Abstract: This article discusses “John,” who is the trustee of his deceased brother’s irrevocable trust. In light of the 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 his options is to decant the trust. Decanting would allow him 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 among them. The article discusses some common differences.
John is the trustee of his deceased brother’s irrevocable trust. In light of the 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.
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’re 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’s a good idea to move the trust to a state whose law specifically addresses this issue. In some cases, it’s 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.