In 1992, New York was the first state to enact a “decanting “statute. Decanting allows a trustee to exercise its power to distribute trust principal to a beneficiary by distributing the assets to a new trust instead. Trustees and beneficiaries are often unhappy with the terms of an existing irrevocable trust. There are several methods of amending an irrevocable trust. Sometimes the trust has a provision for a trust protector which allows the nominated “protector” to make the necessary amendment. An irrevocable trust can also be amended by consent of the beneficiaries, but that may not be possible if the beneficiaries are minors or disabled. Of course, the Trustee could also make an application to the court for permission to amend the trust, but that could be timely and expensive. In most cases, decanting will be the simplest and least expensive alternative.
There are many reasons for decanting an irrevocable trust. Many older trusts lack the flexibility of modern trusts. Drafting techniques have improved over the years, making trusts better instruments for managing and transferring assets. The trustee can decant an old trust into a new trust with all the “bell and whistles.” One common provision is the power of the Trustee to change the “situs” of a trust. Situs is the state law which will apply to the trust. While this is almost a boiler plate provision in a new trust, many older trusts do not have this provision. Today, Trustees and beneficiaries are mobile and often move from one state to another. Including this provision will allow Trustees to choose or change the situs that provides more favorable treatment to the beneficiaries. Older Trust tend to have fewer Trustee powers enumerated in the document. As a result, the Trustee might have to resort to court approval to carry on trust business. A new trust can relieve this problem, save needless court costs and streamline trust administration. Asset protection concerns are another reason to decant a trust. Some trusts do not have a “spendthrift” clause. This clause protects the interests of beneficiaries from creditors’ claims and prevents beneficiaries from pledging their interests in the trust to others. The use of this clause can protect beneficiaries from creditor’s claims, including the claims of spouses in a divorce proceeding.
Trustees are usually concerned about their own liability in decanting or changing the terms of an existing trust. The trustee does not want to open itself up to a claim of breach of fiduciary duty from a beneficiary. So, although New York law allows a Trustee to decant a trust with beneficiary approval and even without court approval, many trustees will seek the consent of the beneficiaries and releases as well. When drafting the new trust, I would include enabling provisions in the trust which enable the Trustee to decant and limit the Trustee’s liability if decanting is required in the future
One of the most common reasons for decanting a trust is to change the payout to a beneficiary at a set age. It is not uncommon for all the trusts to provide for payment for the beneficiary outright at age 25, or even at age 21. The new decanting trust can create a descending trust that will last for several generations. This type of trust provision will protect the assets from creditors and divorcing spouses as well as avoid estate tax at each successive generation. In addition there could be provisions for disabled beneficiaries which trigger supplemental needs trust and substance abuse causes for beneficiaries that fall prey to drug and alcohol addiction.
One of the problems might be obtaining the consent of the beneficiary in creating this type of trust. If the trustee is concerned about liability, it may be simpler to first decant to a trust that limits the trustee’s liability. After time the trustee may be willing to create a more restrictive trust that conformed to the grantors current intention. These are all issues to be discussed with the client to better serve both the client and his descendants.
-By Nancy Burner, Esq.