It may seem surprising to use a wine analogy to explain a legal concept, however, when discussing trust decanting, pouring wine is often a part of the conversation. When you take a bottle of wine and slowly pour the wine from the bottle into a different container, you are separating the wine from any sediments that may have formed in the bottle — this process is called wine decanting. Decanting ultimately makes the wine taste better as it removes the harsh taste of built-up sediment.
Similarly, trust decanting allows a trustee to change an irrevocable trust by “pouring” the trust assets into a new trust that has different, often more favorable terms. If a trustee has the discretionary power to distribute trust assets to and for the benefit of a beneficiary, decanting enables a trustee to use this power to dictate the terms of a new trust.
Learning that a trustee may change an irrevocable trust may sound compelling, particularly if you have received advice that the terms of their irrevocable trusts cannot be changed. Nevertheless, trust decanting is becoming more common because it is a mechanism that addresses a persistent issue: that complete irrevocability may be too inflexible for our lives which are increasingly fluid.
Irrevocability does not take into consideration the unforeseeable circumstances, or uneconomical administration that may occur during the life of a trust. Trust decanting allows for flexibility when the original trust terms no longer make sense.
Why Explore Decanting?
Why might a trustee wish to explore decanting as a creative solution to change an irrevocable trust? Common motivations for decanting a trust include the following:
- Changing the trust’s tax attributes
- Expanding the trustee’s decision-making authority over investments, principal, and/or income
- Changing a trust’s governing law or situs that may be more beneficial
- Protecting trust assets from a beneficiary’s creditors by adding a spendthrift clause or changing a mandatory distribution provision
- Extending the term of the trust:
- Addressing unanticipated circumstances, such as a beneficiary with unforeseen mental or physical health issues; for example, including a special needs provision so that a beneficiary can qualify for government benefits
- Changing a support trust into a discretionary trust
To amend an irrevocable trust’s terms, a trustee must have authority. Authority may be granted in a few separate ways. First, the trust document itself may have a decanting provision.
If decanting authority is not clearly stated in the trust document, a trustee may consider seeking legal advice to analyze whether any other terms provide an opportunity to amend or decant the trust. Also, a majority of states, including Virginia, provide decanting authority, but in the majority of states that permit decanting, a state statute is controlling.
If the authority to decant is not provided in the trust document, or if the state law governing the trust does not include a decanting statute, it may be possible to change the trust’s situs to a state that authorizes decanting. Certain requirements must be met prior to changing a trust’s location. For example, it may be necessary to gather evidence that the newly designated state has a substantial relation to the trust or that the application of the law of the designated state does not violate the public policy of the state with a stronger relationship to the trust.
A Path to Greater Flexibility
Overall, there are many other reasons that a trustee may look to change the terms of an irrevocable trust. Other opportunities include changing the appointment and authority of trustees, merging trusts for improved efficiency or severing trusts for greater privacy, adding provisions for a special needs beneficiary, qualifying a trust to own S corporation stock … and the list goes on and on.
We believe that decanting may be among the most underused tools in the estate planning industry. It’s a path to much greater flexibility, and we at General Counsel P.C. would welcome the opportunity to talk with you about amending your Trust, and estate planning in general.