Decant a trust to add trustee flexibility
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 allow the trustee to 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 are 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.
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. 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 is a good idea to move the trust to a state whose law specifically addresses this issue. In some cases, it is 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 do not require beneficiaries to consent to a trust decanting and several do not 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 is not 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.
Do not 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 is also concerned about how state law differences affect trust decanting. Before taking action, it is best to discuss the ins and outs of decanting with an estate planning advisor.