defense when a problem arises. If the original irrevocable trust allows for a trust protector, she may be able to alter that trust to bring about the desired result. If a trust protector is not provided for in the original trust, or if she cannot fix the problem, decanting might be a good solution.
Decanting originated under common law in Phipps v. Palm Beach Trust Company, 196 So. 299 (Fla. 1940). To date, the following states allow decanting by statute: Alaska, Arizona, Delaware, Florida, Illinois, Indiana, Kentucky, Michigan, Minnesota, Missouri, Nevada, New Hampshire, New Mexico, New York, North Carolina, Ohio, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Virginia, Wisconsin and Wyoming. Massachusetts allows decanting through case law, namely Morse v. Kraft, 992 N.E.2d 1021 (Mass. 2013).
When would you use the power to decant?
4 Scenarios When Decanting is a Good Idea
- To Amend Trusteeship
Maybe you now realize it would be prudent to add an investment trustee, or a limited special trustee. If your original trust does not allow for these modifications, you could decant into a new trust that contains these provisions.
- To Combine Trusts or Separating Trusts
Sometimes a family has one big trust, where smaller separate trusts would work better. Conversely, there may be several smaller trusts that have accumulated over the years and it would make sense to combine them.
- To Adapt to Changes in the Law
If there is a change in law that makes your current trust unfavorable, unfeasible, or illegal, it might be a good idea to decant. Likewise, if a new law emerges that you would like to take advantage of that your current trust does not account for, decanting should be considered. Give this a lot of thought however. Decanting for purposes of a law that changes regularly may not be a good idea, as you would always be playing catch-up to the new regulations.
- To Fix Drafting Errors
Oops! You notice a huge drafting error that needs to be fixed. Decanting into a new trust with the correct terms would be a good move. Say, in a Medicaid Asset Protection Trust, the original trust gave the grantor access to principal. This is a big no-no and Medicaid will count the corpus of the trust as available to the grantor for Medicaid eligibility purposes. You could decant into a new irrevocable trust that does not give the grantor access to principal.
How does decanting work?
You will want to check your state statutes for any decanting requirements. Some states require that all beneficiaries give consent. Some states simply require notice to the beneficiaries. Some states do not allow decanting at all. The Uniform Trust Decanting Act has been gaining momentum in recent years, and has been enacted by a handful of states.
If your state does not allow decanting, or is silent on the issue, you may want to consider moving the situs of the trust to a state that does have favorable decanting statutes. (Decanting under common law is usually not advisable.) For example, if the instant state dictates the situs of the trust is where the trustee resides, find a trustee in the favorable state that you want to move the trust to. Then, the trust will be under the jurisdiction of the state that allows decanting and you can proceed. If the instant trust forbids moving the trust to a new jurisdiction, look into having the trust protector amend that language.
Next, draft the new trust documents. Make sure to heed all relevant laws and reassess the case in detail to ensure you are achieving the optimal outcome. Give a lot of thought into providing the most flexibility possible, while still maintaining the desired protections and tax advantages.
Finally, transfer assets into the new trust. This is achieved through re-titling assets, setting up new accounts, changing beneficiary designation forms, and creating new assignments. Transfers are achieved by the trustee making discretionary distributions from the old trust into the new trust.
Decanting is a powerful tool and a good practitioner should know when and how to use it. Is decanting allowed in your state? How does your state define the situs of a trust? Should you include decanting provisions in your trust documents? Consider these questions and be familiar with decanting case law in your jurisdiction. Decanting has gained momentum in recent years, and can be a good strategy when faced with an unfixable problem in a trust.