The term “decanting” typically is associated with wine — pouring it from one bottle into another container to remove sediment and allow it to breathe. In regard to an irrevocable trust, decanting allows a trustee to use his or her distribution powers to “pour” funds from one trust into another with different terms. Doing so provides the trustee with additional flexibility in light of changing tax laws or family circumstances.
Depending on the language of the trust and applicable state law, decanting may enable the trustee to correct errors, take advantage of new tax laws, eliminate or add a beneficiary, extend the trust term, modify the trust’s distribution standard, and add spendthrift language to protect the trust assets from creditors’ claims.
If you’re in the process of planning your estate, consider including trust provisions that specifically authorize your trustee to decant the trust. Even for an existing irrevocable trust, however, your trustee may be able to take advantage of decanting laws to change its terms.
Questions to consider
Differences in state law complicate the decanting process. A detailed discussion of the various decanting laws is beyond the scope of this article, but here are several issues that you and your advisor should consider:
Q: If your trust is in a state without a decanting law, can you take advantage of another state’s law?
A: Generally, the answer is “yes,” but to avoid any potential complaints by beneficiaries it’s a good idea to move the trust to a state whose law specifically addresses this issue. In some cases, it’s simply a matter of transferring the existing trust’s governing jurisdiction to the new state or arranging for it to be administered in that state.
Q: Will the trustee need to notify beneficiaries or obtain their consent?
A: Decanting laws generally don’t require beneficiaries to consent to a trust decanting and several don’t even require that beneficiaries be notified. Where notice is required, the specific requirements are all over the map: Some laws require notice to current beneficiaries while others also include contingent or remainder beneficiaries. Even if notice isn’t required, notifying beneficiaries may help stave off potential disputes down the road.
Q: What is the trustee’s authority?
A: When exploring decanting options, trustees should consider which states offer them the greatest flexibility to achieve their goals. Generally, decanting authority is derived from a trustee’s power to make discretionary distributions. In other words, if the trustee is empowered to distribute the trust’s funds among the beneficiaries, he or she should also have the power to distribute them to another trust. But state decanting laws may restrict this power.
Don’t try this at home
Before “popping the cork” (in other words, taking action), contact your estate planning advisor. Because of the complexities of decanting a trust, it’s best to leave this to the experts.