Today, many estate plans contain an irrevocable trust that will continue for a spouse's lifetime and then continue for the benefit of several generations. Because trusts like these are designed to span multiple decades, they must include trust decanting provisions to address changes in circumstances, beneficiaries, and governing laws.

What is trust decanting?

When a bottle of wine is decanted, it is poured from one container into another. When a trust is decanted, the accounts and property from the existing trust are removed and distributed into a new trust with different and more favorable terms. 

When should a trust be decanted?

Provisions for trust decanting should be included in trusts intended to last decades into the future. Decanting can do the following:

1. 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.
2. 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.
3. 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 it 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.
4. Merge similar trusts into a single trust or create separate trusts from a single trust. An individual may be the beneficiary of multiple trusts with similar terms. Decanting can combine these trusts into one trust, reducing administrative costs and oversight. On the other hand, a single trust with multiple beneficiaries with differing needs can be decanted into separate trusts tailored to each individual beneficiary.
5. 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.  

Decanting: How to Fix a Trust That Is Not Getting Better with Age

While many wines improve with age, the same cannot be said for some irrevocable trusts.  Maybe you are the beneficiary of a trust created by your great-grandfather over 70 years ago, and that trust no longer makes sense. Or perhaps you created an irrevocable trust over 20 years ago, and it no longer makes sense for your current situation. Wine connoisseurs may wonder if there is any way to fix an irrevocable trust that has turned from a fine wine into vinegar. You may be surprised to learn that the answer is yes under certain circumstances—by decanting the old, broken trust into a brand new one.

What Does It Mean to Decant a Trust?

Wine lovers know that the term decant means to pour wine from one container into another to open up the aromas and flavors of the wine. In the world of irrevocable trusts, decanting refers to transferring some or all of the accounts and property owned by an existing trust into a brand-new trust with different and more favorable terms.

When Does It Make Sense to Decant a Trust?

Decanting a trust makes sense under myriad circumstances, including when you would like to make the following types of changes:

●     Tweak the trustee provisions to clarify who can or cannot serve as trustee

●     Expand or limit the trustee's powers

●     Convert a trust that terminates when a beneficiary reaches a certain age into a lifetime trust

●     Change a trust in which a beneficiary is entitled to receive their inheritance at a certain point or for specific purposes into a full discretionary trust in which the trustee decides when money will be given to the beneficiary to protect the trust's accounts and property from the beneficiary's creditors

●     Clarify ambiguous provisions or drafting errors in the existing trust

●     Change the governing law or trust situs to a less taxing or more beneficiary-friendly state

●     Merge similar trusts into a single trust for the same beneficiary

●     Create separate trusts from a single trust to address the differing needs of multiple beneficiaries

●     Provide for and protect a special needs beneficiary  

What Is the Process for Decanting a Trust?

A state's statutes or case law can allow decanting. Additionally, the trust agreement may contain specific instructions regarding when or how a trust may be decanted.

Once it is determined that a trust can and should be decanted, the trustee creates a new trust agreement with the desired provisions. The trustee then transfers some or all of the accounts and property from the existing trust into the new trust. Any accounts or property remaining in the existing trust will continue to be administered under its terms; an empty trust will be terminated.

Decanting Is Not the Only Solution to Fix a Broken Trust

While decanting may work under certain circumstances, fortunately, it is not the only way to fix a “broken” irrevocable trust. Our firm can help you evaluate options for fixing your broken trust and determine the best method for your situation. Call us if you have a trust that has turned to vinegar and is not what you want it to be.

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 point in the future is critical to the trust's success and longevity. 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 or would like to have your trust's decanting provisions reviewed, please call our office.

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If you have questions about Dynasty Trusts, contact our office to speak to an estate planning attorney.

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