Decanting

Irrevocable Trust Decanting in 4 Steps

We all need a “do over” from time to time. Life changes, the law changes, and professionals learn to do things in better ways. Change is a fact of life – and the law. Unfortunately, many folks think they’re stuck with an irrevocable trust. After all, if the trust can be revoked, why call it “irrevocable”? Good question.

Fortunately, irrevocable trusts can be changed and one way to make that change is to decant the original trust. Decanting is a “do over.” Funds from an existing trust (with less favorable terms) are distributed to a new trust (with more favorable terms).

As the name may suggest, decanting a trust is similar to decanting wine: you take wine from one bottle and transfer it to another (decanter) – leaving the unwanted wine sediment / trust terms in the original bottle / document. Just like pouring wine from one bottle to another, decanting is relatively straight-forward and consists of these four steps:

1. Determine Whether Your State Has a Decanting Statute.

Nearly half of US states currently have decanting laws. If yours does, determine whether the trustee is permitted to make the specific changes desired. If so, omit step 2 and move directly to step 3.

If your state does not have a decanting statute, the answer isn’t as clear cut. While attempting to decant a trust in a state without a statute certainly can be done, it’s risky. Consider step 2.

2. Move the Trust.

If the trust’s current jurisdiction does not have a decanting statute or the existing statute is either not user friendly or does not allow for the desired modifications, it’s time to review the trust and determine if it can be moved to another jurisdiction.

If so, we can make that happen, including adding a trustee or co-trustee, and taking advantage of that jurisdiction’s laws. If not, we can petition the local court to move the trust.

3. Decant the Trust.

We’ll prepare whatever documents are necessary to decant the trust by “pouring” the assets into a trust with more favorable terms. All statutory requirements must be followed and state decanting statutes referenced.

4. Transfer the Assets

The final step is simply transferring assets from the old trust into the new trust. While this can be effectuated in many different ways, the most common are by deed, assignment, change of owner / beneficiary forms, and the creation of new accounts.

Get the Most from Your Trust

Although irrevocable trusts are commonly thought of as documents which cannot be revoked or changed, that isn’t quite true. If you feel stuck with a less than optional trust, we’d love to review the trust and your goals to determine whether decanting or other trust modification would help. Please feel free to call our office right now.

Escape from a Bad Trust: 5 Strong Reasons to Decant Your Trust

When a bottle of wine is decanted, it’s poured from one container into another. When a trust is decanted, trust assets are poured from an old trust into a new trust with more favorable terms.

Why Should a Trust Be Decanted?

Trusts are decanted to escape from a bad trust and provide beneficiaries with more favorable trust provisions and benefits.

Here are 5 strong reasons to decant your trust:

To clarify ambiguities or drafting errors in the trust agreement. As trust beneficiaries die and younger generations become the new heirs, vague provisions or mistakes in the original trust agreement may become apparent. Decanting can be used to correct these problems.

To provide 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 supplemental needs trust, thereby supplementing, but not supplanting, what government benefits cover.

To protect trust assets from the beneficiary’s creditors. A trust that is not designed to protect the trust assets from being snatched by beneficiary’s creditors can be rapidly depleted if the beneficiary is sued, gets divorced, goes bankrupt, succumbs to business failure, or suffers a health crisis. Decanting can be used to convert a support trust into a full discretionary trust that beneficiary’s creditors will not be able to reach.

To merge similar trusts into a single trust or create separate trusts from a single trust. An individual may be the beneficiary of multiple trusts with similar terms. Decanting can be used to combine trusts into one trust thereby reducing administrative costs and oversight responsibilities. And, on the other hand, a single trust that has multiple beneficiaries with differing needs can be decanted into separate trusts tailored to each individual beneficiary.

To change 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, governed by laws that have become unfavorable, and convert it into a trust that is governed by different and more advantageous laws.

You’re Not Stuck With Your Trust: We’ll Help You Escape

We include trust decanting provisions in the trusts we create. 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. Such provisions will help to ensure that the trust agreement has the flexibility necessary to avoid court intervention to fix a trust that no longer makes practical or economic sense.

You and your loved ones don’t need to muddle through with outdated and inappropriate trust provisions. If you are interested in adding trust decanting provisions to your trust or would like to have the decanting provisions of your trust reviewed, please call our office.

What’s Hot in Estate Planning Right Now May Surprise You

Estate planning has truly evolved over the past 20 years. Gone is the uncertainty about federal estate taxes and the absolute requirement for married couples to use complex trusts to minimize these taxes. But also gone is planning for the “traditional” family. In fact, today estate planning is more complicated than ever before.

Estate Planning in 1995 Versus 2015

In 1995 the federal estate tax exemption was only $600,000 and the estate tax rate was 55%. Back then it was easy to accumulate a taxable estate by simply owning a home, a few investments and some life insurance. And while married couples could pass on two times the exemption ($1.2 million) free from estate taxes by incorporating Marital/Family Trusts into their estate plan, these trusts came with strings attached. Yet these inflexible trusts were worth it to avoid the hefty 55% tax.

Today the federal estate tax exemption is a whopping $5.43 million (and will increase annually based on inflation) and the federal estate tax rate has dropped to 40%. In addition, married couples can now combine their estate tax exemptions and pass on two times the threshold ($10.68 million) without Marital/Family Trust planning by making the “portability” election. As a result, today the focus of estate planning has shifted away from estate tax planning to more relevant concerns:

While the federal estate tax rate has decreased from 55% to 40%, since 2012 the top federal income tax rate has increased from 35% to 43.4% and the top long-term capital gains rate has increased from 15% to 23.8%. This has made minimizing income taxes an integral part of estate planning.
Today many families are blended, dysfunctional or completely estranged. This has made flexible estate planning and finding ways to modify what was thought to be an irrevocable plan the “new normal.”

Estate Planning for the “New Normal”

Today with the generous and ever-increasing estate tax exemption and “portability” of the exemption available to married couples, it is estimated that 99.8% of Americans will have no federal estate tax exposure. As a result, traditional Marital/Family Trust planning is no longer a necessity for a majority of families. Therefore, instead of planning for excluding assets from the taxable estate, the new trend for couples with less than $10 million is to plan for estate inclusion so that their heirs will receive a basis step up. This can be accomplished by:

Leaving assets outright to your spouse and making the portability election; but beware if your spouse is a spendthrift, has creditor issues, or if you want to insure your assets stay within your bloodline.
Taking a wait-and-see approach, such as all to the Family Trust with the ability to disclaim to the Marital Trust or vice versa.
Including flexibility in the Marital Trust provisions.
Using a Family Trust and allowing for basis increase through a customized power of appointment.

But while building flexibility into your estate plan is ideal, what happens if your plan becomes irrevocable before you have had a chance to make it flexible? What if it would be advantageous to include assets in the estate of your spouse or a beneficiary, change the situs of your trust or its governing law, add or remove beneficiaries, add a trust protector or advisor, or change the trustee structure? Is it possible to modify or even revoke your inflexible, irrevocable trust? Under many circumstances the answer is yes, these things can be accomplished by agreement or a court order through:

Reforming the trust: Using judicial interpretation to determine and properly restate your intent.
Modifying the trust: Changing the terms of the trust to meet your tax‐saving objectives.
Equitably deviating the trust: Modifying the trust provisions upon the showing of an unforeseen change in circumstance the impact of which would frustrate your intent.
Invoking the Trust Protector: Allowing a third‐party to exercise specific powers as defined in the trust agreement.
Decanting the trust: Allowing the trustee to distribute property in further trust for a beneficiary.

Where Should Your Estate Plan Go From Here?

Estate-tax driven estate plans are becoming a thing of the past. Higher income tax rates, changing state laws, unfavorable jurisdictions and wayward heirs add up to the need for an estate plan that is able to adapt over time. Modern families need modern estate planning solutions, and our firm stands ready to help you create a flexible estate plan.

5 Good Reasons to Decant a Trust

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.

If you are interested in adding trust decanting provisions to your trust or would like to have the decanting provisions of your trust reviewed, please call our office.