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Consider Decanting an Irrevocable Trust

Consider Decanting an Irrevocable Trust

Why Decanting?

Decanting is the act of distributing the assets of an old trust to a new trust with more favorable terms.  It provides a more simplistic method for correcting errors or adding flexibility to a trust. Decanting can present new planning opportunities that may meet the client’s needs given their current goals and objectives.

(1) Correcting Drafting Errors in the Trust Agreement
Trusts may have errors or ambiguities that exist. They may contain provisions that are vague. Decanting may be utilized to correct these problems.

(2) Moving the Trust situs to a different state or changing the governing law
Changes in state and federal laws may impact the taxation of a trust. A trust established in a particular state that has state taxes and unfavorable creditor protection may be converted into a trust that is governed by different laws via decanting.

(3) Protecting the Trust Assets from the Beneficiary’s Creditors
A trust that was not designed properly to protect the trust assets may result in a beneficiary’s creditors depleting the trust’s assets in the event a law suit occurred. Decanting may be used to convert a support trust into a full discretionary trust to prevent the beneficiary’s creditors from reaching the trust assets.

(4) Merging multiple trusts
An individual may have several trusts with similar terms. Decanting may be utilized to combine these trusts into a newly formed trust to reduce administrative costs.

(5) Special Needs Trust
Given when the initial trust was drafted, it did not provide for a special needs beneficiary. Therefore, a special needs trust allows a disabled beneficiary to use the trust assets without impacting their eligibility for government benefits. A client may decant a trust to add these provisions in the new trust.

Decanting is a useful tool given the objectives have changed with an existing trust. Decanting ensures the trust agreement has the flexibility necessary to avoid court intervention or alter the terms of a trust that doesn’t make economic sense.