Decanting– Friend or Foe?

/ October 5, 2018

I recently went to a CLE conference on trusts and heard the word “decanting” thrown around. Naturally, my ears perked up because, well, I thought of wine or tea for that matter.

But no.

Turns out, irrevocable trusts can be decanted. Who knew?

The definition of “decant” is:
gradually pour from one container into another, especially without disturbing the sediment.”

Sounds pretty harmless, right? Or is it?

Well, it depends, naturally.

“Irrevocable” means unmodifiable, not able to be changed. So once an irrevocable trust is created, that’s it. One of the main raisons d’être for this kind of trust instrument is to signal to certain parties (i.e. the IRS, beneficiaries, and/or creditors) that these assets/money/precious things are unalterably “stored” in this imaginary vault we call a trust and you can’t take them.

But what if…things change?!

  • What if your beneficiaries move to another state?
  • Your beneficiary ends up being a total financial fiasco?
  • You made a DRAFTING ERROR?
  • The LAW CHANGES?????

Fear not, decanting is a perfectly legal way of pouring an original trust into a bigger and better trust instrument. The trust can then breathe better – come to life, if you will. Just like a child, you have hopes and dreams for an infant trust when it is first born, but as it grows and ages, who can possibly predict exactly how things will play out? Not we mortals. And, no, not even lawyers.

So, you pour the baby trust terms into a new, roomier trust container and let it come into its own, so to speak.

Are there tax consequences to consider? Of course. But, generally speaking, if you are exchanging like for like, income tax implications remain the same. Gift tax can become a problem if the trustee deciding to decant the trust is a beneficiary. What does this mean? It means you don’t have a beneficiary trustee decant a trust. You have an independent trustee (i. e. a trustee who is NOT a beneficiary and presumably has a higher degree of objectivity) exercise this power. If you didn’t appoint an independent trustee originally, let’s hope you put some language in there that allows the beneficiary trustee to appoint one.

Incidentally, if you haven’t been including any kind of reference to decanting in your trust documents, not to worry. So long as the trust instrument doesn’t expressly prohibit decanting (and the trust lives in a state that allows the process), decanting can be done. You draft a decanting agreement and pour away.

And on that note, I’m going to have a nice cup of tea (decanted, naturally).

Leave a Reply

Your email address will not be published. Required fields are marked *