Decanting:  I thought that was something you did to wine

Trust decanting in the world of estate planning is very much like it is in the world of wine.  In the world of wine decanting is transferring wine from one container to another.  In the world of estate planning, decanting is transferring assets from one trust to another trust with different terms.  It is a form of modification initiated by a trustee.  Decanting is making it possible to alter the irrevocable trust.  As with decanting a wine, careful trust decanting can improve a trust.

Decant a trust to add trustee flexibility

John is the trustee of his deceased brother’s irrevocable trust. In light of the recently enacted estate tax laws as well as changing circumstances surrounding his brother’s family, John would like additional flexibility in adapting the trust to the new laws and evolving family situation. One of John’s options is to decant the trust.

Decanting would allow John to use his distribution powers to “pour” funds from the trust into another trust with different terms. Even though this strategy is permitted in many states, decanting laws can vary dramatically from state to state.

Additional options for trustee

Depending on the language of the trust and applicable state law, decanting may let the trustee correct errors, take advantage of new tax laws, eliminate or add a beneficiary, extend the trust term, modify the trust’s distribution standard, and add spendthrift language to protect the trust assets from creditors’ claims.

If you’re in the process of planning your estate, consider including trust provisions that specifically authorize your trustee to decant the trust.  Even for an existing irrevocable trust, however, your trustee may be able to take advantage of decanting laws to change its terms.

State differences

Differences in state law complicate the decanting process. In some states, decanting is authorized by common law. But in recent years, more than a dozen states have enacted decanting statutes.  Although Texas does not have an express decanting statute, it may still be possible to decant.  Several other states are considering similar laws. A detailed discussion of the various decanting laws is beyond the scope of this article, but here are several issues that you and your advisor should consider:

Taking advantage of another state’s law. Generally, if your trust is in a state without a decanting law, you can take advantage of another state’s law. But to avoid any potential complaints by beneficiaries, it’s a good idea to move the trust to a state whose law specifically addresses this issue. In some cases, it’s simply a matter of transferring the existing trust’s governing jurisdiction to the new state or arranging for it to be administered in that state.

Court approval. Most states’ laws permit decanting without court approval. If the trustee anticipates beneficiary objections, however, he or she may want to seek court approval voluntarily.

Beneficiaries. Decanting laws generally don’t require beneficiaries to consent to a trust decanting and several don’t even require that beneficiaries be notified. Where notice is required, the specific requirements are all over the map: Some laws require notice to current beneficiaries while others also include contingent or remainder beneficiaries. Even if notice isn’t required, notifying beneficiaries may help stave off potential disputes down the road.

Trustee authority. When exploring decanting options, trustees should consider which states offer them the greatest flexibility to achieve their goals. Generally, decanting authority is derived from a trustee’s power to make discretionary distributions. In other words, if the trustee is empowered to distribute the trust’s funds among the beneficiaries, he or she should also have the power to distribute them to another trust. But state decanting laws may restrict this power.

Some decanting laws, for example, require the trustee to act in the best interests of certain beneficiaries or heirs or to meet certain standards of care. Also, while decanting laws generally allow decanting when the trustee has complete discretion over distributions of principal and income, their rules differ for trustees whose powers are restricted. Some allow decanting only if the trustee has the authority to distribute principal, while others allow it even if the trustee has only income distribution authority.

Don’t try this at home

After learning more about the benefits of decanting a trust, John is intrigued by the additional flexibility he could have as trustee. However, he’s also concerned about how state law differences affect trust decanting. Before taking action, it’s best to discuss the ins and outs of decanting with an estate planning advisor.

Contact estate planning lawyer Antoinette Bone at 817.462.5454 located in Bedford, Texas to discuss your estate planning needs.