Once an irrevocable trust is set up with the best of intentions for your children, it’s set in stone, and you’re out of luck if circumstances change … or are you? In some cases, you may be able to undo, or “decant,” the trust.
By: Jedediah McClure, JD
Key Points
- Irrevocable Trusts: Often set up to provide long-term financial security, but circumstances can change, leading to potential issues.
- Decanting: A legal process that allows for the transfer of assets from an old, inadequate irrevocable trust to a new trust with updated terms.
- Flexibility: Decanting can offer solutions to address changing economic and societal circumstances affecting the beneficiaries.
Important Definitions
- Irrevocable Trust: A trust that cannot be altered, amended, or terminated without the permission of the grantor’s named beneficiary or beneficiaries.
- Decanting: The process of transferring assets from one trust to another to create a new trust with updated terms and provisions.
- Dynasty Trust: A long-term trust designed to pass wealth down through multiple generations.
Understanding the Need for Flexibility in Trusts
Wealthy parents and grandparents who have carefully planned ahead for their children’s futures should take heed of this cautionary tale.
A Real-World Example
It’s 1998: You’ve accumulated substantial estate assets and, with the help of your lawyer, created an irrevocable dynasty trust for your infant son to protect his legacy and provide him with long-term financial security. You were a thoughtful and proactive parent.
It’s 2018: A lot has changed over the past 20 years. The business landscape has evolved, and the path to independent adulthood has become more challenging. Your son, now an adult, has adopted the modern ethos of “do what makes you happy.” With a degree in a niche field, limited job prospects, and a history of short-term jobs, he’s moved back home.
Your estate planning attorney calls to remind you that the first significant distribution from your son’s trust is imminent. You worry he’ll quit job hunting and rely entirely on the trust funds, becoming a “trust fund baby.”
You ask your attorney to stop the distribution, fearing it will hinder his motivation and independence. However, the trust you created is irrevocable and cannot be changed.
You Are Not Alone
This scenario is all too common. Many parents and grandparents face the same dilemma, seeking to protect their adult children from the consequences of their own decisions.
Thirty years ago, it was common to draft irrevocable trusts without considering the potential need for future adjustments due to changing circumstances. Estate planners did not foresee the economic and societal shifts that could render these trusts problematic.
Fortunately, the landscape is changing. As of the end of 2018, 25 states have enacted “decanting” statutes that allow modifications to irrevocable trusts. California joined this group on January 1, 2019, providing limited options for revising these trusts.
The Process of Decanting
Decanting involves transferring assets from an old irrevocable trust to a new one with updated terms that better suit current circumstances. This process can effectively rectify outdated provisions, creating a more appropriate trust for today’s needs.
However, decanting statutes vary significantly between states. Some, like California, have restrictive laws with extensive notice requirements. If your trust includes a “change of situs” provision, consider moving the trust to a state with more flexible decanting laws, such as Nevada, Delaware, or South Dakota.
Why You May Want to Decant a Trust
Decanting can address various issues, including:
- Extending the Term of the Trust: Lengthening the trust’s duration to protect assets for multiple generations.
- Changing a Support Trust to a Discretionary Trust: Shifting from mandatory to discretionary distributions to protect against liabilities, creditor claims, tax liens, or divorces.
- Correcting Drafting Errors: Adding provisions, such as Special Needs Provisions, that were omitted initially.
- Changing the Governing Law: Moving the trust to a jurisdiction with more favorable tax laws.
- Combining Trusts for Efficiency: Reducing administrative costs by merging multiple trusts.
- Qualifying a Trust to Hold S Corporation Shares: Allowing for better estate planning and asset protection opportunities.
Decanting is a relatively new concept, and its potential is just being realized. It offers a way to fix outdated or poorly drafted irrevocable trusts, providing a valuable tool for modern estate planning.
Additional Information
- Consult with Professionals: Always consult with an estate planning attorney to understand the implications and process of decanting a trust.
- Review Trust Provisions: Regularly review the provisions of your trust to ensure they continue to meet the needs of the beneficiaries.
- State Laws: Be aware of the specific decanting laws in your state and consider the possibility of moving the trust to a more flexible jurisdiction if necessary.
Frequently Asked Questions (FAQs)
Q: What is decanting in the context of a trust?
A: Decanting is the process of transferring assets from one irrevocable trust to a new trust with updated terms and provisions, effectively allowing modifications to the trust that would otherwise be unchangeable.
Q: Can any irrevocable trust be decanted?
A: Not all irrevocable trusts can be decanted. It depends on the terms of the original trust and the laws of the state governing the trust. Consulting with an estate planning attorney is essential to determine if decanting is possible.
Q: What are some common reasons for decanting a trust?
A: Common reasons include extending the term of the trust, changing a support trust to a discretionary trust, correcting drafting errors, changing the governing law, combining trusts for greater efficiencies, and qualifying a trust to hold S Corporation shares.
Q: How do I know if my state allows for decanting?
A: Many states have decanting statutes, but the specifics vary. It’s important to consult with an estate planning attorney who is familiar with your state’s laws to determine if decanting is an option for your trust.
Q: What are the potential tax implications of decanting a trust?
A: Decanting a trust can have tax implications, including potential gift taxes, generation-skipping transfer taxes, and changes in income tax treatment. It’s crucial to consult with a tax advisor to understand the full tax implications before proceeding with decanting.
Take Action Now
If you need assistance with decanting a trust or have questions about how to protect your heirs from financial mismanagement, contact me today. At Supernus Law, we specialize in creating comprehensive estate plans tailored to your unique needs. Schedule a consultation with me, Jedediah McClure, to discuss your estate and ensure your plans provide the support and protection your loved ones need.
Contact Information:
- Phone: (618) 354-0302
- Email: jed@supernuslaw.com
- Website: Supernus Law Website
Don’t let outdated trust provisions jeopardize your family’s future. Let’s work together to protect your assets and provide peace of mind for you and your family.
DISCLAIMER
This post is for informational purposes only and is not intended as legal advice. Please do not act or refrain from acting based on anything you read on this site. You should always seek competent legal counsel before taking any legal action. Using this site or communicating with the Supernus Business & Law Center, LLC through this site does not form an attorney/client relationship.
