While many wines get better with age, the same cannot be
said for some irrevocable trusts. Maybe
you’re the beneficiary of a trust created by your great grandfather seventy
years ago that no longer makes sense. Or
maybe you created an irrevocable trust twenty years ago that doesn’t work as it
should. Is there
any way to fix an irrevocable trust that has turned from a fine wine into vinegar? You may be surprised to learn that under
certain circumstances the answer is yes, by “decanting” the old broken trust
into a brand new one.
What Does It Mean to
“Decant” a Trust?
Wine lovers know that the term “decant” means to pour wine from
one container into another in order to open up the aromas and flavors of the
wine. In the world of irrevocable trusts
“decant” means the legal process through which the trustee appoints or
distributes trust property in further trust for the benefit of one or more of
the beneficiaries. In other words, the
trustee transfers some or all of the property held in an existing trust into a
brand new trust with different and more favorable terms.
When Does It Make
Sense to Decant a Trust?
Decanting a trust makes sense under many different
circumstances:
·
Tweaking
the trustee provisions to clarify who can or cannot serve as the trustee.
·
Expanding
or limiting the powers of the trustee.
·
Converting
a trust that terminates when a beneficiary reaches a certain age into a lifetime
trust.
·
Changing
a support trust into a full discretionary trust in order to protect the trust assets
from the beneficiary’s creditors.
·
Clarifying
ambiguous provisions or drafting errors in the existing trust.
·
Changing
the governing law or trust situs to a less taxing or more beneficiary-friendly
state.
·
Adding,
modifying or removing powers of appointment for income tax or other reasons.
·
Merging
similar trusts into a single trust for the same beneficiary.
·
Creating
separate trusts from a single trust to address the differing needs of multiple beneficiaries.
·
Providing
for and protecting a special needs beneficiary.
What is the Process
for Decanting a Trust?
First of all, decanting must be allowed under applicable
state case law or statutory law. Aside
from this, the trust agreement may contain specific instructions with regard to
when or how a trust may be decanted.
Once it is determined that a trust can and should be
decanted, the next step is for the trustee to create the new trust agreement with
the desired provisions. The trustee must
then transfer some or all of the property from the existing trust into the new
trust. Any assets remaining in the existing
trust will continue to be administered under its terms, otherwise the empty
trust will terminate.
Beware: Decanting is Not the Only Solution to Fix a
Broken Trust
While decanting may work under certain circumstances, it is
not the only way to fix a “broken” irrevocable trust. Our firm can help you evaluate all of the
options available to fix your broken trust and determine which ones will work
the best for your situation.
To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax adviser based on the taxpayer’s particular circumstances.
