Trust Decanting – Revitalizing an Old Estate Plan

Traditional estate planning typically involves the use of a revocable living trust for the purpose of an efficient management and distribution of assets in the event of incapacity or death.  During the trust-maker’s lifetime, the trust is revocable by the trust-maker and simply acts as a manner of holding title to assets.  However, in the event of the trust-maker’s incapacity, the successor trustee chosen by the trust-maker will have immediate authority to manage the assets for the benefit of the trust-maker.  Similarly, upon the death of the trust-maker, the successor trustee will have immediate authority to settle the estate and distribute the assets to the beneficiaries of the trust.  In both cases, the necessity of going to court is avoided.  These are significant advantages of living trusts.  

However, there can be further advantages to trust planning.  Rather than distribute the assets directly to the beneficiaries after the death of the trust-maker, it is often advantageous to keep the assets in trust for the benefit of the beneficiaries. Advantages include managing an inheritance for a minor beneficiary; managing an inheritance for a financially irresponsible beneficiary; protecting an inheritance from the beneficiary’s creditors; protecting an inheritance from a beneficiary’s divorcing spouse; preserving public benefits for a special needs beneficiary; and various tax planning strategies.  

One drawback to in-trust inheritances is the fact that these potential benefits require that the trust be irrevocable upon the death of the trust-maker.  Even the most carefully drafted trust can become outdated as the law changes or as the beneficiary’s circumstances change.  The good news is that a great deal of flexibility can be built in to an otherwise irrevocable trust.  One effective tool for introducing flexibility to an otherwise irrevocable trust is “trust decanting.”

The definition of “decant” is “to pour (a liquid) from one container to another.”  Often wine is decanted in order to separate any sediment that may have formed as well as to aerate it so that its flavor and smell will be more dynamic.  The concept of “trust decanting” is to “pour” the assets from an old, outdated trust into a new up-to-date trust in order to remove out the old, outdated provisions (the “sediment”) and to “freshen-up” the plan.  

In-trust inheritances can provide a wide arrange of authority and directions to the trustee.  Some trusts might require that the trustee distribute a specified amount of principal or income at regular intervals.  Other trusts might forbid the distribution of principal and mandate that all income be distributed to the beneficiary.  However, many trusts give the trustee broad discretion to distribute principal to the beneficiary based upon the beneficiary’s needs or circumstances.   

The concept of “trust decanting” is based upon the trustee’s discretionary authority to distribute principal to or on behalf of the beneficiary.  The reasoning is that if a trustee has the authority to distribute principal directly to the beneficiary, the trustee naturally also has the authority to distribute the principal to a new, updated trust for the benefit of the beneficiary.

Many states have laws that expressly allow trust decanting any time a trustee has the discretionary authority to distribute principal to the beneficiary.  Other states, such as California, do not have such laws on the books.  However, trusts in those states can still take advantage of trust decanting if it is expressly allowed by the terms of the trust.

In a society where the law is constantly changing, including tools for keeping trusts flexible such as trust decanting can provide beneficiaries with more options and broader protections and prevents thoughtful planning from being thwarted by unanticipated developments years into the future.

KRASA LAW, Inc. is located at 704-D Forest Avenue, Pacific Grove, California 93950 and Kyle may be reached at 831-920-0205.

Disclaimer: This article is for general information only.  Reading this article does not establish an attorney-client relationship.  Before acting on any of the information provided in this article, you should consult a competent attorney who is licensed to practice law in your community.