It used to be an irrevocable trust was really irrevocable. Now 25 states allow you to change the terms of an old trust by a newfangled process called decanting. It’s done without going to court, sometimes behind beneficiaries’ backs. And yes, that’s legal.
“Now you have clients saying, ‘Hey, we want to change this trust,’ and I tell them, ‘You can do it.’ You don’t have to have a reason other than you don’t like the terms,” says Jonathan Forster, an estate lawyer with Greenberg Traurig in McLean, Va. “ Decanting is all the rage. ”
Technically it’s the trustee, who has a fiduciary duty to all of the beneficiaries of the trust, who has to initiate a decanting. You’re doing a rewrite by distributing assets from an old trust into a new trust with new terms, for the benefit of one or more of the beneficiaries of the first trust. It’s called decanting because it’s like pouring wine from a bottle into a decanter, and leaving the residue (or unwanted trust terms) behind.
Thirteen of the states that now allow decanting by statute passed their laws in the last five years, with most of the others tweaking their laws to make them even more flexible—as states compete for trust business. You don’t have to live in one of these states to decant—because one strategy is to move your trust to a decanting-friendly state (most trusts let you change “situs”), and then decant, in a two-step process.
Take a first generation wealth creator in California who hastily set up a trust for his children with gifts of private company stock, providing that the trust would distribute out assets to them at age 35. The trustee could move the trust to Nevada, decant it into a new long-term trust that would last the children’s lives, giving them creditor protection, and saving California’s 13.3% top income tax rate (Nevada is a no-income-tax state). “We draft better trusts,” boasts Nevada estate lawyer Steve Oshins, who notes you have to use a non-grantor discretionary trust with no California trustees to make this work.
Nevada, along with South Dakota, Tennessee, New Hampshire and Delaware are considered destination decanting states because their laws provide the most flexibility, but even they have their differences. Which state you pick depends in part on what you’re trying to accomplish. Six of the 25 states let you remove a mandatory income interest. Four states let you accelerate a remainder beneficiary’s interest. Seven states let you decant without first giving notice to all the beneficiaries. In most states, by contrast, you have to send out notices and copies of the old trust and proposed new trust to all the beneficiaries, wait a certain number of days, and then you can go forward if there are no objections. “That’s a big hurdle for many wealthy families. ‘Absolutely not. I’m not going to tell little Johnny and Sally how much money they have,’” says Forster.
Old trust terms often don’t fit. “As the world changes, decanting becomes an important way to keep up,” says Stephanie Denby, an estate lawyer with Barnes & Thornburg in Chicago. An old trust might limit investments to bonds; you can decant to invest more broadly. You can decant to create a directed trusteeship so you can invest in private equity. Forster helped a family decant a trust that owned a family compound so they could change the governance and put in place conservation easements to protect the land from development.
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Decanting can go wrong. In 2015, a New York trial court invalidated a decanting because the trustee added new beneficiaries--a no-no under New York’s law. Last year, an appellate court in Florida invalidated a decanting because the trustee failed (as required under Florida law) to notify two sisters (remainder beneficiaries under the first trust) when he decanted into a special needs trust for their brother and left them out.
Lawyers have been waiting for official guidance from the Internal Revenue Service on some of the trickier income, gift and estate tax consequences of decanting since the IRS put out a Notice in 2011 that it wouldn’t issue rulings on specific cases. In the meantime, in 2015, lawyers drew up a new model law, the Uniform Trust Decanting Act, which provides tax safeguards, offers relief for a flawed decanting, and provides some protections for trustees. Colorado and New Mexico, the latest two decanting states, passed it in 2016, and a handful of other states are considering it. Susan Bart, the principal drafter of the model law and an estate lawyer with Sidley & Austin in Chicago, keeps a compendium of state decanting laws here. Oshins maintains a chart ranking decanting statutes here.
What if you’re drafting a new trust? If you’re open to changes beyond your pen, allow decanting. Or if you’re heavy-handed and keen on the restrictions you’re putting in place, make sure you include a provision saying that it can’t be decanted.
