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What decanting is and how it may help trust holders "fix" trusts

There was a time when someone in New York with significant assets that they wanted to pass along to their children in a controlled manner would likely be advised to set up an irrevocable trust. The problem is that such trusts are close to impossible to amend. This can present further issues for trust holders with adult children who not quite ready to responsibly handle regular disbursements.

There is a way that irrevocable trusts may be amended with a fairly new concept known as "decanting." Several states have enacted so-called decanting statutes to allow trust grantors to essentially have a do-over to address issues that didn't exist at the time the trust was drafted. This means grantors can transfer or "pour" assets from an existing irrevocable trust into a new one with more appropriate and relevant provisions.

There are several potential benefits associated with trust do-overs. For instance, trust terms can be extended to include asset protections for additional generations beyond the creator's children. Another option is to change a trust to one that's discretionary, which could provide added protection against marriage dissolution and various liabilities. Additionally, provisions can be added to address special beneficiary needs, change the governing law to avoid state income tax or allow a trust to hold S Corporation shares. Also, trustee and tax compliance fees may be avoided or minimized if a trust holder opts to combine multiple trusts into a single trust.

Guidelines about decanting vary from one state to the next, so it can be helpful for a trust holder with an irrevocable trust that needs fixing to consult with an estate planning attorney. If a broken trust contains a change of situs provision, which is common, a lawyer may recommend moving the trust situs to a state that's more flexible with decanting.

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