Tuesday, September 8, 2015

Decanting: How to Fix a Trust That Isn’t Getting Better With Age

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.
The Advisors Forum