I’ve written in the past about a variety of ways to modify problem trusts. I mentioned one technique, “trust decanting” as a viable option. Today, I thought that I’d expand on what trust decanting is and how it works, as this is a little understood option that often isn’t considered when it could be a solution that the family is looking for.
For those of us who have oenophile tendencies, you may know that decanting is the action of pouring wine from its bottle into a wide-based container. The idea is to separate the wine from its sediment and expose a large surface of the wine to oxygen, allowing it to express its desirable aromas.
Decanting also helps to soften some aromas which are overpowering or unpleasant. The same holds true when decanting a trust, which is the process of modifying an otherwise irrevocable trust to better reflect the maker’s intent – to accommodate problems like scrivener’s errors, changing the situs or governing law, modifying administrative provisions, consolidate assets, take advantage of planning strategies or dealing with changed circumstances after the trust became irrevocable.
When decanting, a new trust is drawn up and the contents (assets) of the old trust are then “poured into” the new trust. Florida law, ahead of many other states, offers a specific statute that allows decanting so long as proper notice is provided to all “qualified beneficiaries,” which is a legal term also defined by statute, provided that the new trust does not impair the rights of any beneficiary or adversely affect the achievement of the purposes of the original trust.
Suppose, for example, that the beneficiaries of a trust want to change the way and method that trustees are removed, appointed or compensated. Here, a decanting from one trust to another with the new trustee provisions might achieve those goals. Or sometimes there might be two different trusts for each beneficiary, one created by their father and one created by their mother. Here, decanting from both trusts into a single trust could solve investment issues or even reduce the administrative expenses associated with carrying two different trusts that have substantially the same provisions for a beneficiary.
On the other hand, decanting may help solve issues involving pooled trusts, which are trusts that are created for several beneficiaries. If the beneficiaries are fighting over who is entitled to the assets, or if one beneficiary needs income and the other growth, or if distributions to any one beneficiary become an issue, decanting could allow for the pooled trusts to become separate shares for each beneficiary.
Another example is where there are two different trusts, one that is very liquid and one illiquid. It might make sense to combine the trusts as the liquidity could assist with the carrying costs of the illiquid assets. Perhaps a trust is overly restrictive as to its investment strategies that have now become outdated. Here, a new trust that is more liberal in its investment options may be created, and the old trust could be decanted into it.
You may have a trust that was originally established in a state that imposes a state income tax and wish to move the trust situs to Florida that has no state income tax. Here, decanting can help achieve that goal. Since the tax law continually evolves, an irrevocable trust that was once tax advantageous could become disadvantageous. Here, decanting into a new trust could solve the problem.
Beneficiaries who encounter unexpected problems, such as creditor issues, divorce, having their own independent wealth or even those with self destructive behavior could benefit from decanting. Here the objective could be to make the trust terms more restrictive so that creditors and predators can’t take the assets away from a beneficiary.
When creating revocable trusts that continue on for your beneficiaries, it may be a good idea to proactively provide for decanting powers so that an independent trustee (one who is also not a beneficiary – to eliminate bias or tax law problems associated with having certain powers over assets) can adjust the trust to future changes in circumstances. The options should be carefully considered, since an improperly drafted decanting power could backfire and cause more harm than it does good.
When including these decanting powers, moreover, you should discuss with your attorney your comfort level of allowing for such potential future modifications to your estate plan. Continuing trusts offer substantial benefits for your beneficiaries, in the form of tax savings, creditor and divorce protection. With that said, I often counsel my clients that it’s favorable to allow for flexibility in continuing trusts, since no one knows what the future brings. By specifically allowing for a decanting power, you can better ensure that your beneficiaries won’t be caught by unexpected circumstances.
The Sheppard Law Firm has its main in Fort Myers and also in Naples by appointment.
© 2017 Craig R. Hersch. Originally published in the Sanibel Island Sun.