What is Decanting?
Trust decanting is a simple concept. You move your trust from one state to another. There is even a uniform trust decanting act that has been adopted in some form or another by many states. The question is whether you can move or decant the trust simply by the trustee acting or whether you need beneficiary or court approval. Additional questions are: why decant, who benefits and when is it a good idea. We discuss these questions below.
How Can a Trust Be Decanted?
You have to follow state law, but generally, if the trustee has the authority to make distributions to beneficiaries, the trustee may make distributions to the same beneficiaries by depositing them into a trust formed under the laws of a different state.
You have to examine the authority of the trustee. If there are broad distribution powers over principal and income, then decanting is fairly straight forward. If not, you have to comply with the distribution powers specifically provided in the trust. The rule is that you may decant in this instance, but only if doing so does not “materially change” the interests of the beneficiaries in the trust being decanted from.
Even though the trustee may be entitled to distribute in his or her sole discretion, i.e., an absolute power, the power to decant is still subject to additional limitations, all of which are meant to protect the beneficiaries. The new trust:
- cannot eliminate or modify in any way a beneficiary’s right to mandatory distributions;
- may not change the tax benefits the original trust was set up to achieve;
- may not lessen the trustee’s duty of care to beneficiaries; and
- may not raise the trustee’s compensation.
Decanting generally does not require court or beneficiary approval, although it may be the beneficiaries who instigate the decanting. Keep in mind that the trust agreement itself may have specific requirements to be met for decanting which could vary all of the above.
Why Decant a Trust?
There are many, many reasons to decant. First, to protect trust assets from a beneficiary’s creditors of from the beneficiary him or herself. If the original trust requires a mandatory distribution of all or a portion of trust property at one or several dates, these distributions can be taken by a beneficiary’s creditors or wasted by a financially immature beneficiary. If you decant to a new trust and extend the term or vary the distributions while maintaining the “spendthrift” aspects of the original trust, the trust property for the at-risk beneficiary may be preserved.
Second, to provide “spendthrift” protection to a beneficiary to usurp creditor claims. An example would be a transfer from a trust established to support a beneficiary’s education, health, welfare and support into a trust that gives the trustee absolute discretion over distributions. This discretionary standard in Wyoming makes it impossible to garnish trust assets and impossible to attach the beneficiary’s interest because that interest is not a property right.
Third, to update a trust to achieve the trust’s purposes if a new law (state or federal) is enacted or an old one is amended that would detrimentally affect the purpose of the trust. An example would be a modification of the way beneficiaries are taxed based on trustee powers. You would want to decant to a state law that provides the appropriate classification.
There are numerous other reasons to decant, including a change in trustees or their successors; a change to a state with more favorable tax or trust laws; a distribution to separate trusts for each beneficiary rather than maintain a common trust; and distributions from several trusts into one trust for ease of administration.
Who Benefits when you Decant a Trust?
Everything depends on the beneficiaries and their needs. Each situation is unique and as varied as the families themselves.
Good luck out there.