When you create an irrevocable trust, usually, the terms are set in stone. But what happens when you need to make adjustments due to significant life, law or personal changes? For example, let’s say your trustee is diagnosed with a life-threatening illness and you need to name a successor trustee. In the past, you might not have been able to make these changes to your trust. However, decanting a trust to amend your irrevocable trust is an option if you understand how it works. It can be beneficial to work with a financial advisor before making any big decisions that could impact your finances.
What Is Trust Decanting?
Wine connoisseurs know the purpose of decanting vintage wine is to separate the undesirable sediment from the desirable and flavorful liquid. So, when you decant a bottle, the unwanted residue stays in the bottle, where the desired beverage enters your glass. Decanting a trust works the same way. You leave behind the existing trust’s outdated terms and provisions while preserving the original trust’s purpose.
Trust decanting is usually a method used to amend irrevocable trusts since they are almost impossible to change or revoke, hence the name. When you decant a trust, you establish a new one using the assets of the old one.
How Trust Decanting Works?
There are usually two ways to decant a trust. You can either distribute the old trust’s assets to a pre-existing trust with more accommodating terms or create a new one by distributing assets from the old one. Creating a new trust is typically the method of choice since you can cater the new trust to the unique needs of the beneficiaries and trustees.
But, before you can move forward with either option, the trust must meet the following criteria:
- The trustees must determine if decanting makes sense and can be initiated.
- The state the trust was created in must allow trust decanting.
- The trustees must contact all trust parties following state laws.
Once these requirements are met, the trustee can draft, design and sign a new trust that adjusts the current trust provisions. After the new trust is in place, the trustee can distribute the funds of the old trust to the new trust.
Keep in mind, though, not every state allows for decanting a trust. However, trust provisions may allow you to move the trust to a state with decanting laws. Another option is to name a co-trustee that lives in a state where decanting is allowed.
Reasons to Decant a Trust
There are various reasons why you would choose to decant a trust. Here are a few examples of when decanting a trust could make sense.
- Protection from creditors: When a trust mandates that distributions must be made to beneficiaries at specific ages, creditors may have access to funds. Additionally, beneficiaries might have to pay estate taxes. However, if you decant the trust, the terms of the distributions can be extended to protect assets from creditors and estate taxation.
- Correct errors: You may need to fix errors that in older trusts. While some trusts allow protectors and trustees to correct errors, others don’t. Decanting trust can help you fix these errors.
- Move to a state with favorable laws: Perhaps the trust was drafted in a state that has stringent trust laws. Decanting a trust can allow you to move it to a state with favorable trust laws.
- Distribution flexibility: If the trustee(s) has restricted prudence to make payment on the beneficiaries’ behalf (i.e., education costs, welfare or other support), decanting the assets to another trust may give them more distribution flexibility.
- Update provisions: When the laws that govern the trust are changed or amended, it can impact the terms of the trust. Therefore, decanting the trust can give the trustee the flexibility to amend provisions so that the trust can fulfill its original purpose.
- Include the power of appointments: Many old trusts don’t include powers of appointment, allowing individuals the right to change the subsequent interests of the beneficiaries and how they receive assets. In addition, once decanted, trust assets can receive a new tax basis once the trustor or grantor passes away, which can help the beneficiaries lower their tax bill.
- Update or change trustees: Whether the trustor has a change of heart about the trustees chosen or the current trust provisions don’t allow for successor trustees, decanting a trust can include these provisions so the settler can make appropriate changes.
- Merging multiple trusts: If you established several different trusts with various law firms, you might find it best to merge them into one. Decanting a trust can help you combine formally formed trusts into one.
- Condense large trusts: Another issue is that some trusts are too large to serve an entire family’s needs. In this case, trust decanting can help you break down the trust into smaller trusts so each beneficiaries’ needs are better served.
- Create a special needs trust: If a beneficiary was named in the original trust without the knowledge they had special needs; you can decant the trust to a new special needs trust.
Trust Decanting Restrictions
Usually, trustors use trust decanting to amend irrevocable trusts. However, there are several trusts that cannot be decanted because the changes may lower the income of the beneficiaries. Some trusts that can’t be decanted include:
- Charitable Remainder Trusts
- Marital Trusts for estate or tax planning purposes
- Qualified Subchapter “S” Trusts
- Grantor Retained Annuity Trusts
Additionally, if the beneficiary currently receives distributions from the trust, you can’t decant the trust unless the distributions remain the same. Furthermore, if the beneficiary and the trustee are the same parties or the current trust allows for a change of trustee, there may be additional decanting restrictions. In either case, it’s best to discuss your options with a knowledgeable attorney so you can determine the best way to modify your current trust.
The Bottom Line
Remember, trust decanting is a formidable tool you can use to resolve issues, usually with irrevocable trusts. As long as state statutes allow for decanting, you can use this strategy to change the provisions of an old trust. Because trust decanting rules are complex, partnering with an estate attorney is advantageous. This way, you can ensure the new trust fulfills your current needs and objectives and you won’t face any legal or financial hurdles in the future.
Estate Planning Tips
- As you age, you will likely need to address many financial matters, including the formation of a trust. Because of the complexities of forming a trust, working with a financial advisor can help to ensure you cover all of your bases so you don’t have to worry when you head into retirement. Finding a qualified financial advisor doesn’t have to be complicated. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Before you take on concerns about your estate, you need to prioritize your retirement savings and pinpoint how much you need to live comfortably in your golden years. SmartAsset’s retirement calculator can help you see whether you’re on track for your retirement goals or need to start saving more.
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