Old wine and old trusts: When to decant?

Share This Article

What is decanting?

Decanting usually means gently pouring off the clear liquid from a solution by tipping the vessel. Decanting aged red wine can give it a clearer appearance and smoother texture.

In analogy, old irrevocable trusts can also be refreshed by a process called decanting. Decanting can mean moving (pouring) trust assets into another trust or modifying the original trust. Decanting largely applies to irrevocable trusts, and in a sense, decanting ‘revokes’ or modifies important provisions in the ‘irrevocable’ trust; therefore, strict limitations apply.

Prior to 2019, a court proceeding, or the consent of all trust beneficiaries, was necessary to modify the provisions of a California irrevocable trust, unless the trust language provided otherwise. However, on September 14, 2018, California joined other states in enacting the Uniform Trust Decanting Act allowing the trustee to decant without approval by the settlor, beneficiaries, or court. Trust decanting is not synonymous with trust modification because the uniform law has put limits on what can be modified through decanting based on two categories: (1) the rules that apply to trustees with “limited distributive discretion” and (2) the rules that apply to trustees with “expanded distributive discretion.” For further exposition, see here. And for a specialist article here.

What are some reasons for trust decanting?

Trust decanting can be beneficial for adapting to changes in beneficiaries’ circumstances, such as creditor or marital issues, disability, and state and federal tax law changes after a trust has become irrevocable. For instance, trust decanting can enable the transfer of assets to a supplemental (special) needs trust, which can help a disabled beneficiary not be disqualified for public assistance.

Currently, estate taxes are a non-issue for 99% of Californians because of the large exemption amounts. However, when the threshold was much lower, complex AB Trust estate plans were popular. Many are still in force. These AB trusts avoided estate taxes but at the expense of creating the possibility for significant capital gains income tax.  When one spouse has already died, an AB trust has become irrevocable, making it very difficult to change. However, using the statutory trust decanting procedure, the trust can be decanted into a new trust and become part of the estate of the surviving spouse avoiding the capital gains problem.

Should we rely on the decanting statute?

In probate law, statutes are often a fallback when the relevant instrument, be it a will or a trust, is silent on the respective issue; it fills in the gaps. Clients should consider including a specific decanting power in otherwise irrevocable trusts. However, these provisions can either be too broad or too narrow. In the former case, they may conflict with the grantor’s intent and thus invite a legal challenge; in the latter case, the lack of flexibility may also make it impossible to adhere to the grantor’s wishes when the circumstances change.

To conclude, the correct application of the decanting statute and the drafting of decanting clauses require careful attention to detail and good familiarity with this complex area of probate law.

See also the following technical articles:

Trust decanting: an overview and introduction to creative planning opportunities

The uniform trust decanting act: significant changes in the California trust landscape

Expert Q&A on Decanting a Trust

We don’t spam! No more than five mailings per year.

More Articles

Schedule a free consultation with Klaus Gottlieb

© 2024 wealthcarelawyer.com. All rights reserved.

Wealth care is an orchestrated approach to your estate planning needs that considers multiple dimensions and coordination with your existing financial and tax professionals.