In a constantly evolving world, having the flexibility to adapt to changing circumstances is a valuable trait. But is flexibility less important in estate planning than in other areas of life? In many situations, you may not want your estate planning documents to be flexible after you have signed them. If your planning could be changed on a whim, there is a risk that your intent can be defeated by someone who does not understand or respect it. This risk is the primary reason why, when a trustmaker dies, their revocable living trust becomes irrevocable and can no longer be amended. This trust feature is important for providing certainty to the trust administration process. Other types of trusts become irrevocable upon their creation to obtain certain tax or asset protection benefits available under the law.

But what happens when, after a trust has become irrevocable, a situation arises that appears to undermine or conflict with your intent as the trustmaker? Are you stuck? Thankfully, no. A variety of tools exists to help handle unforeseen circumstances that might have negative consequences. Decanting is one of them.

Trust Decanting

Decanting is an important tool that emerged in some states, including Texas, in the last century.^[1] This tool is increasingly being used to remedy situations where a now-irrevocable trust needs to be fixed because of changing circumstances that appear to work contrary to the trustmaker’s intent.

What is Decanting?

Decanting gets its name from the practice of pouring wine from an old bottle into a new container, allowing the undesirable sediment or impurities to remain behind in the original container and the pure wine to be held in a much cleaner container, thereby enhancing the quality of the wine prior to consumption. Similarly, trust decanting aims to pour the trust property from an outdated or problematic trust into a newly drafted trust with the necessary improvements so that the beneficiaries can enjoy the trust property without the undesirable elements of the old trust.

Why Decant a Trust?

Trust decanting may be used to

• correct drafting errors such as misspelled names or incorrect birth dates,
• avoid adverse tax consequences caused by changing laws,
• reduce or avoid particular state or local taxes,
• extend the trust’s duration,
• combine or separate trusts for one or more beneficiaries,
• amend certain terms of the trust
• resolve ambiguities in the trust language,
• add or eliminate spendthrift and other asset protection provisions, and
• change the trust’s governing law.

For example, imagine a situation where your trust instructs your trustee to distribute the trust’s principal to your child in staged distributions such as one-third at age twenty-five, one-half of the remainder at age thirty, and the balance at age thirty-five. Imagine further that, when your child is twenty-nine years old, your trustee learns that your child has a serious gambling problem, and the trustee knows that the your intention was never to allow trust money to be used for something like gambling. The trustee may be able to use trust decanting to protect the trust accounts and property from being distributed to your child, so it gets used to support their gambling problem, and instead crafts a trust which allows your money to be used only to support your child’s necessities of life going forward, until they enter recovery.

On the other hand, imagine a situation where your trust has become irrevocable but the state legislature recently passed a law significantly raising the income taxes assessed on income within a trust. Trust decanting could be a viable solution which allows the trustee to move the trust property into a trust created in another state with much lower, or even no, state income taxes assessed against the trust, thereby protecting the value of the trust property for the benefit of your beneficiaries.

How Do You Decant a Trust?

Under Texas law, the trustee of the current trust has the authority to determine whether trust decanting is appropriate and should take place. As mentioned, Texas is one of the handful of states which allow decanting, and when a trustee determines there is an issue which might call for a change to the trust, it is a good idea to reach out to an attorney specializing in estate planning.

After the trustee has determined whether decanting is allowed, the trustee must notify the parties of the trust as required by the jurisdiction’s decanting laws. Such laws can vary widely from state to state; though Texas law does require trustees to notify all the beneficiaries. Then, a new trust will need to be drafted which addresses the particular issues needing attention. After that trust is designed and signed, and after meeting all necessary notice requirements, the trustee can transfer (or decant) the property from the old trust into the new one and begin administering it under its provisions.

Conclusion

Trust decanting is a powerful tool that can remedy situations that might otherwise create significant problems. Nevertheless, it is a sophisticated planning tool that must be approached carefully. You should rely on experienced trust and tax professionals throughout the process to ensure that it is done properly and that the decanting will not trigger unintended negative tax consequences to the parties. If you are facing a situation where trust decanting may be worth exploring, call us. We are here to help you with your questions of this nature whenever you need it. Let us be the sommelier of your trust decanting experience.  Nielsen Law PLLC provides family-focused estate planning to individuals and families in Austin, Round Rock, Cedar Park, and the Central Texas area.  For more information and to learn about our firm, please contact us.

^[1] As of January 2020, approximately thirty-two states had passed or proposed legislation authorizing trust decanting in some manner (see State Decanting Statutes Passed or Proposed, Am. Coll. of Trust and Estate Counsel, https://www.actec.org/assets/1/6/Culler-Decanting-Statutes-Passed-or-Proposed.pdf?hssc=1). Beyond that, a number of states have case law authorizing trust decanting in various forms (see, e.g., Morse v. Kraft, 992 N.E.2d 1021 (Mass. 2013)).