Part 2: My Trust Was Already Executed. Now What?
In Part 1 of this two-part series, we discussed drafting techniques that an attorney can utilize to create flexibility in an irrevocable trust. That article is helpful if you are creating an irrevocable trust, but what if you already have an existing irrevocable trust that needs modification? Are you out of luck if you didn’t read Part 1 prior to executing the document? Thankfully, no. Part 2 will help you assess your options.
Look to the Terms of the Trust
Whenever you have questions regarding a trust, you should first look to the trust document itself. Accordingly, an irrevocable trust should be drafted to maximize flexibility. If circumstances change and the terms of the trust need to be altered, flexible drafting can provide you, the beneficiaries, or the trust protector the power to make the necessary modifications.
If the grantor, beneficiary, or trust protector is not given explicit authority to modify the terms of your irrevocable trust, things become significantly more complicated. Fortunately, complicated does not mean impossible. Many states have developed decanting statutes to accommodate those inevitable situations in which an irrevocable trust needs to be altered.1
Decanting is the process of transferring assets from one irrevocable trust to another irrevocable trust. Because the ability to revoke or amend an irrevocable trust is severely restricted, decanting provides a way to modify the terms of the original trust without revoking or amending it. The word “decant” originally referred to the process of pouring wine into a new container, leaving unwanted sediment behind. Hence, decanting a trust allows you to “pour” trust assets into a new irrevocable trust, leaving behind the unwanted features of the original trust.
There are many reasons to decant an irrevocable trust. Perhaps you want to delay a beneficiary’s future distributions because you no longer feel that the beneficiary would be responsible with distributions at a younger age. Perhaps you need to amend the trust to include special needs trust provisions so that you do not disqualify a disabled beneficiary from receiving government assistance. Perhaps you wish to change key terms to mitigate potential tax consequences for beneficiaries. Perhaps you simply wish to correct drafting errors or ambiguous terms so that the trust can efficiently fulfill its original purpose.
Regardless of your intentions, the ability to decant an irrevocable trust is determined by state statute.1 Although decanting statutes vary from state to state, there are some common themes that emerge when you compare the statutes. First, many states only allow decanting when the trustee of the original trust has a discretionary power to make distributions of income and/or principal. The extent to which the trustee is required to have such a power varies by state. Second, generally at least one trustee of the trust must not also be a beneficiary of the trust. Third, many states require that the trustee intending to decant provide the intended beneficiaries of the new trust with written notice. Finally, many states prohibit the new trust from including beneficiaries who were not also beneficiaries of the original trust. However, this restriction does not generally prevent a trustee from excluding a beneficiary of the original trust from the new trust.
What If You Don’t Live in a State That Allows Decanting?
If you do not live in a state that currently has decanting statutes or if you live in a state with prohibitive decanting statutes, you may still have options. The terms of the trust or state law may allow you to transfer the trust to a different jurisdiction where decanting is permitted or simplified.
As you can see, with proper drafting and the emergence of decanting statutes, your irrevocable trust is not really that irrevocable. Therefore, if you don’t like something about your irrevocable trust, change it (with the help of a local estate planning attorney).
1 As of December 1, 2021, the following states have passed decanting statutes: Alabama, Alaska, Arizona, California, Colorado, Delaware, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Maine, Michigan, Minnesota, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Mexico, New York, North Carolina, North Dakota, Ohio, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Virginia, Washington, West Virginia, Wisconsin, and Wyoming. Massachusetts has introduced a decanting statute, but it has not yet been enacted into law. See https://www.actec.org/assets/1/6/Bart-State-Decanting-Statutes.pdf?hssc=1.
Stifel does not provide legal or tax advice. You should consult with your legal and tax advisors regarding your particular situation.