Decanting a Trust: Pouring Old Wine into a New Bottle

In the realm of estate planning, the term irrevocable trust often conjures notions of permanence and unchangeability. You may be the trustee, beneficiary, or even grantor of such a trust and have been told that its terms cannot be changed. However, just as life’s circumstances evolve, so too might the need to adapt these seemingly unalterable instruments. Enter the concept of trust decanting—a strategy that offers a measure of flexibility within the rigid framework of irrevocable trusts.

What Is Trust Decanting?

Decanting a trust is analogous to decanting a bottle of fine wine. Both involve transferring contents from their original container to a new one to create a more desirable outcome or experience. We pour wine into a decanter to remove sediment and introduce oxygen, enhancing the flavor. Decanting a trust involves transferring assets from an existing irrevocable trust into a new trust with modified terms, enabling the trustees to leave behind outdated provisions and introduce improvements that better serve the trust’s intended purpose.

Using applicable decanting statutes, trustees can modify the trust to address legislative changes, evolving family dynamics, or new planning objectives, all while honoring the grantor’s original intent. It offers a practical and flexible solution for adapting a trust that no longer fits the current needs of the family or the planning landscape.

Why Consider Decanting?

There are a few reasons why families or trustees might consider decanting a trust. In some cases, the original trust may contain outdated or unclear language. Over time, what once seemed sufficient or understandable may no longer serve the trust’s beneficiaries well. Decanting allows the trustee to clean up ambiguous provisions and bring the document up to date.

Sometimes, the beneficiaries’ needs change in ways the original trust did not anticipate. A beneficiary may develop special needs, encounter financial difficulties, or require additional asset protection in light of a divorce or lawsuit. In these cases, decanting may be an option to adjust the terms of the trust, providing more tailored support, often while preserving important benefits such as eligibility for government assistance.

Decanting can also serve a strategic purpose. Tax laws change over time, and a trust that was tax-efficient at its inception may now be outdated. Through decanting, trustees can revise the trust to take advantage of current tax laws or state-specific provisions that offer greater flexibility or protection. Additionally, trustees may update provisions related to investment authority, succession planning, or the administrative jurisdiction to improve management and align with modern best practices.

What Can—and Cannot—Be Changed?

While trust decanting allows for meaningful changes, it is not without limits. The extent of permissible changes varies by state law, but trustees often have broad authority to modify:

• Administrative Language: Trustees can revise terms to clarify their powers, appoint trust protectors or advisors, and even relocate the trust to a jurisdiction with better legal or tax benefits.
• Powers of Appointment: A trustee who is decanting a trust may modify, remove, or add a power of appointment for a beneficiary, provided it aligns with the trust’s overall purpose and the trustee’s fiduciary duties. A power of appointment is a provision in a trust that allows the powerholder to decide who will receive certain trust assets, either during their lifetime or after their death.

However, certain core elements typically cannot be altered:

• Beneficiaries: Trustees generally cannot add new beneficiaries or remove existing ones. The class of individuals designated by the grantor must remain intact.
• Charitable Intent: If the trust was established for a charitable purpose or includes irrevocable gifts to nonprofits, those provisions are usually untouchable.
• Spendthrift Provisions: Designed to protect assets from creditors, these provisions are often safeguarded from modification.

Attempting to alter these fundamental elements can violate the trust’s original intent and may invite legal challenges. It’s important to note that state trust statutes vary widely on this topic. Each state’s decanting statute outlines specific rules about what may and may not be altered. Trustees must consult applicable state law, and ideally, a qualified attorney, before proceeding.

Proceeding With Care

Decanting, while powerful, is not a casual exercise. First, it’s important to determine whether decanting is allowed under the applicable state law, as not all states permit it, and those that do may impose specific limitations. Trustees must also act with utmost care and loyalty, as they are legally bound to act in the best interests of the trust’s beneficiaries. Modifying the trust in a way that is self-serving or that disadvantages any beneficiary can breach this duty and open the door to litigation.

In addition, the tax implications of decanting must be carefully reviewed. While the process itself is often neutral from a tax standpoint, it can inadvertently trigger gift, estate, or generation-skipping transfer taxes if not executed properly. A thorough review with your estate planning attorney and your financial advisor is essential before proceeding.

Other Ways to Modify an Irrevocable Trust

While decanting is a powerful tool, it’s not the only way to modify an irrevocable trust. Two other commonly used strategies are judicial modification and non-judicial settlement agreements (NJSAs). Judicial modification requires a court’s approval and is often used in situations involving complex or contested changes. This route is particularly helpful when the proposed changes go beyond what is allowed under a state’s decanting statute or when beneficiaries disagree about the terms.

NJSAs, on the other hand, offer a more streamlined approach. These are private agreements among all interested parties—typically the trustee and beneficiaries—that modify or interpret certain terms of the trust without involving the court. Most states limit the scope of NJSAs to nonmaterial changes, such as clarifying ambiguity or resolving administrative questions. As with decanting, the use of NJSAs is governed by state law and should be undertaken with careful legal guidance.

Final Thoughts

Trust decanting serves as a modern solution for an age-old challenge: how to plan for the future in a constantly changing world. While irrevocable trusts are meant to provide stability and long-term direction, the ability to adapt these structures, when necessary, can make them far more effective over time.

We are not attorneys at Bragg Financial, nor do we practice law. This article is intended solely for general informational purposes. Every trust is different, and decanting decisions should not be made lightly. Any questions related to a specific trust—or the appropriateness of decanting in your situation—should be addressed directly with an experienced estate planning attorney.

This information is believed to be accurate at the time of publication but should not be used as specific investment or tax advice as opinions and legislation are subject to change. You should always consult your tax professional or other advisors before acting on the ideas presented here.