Decanting a Trust: What it Means and When it Should be Considered

/ June 1, 2017

Is this about wine?

 Unfortunately, no.

 What does it mean to decant a trust? 

Trust decanting is the process of pouring the assets of one irrevocable trust (the “original trust”) into a second irrevocable trust with more desirable terms (the “new trust”).  There are many restrictions on when and how a trust may be decanted, but decanting can be a valuable option when unforeseen circumstances arise during the administration of a trust.

A trust is the best estate planning instrument to provide for a myriad of scenarios and unforeseeable circumstances, but there are many reasons that a trust may need to be modified.  Personal circumstances and tax laws frequently change, trust documents are sometimes poorly drafted or certain scenarios can simply not be foreseen.  In these cases, a trust document may need to be amended.

While a revocable trust can be amended freely as long as the grantor is living and has the capacity to do so, such a trust becomes irrevocable upon the grantor’s death.  Additionally, irrevocable trusts established for gifting or tax purposes have strict limitations on amendments.  When an amendment is not otherwise permitted, decanting a trust is a viable option.

Purpose of Decanting

Decanting is a valuable estate planning tool when the power to amend a trust was limited to the grantor, who has since passed away.  This is a common scenario when an individual establishes a revocable trust, with the spouse as the remainder beneficiary.  The trustee is granted broad discretion to make distributions to the spouse.  However, the trustee decides that it is in the best interest of the spouse and or the remainder beneficiaries to amend the decedent’s trust, either due to changes in personal relationships or legal or tax circumstances.  Of course, a trust that was irrevocable from the beginning may also require changes that are beyond the authority of the third-party trustee or trust protector, if one was utilized.

Such changes may include correcting an error, modifying the ages of distributions for the remainder beneficiaries, increasing the asset protection capabilities of the trustee for the benefit of the beneficiaries, changing the jurisdiction of the trust for tax or asset protection purposes, adding a power of appointment, changing or adding to the order of successor trustees, adding special-needs trust protections for a disabled beneficiary or several other beneficiary or asset-related scenarios that were neglected or unforeseeable when the original trust was drafted.

Of course, since a trust is a legal contract between the grantor and the trustee, there are limitations on decanting.  If the original trust forbids decanting, then no such changes can be made.  Additionally, if a beneficiary’s right of withdrawal or right to a distribution has already come into effect, then it cannot be amended.  Changing the beneficiaries or their respective interests is a common goal of decanting, but can only be achieved if the trustee has significant discretion over trust distributions.

 Requirements for Decanting

Decanting is most effective if the trustee has the authority to make discretionary distributions under the original trust.  Generally, a trustee is authorized under most trusts to make distributions for the health, support and education of the beneficiary.  These are commonly referred to as “ascertainable standards” because they are legally defined and are thus not considered discretionary.  A broader standard, such as distributions for any expense or request that the trustee believes is in the best interest of the beneficiary is considered “absolute discretion” of the trustee.

If the trust allows for absolute discretion of the trustee over distributions of principal, then the new trust may remove a current or remainder beneficiary from the original trust in the new trust.  This is a significant power to be held by someone other than the grantor.

If the trust was originally intended to be more restrictive and does not allow for discretionary distributions by the trustee, then the current and remainder beneficiaries in the new trust must remain the same as the original trust.  While there are still many purposes for which decanting may be utilized, this places a significant restriction on the original trust, which may be desirable in certain circumstances.

Additionally, each state has its own requirements when it comes to notice to, or consent of, the beneficiaries of a trust.  Illinois law does not require consent of the beneficiaries but does require the trustee to provide notice to the current beneficiaries and presumptive remainder beneficiaries of the original trust prior to decanting.  If a beneficiary objects, then court approval is required in order to decant the trust.

Utilizing Trust Decanting

Decanting is by no means a substitute for proper, flexible drafting of a trust and should be utilized sparingly and only when necessary.  However, when a legal document can no longer be amended or revoked or circumstances beyond anyone’s control do change, decanting can be a valuable option for achieving the purpose of the trust.