Today many estate plans contain irrevocable trusts that will continue for the benefit of a spouse’s lifetime and then for the benefit of several generations. Since these trusts are designed to span multiple decades, it is important that they include trust decanting provisions to address changes in circumstances, beneficiaries, and governing laws.
What is Trust Decanting?
When a bottle of wine is decanted, it is poured from one container into another. When a trust is “decanted,” the funds from an existing trust are removed and distributed into a new trust that has different and more favorable terms.
When Should a Trust Be Decanted?
Provisions for trust decanting should be included in trusts that are intended to last decades into the future. Decanting allows the following to be addressed:
- Clarifying ambiguities or drafting errors in the trust agreement. As trust beneficiaries die and younger generations become the new heirs, vague provisions or outright mistakes in the original trust agreement may become apparent. Decanting can be used to correct these problems.
- Providing for a special needs beneficiary. A trust that is not tailored to provide for a special needs beneficiary will cause the beneficiary to lose government benefits. Decanting can be used to turn a support trust into a full supplementary needs trust.
- Protecting the trust assets from the beneficiary’s creditors. A trust that is not designed to protect the trust assets from being snatched by the beneficiary’s creditors can be rapidly depleted if the beneficiary is sued. Decanting can be used to convert a support trust into a full discretionary trust that the beneficiary’s creditors will not be able to reach.
- Merging similar trusts into a single trust or creating separate trusts from a single trust. An individual may be the beneficiary of multiple trusts that have similar terms. Decanting can be used to combine these trusts into one trust which will reduce administrative costs and oversight. On the other hand, a single trust that has multiple beneficiaries who have differing needs can be decanted into separate trusts tailored to each individual beneficiary.
- Changing the governing law or situs to a different state. Changes in state and federal laws can adversely affect the administration and taxation of a multi-generational trust. Decanting can be used to take a trust that is governed by laws that have become unfavorable and convert it into a trust that is governed by different and more advantageous laws.
Final Thoughts on Trust Decanting
Including trust decanting provisions in an irrevocable trust agreement or a revocable trust agreement that will become irrevocable at some time in the future is critical to the success and longevity of the trust. This will help to insure that the trust agreement has the flexibility necessary to avoid court intervention to fix a trust that no longer makes practical or economic sense.