Estate planning often involves using irrevocable trusts that can last for several generations. However, circumstances, beneficiaries, and governing laws can change over time, including trust decanting provisions in such trusts, which is important. These provisions allow for the modification of the trust terms without having to go through the costly and time-consuming process of creating a new trust. By including trust decanting provisions, individuals can ensure that their estate plan remains flexible and adaptable to changing circumstances while still providing for their loved ones for generations.
What is trust decanting?
Trust decanting is a legal process involving transferring assets from an existing trust into a new one with different terms. This process is similar to decanting wine, pouring from one container to another. In trust decanting, the assets and accounts from the original trust are distributed into a new trust with more favorable terms.
When should a trust be decanted?
Provisions for trust decanting should be included in trusts that are intended to last decades into the future. Decanting can do the following:
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- Clarify ambiguities or drafting errors in the trust agreement. As trust beneficiaries die and younger generations become the new heirs, vague provisions or outright mistakes in the original trust agreement may become apparent. Decanting can be used to correct these problems.
- Provide for a special needs beneficiary. A trust that is not tailored to provide for a special needs beneficiary will cause the beneficiary to lose government benefits. Decanting can be used to turn a trust in which the beneficiary is entitled to money into a full supplemental needs trust.
- Protect the trust’s accounts and property from the beneficiary’s creditors. A trust that gives the beneficiary control or access to their inheritance puts that inheritance at risk of being snatched by the beneficiary’s creditors, rapidly depleting the inheritance if the beneficiary is sued. Decanting can be used to convert a trust without any asset protection features into a full discretionary trust that the beneficiary’s creditors will not be able to reach.
- Merge similar trusts into a single trust or create separate trusts from a single trust. An individual may be the beneficiary of multiple trusts that have similar terms. Decanting can be used to combine these trusts into one trust that will reduce administrative costs and oversight. On the other hand, a single trust that has multiple beneficiaries with differing needs can be decanted into separate trusts tailored to each individual beneficiary.
- Change the governing law or situs to a different state. Changes in state and federal laws can adversely affect the administration and taxation of a multigenerational trust. Decanting can be used to take a trust that is governed by laws that have become unfavorable and convert it into a trust that is governed by different and more advantageous laws.
Final Thoughts on Trust Decanting
Including trust decanting provisions in an irrevocable trust agreement or a revocable trust agreement that will become irrevocable at some time in the future is critical to the success and longevity of the trust. This will help ensure that the trust agreement has the flexibility necessary to avoid court intervention to fix a trust that no longer makes practical or economic sense.
If you are interested in adding trust decanting provisions to your trust or would like to have the decanting provisions of your trust reviewed, contact our office.