The world is constantly changing, and having the ability to adapt is crucial. But when it comes to your estate planning, do you want these documents to be flexible? In many situations, you may not want them to be easily changed. After all, if your planning could be changed on a whim, your intent behind it runs the risk of being defeated by someone who does not understand or respect it.
This risk is the primary reason why, when a trustmaker dies, their revocable living trust becomes irrevocable and can no longer be amended. This trust feature is important for providing certainty to the trust administration process. Other types of trusts become irrevocable upon their creation to obtain certain tax or asset protection benefits available under the law. But what happens when, after a trust has become irrevocable, a situation arises that appears to undermine or conflict with your intent as the trustmaker? Are you stuck?
Thankfully, no. A variety of tools exists to help handle unforeseen circumstances that might have negative consequences. Decanting is one of them.
What is trust decanting?
You’ve probably heard the term “decanting” when it comes to wine. Decanting is the practice of pouring wine from an old bottle into a new container, which allows the undesirable sediment and impurities to remain behind in the original container. The pure wine is held in a much cleaner container, enhancing its quality.
Similarly, trust decanting aims to “pour” the trust property from an outdated or problematic trust into a newly drafted trust with the necessary improvements so the beneficiaries can enjoy the trust property without the undesirable elements of the old trust. Decanting is increasingly being used to remedy situations where a now-irrevocable trust needs to be fixed because of changing circumstances that appear to work contrary to the trustmaker’s intent.
When might I need to use trust decanting?
Trust decanting may be used to:
correct drafting errors such as misspelled names or incorrect birth dates,
avoid adverse tax consequences caused by changing laws,
reduce or avoid particular state or local taxes,
extend the trust’s duration,
combine or separate trusts for one or more beneficiaries,
amend certain terms of the trust
resolve ambiguities in the trust language,
add or eliminate spendthrift and other asset protection provisions, and
change the trust’s governing law.
For example, imagine a situation where the trust agreement instructs a trustee to distribute the trust’s principal to a beneficiary in staged distributions such as one-third at age twenty-five, one-half of the remainder at age thirty, and the balance at age thirty-five. Imagine further that, when the beneficiary is twenty-nine years old, the trustee learns that they have a serious gambling problem, and the trustee knows that the trustmaker’s intent was never to allow trust money to be used for something like gambling. The trustee may be able to use trust decanting to protect the trust accounts and property from being distributed to the beneficiary with the gambling problem and, instead, allow that money to be used only to support that beneficiary’s necessities of life going forward.
On the other hand, imagine a situation where a trust has become irrevocable but the state legislature recently passed a law significantly raising the state income taxes assessed on income within a trust. Trust decanting could be a viable solution that allows the trustee to move the trust property into a trust created in another state with much lower, or even no, state income taxes assessed against the trust, thereby protecting the value of the trust property for the benefit of the beneficiaries.
How is trust decanting done?
Whomever is the trustee of the current trust is the one who can determine whether trust decanting is appropriate. The trustee will need to initiate the process by checking whether the state law governing the trust authorizes trust decanting (it is allowed in California). Even in states that don’t allow trust decanting, it may still be possible to change the trust’s legal jurisdiction to a state that does authorize decanting so it can be done.
Next, the trustee must notify the parties of the trust as required by the jurisdiction’s decanting laws. Such laws can vary widely from state to state. In the meantime, a new trust will be drafted that addresses the particular issues needing attention. After that trust is designed and signed, and after meeting all necessary notice requirements, the trustee can transfer (or decant) the property from the old trust into the new one and begin administering it under its provisions.
Conclusion
Trust decanting is a powerful and necessary tool that can remedy situations that might otherwise cause major problems. Nevertheless, it is a complex and sophisticated planning tool that must be approached carefully.
You should rely on experienced trust and tax professionals throughout the process to make sure the decanting is done properly. If you’re in a situation where you’re considering trust decanting, reach out to us. We can help you with your questions whenever you need it. Call Santaella Legal Group, serving San Ramon, Danville, Dublin, Pleasanton & the Tri-Valley area, at (925) 831-4840 to set up a consultation.