Decanting BasicsMay, 2013
Decant: pour something gently into another container
The term “decant”, popular with cooks, chemists and wine lovers, has been adopted by trust lawyers to describe a non-judicial process for distributing the assets of an old trust (the distributing trust) into a new trust (the receiving trust). Decanting is usually easier to accomplish than traditional reformation, modification, merger or division processes. It is recognized as a valid estate planning technique by approximately 20 state statutes, several states’ courts and the IRS. A decanting power for trustees is also normally included in many modern trusts.
Decanting can be used to:
- Grant limited powers of appointment
- Accelerate or postpone beneficiary distributions
- Change trust situs or choice of law provisions from one state to another
- Reduce state fiduciary income taxes
- Expand a trustee’s investment powers or modify a trustee’s duty to diversify investments to allow a trust to own a large asset
- Allow a trustee to delegate its investment authority to an investment professional
- Appoint an investment adviser
- Appoint trust protectors or revise the process for choosing successor trustees
- Convert trusts from grantor to non-grantor and vice versa, or convert foreign trusts to domestic trusts and vice versa
- Divide trust property into sub-trusts or combine multiple trusts
- Create a supplemental needs trust to allow a beneficiary to qualify for government benefits
- Improve trust spendthrift provisions or clarify ambiguous trust language
- Delay the trustee’s duty to notify future beneficiaries of their interests until they reach an appropriate age
- Create a self-settled asset protection trust which allows grantor access to trust assets
There are a few restrictions on the ability to decant a trust.
- The trustee of the distributing trust must have the power to invade principal unconstrained by ascertainable standard limitations
- Old trusts with advantageous tax treatment, such as GST-tax exempt trusts might not be able to be decanted
- Trusts created using marital or charitable deductions must be carefully examined to ensure that those deductions are not lost
- Decanting must be structured in such a way that it does not trigger an unintended gift by the lapse or release of a power of appointment or a diminishment of a beneficial interest
The trustee has the power to decant, not the grantor or beneficiaries. A modern trust may allow a trust protector to decant. Any applicable state decanting statute must be followed. A receiving trust must be drafted. The trustee should create a declaration that they have made the distribution to the receiving trust. A new account should be opened with the trust’s custodian in the name of the receiving trust to receive the trust’s assets and the distributing trust account should be closed. Beneficiaries are not usually required to consent to a decanting, however several state statutes require that notice of the decanting be provided to all parties interested in the distributing trust.
Skilled trust counsel must design any decanting plan to assure its effectiveness and to avoid any negative tax consequences.
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