Irrevocable trusts are among the most powerful estate planning tools in use today. Done right, they offer significant tax advantages, protection from creditors and asset control that can extend beyond the grantor’s lifetime.
By their nature, irrevocable trusts are not meant to be changed. What happens, however, when an irrevocable trust no longer meets the goals of its grantor or the needs of its beneficiaries? This is where “decanting” may provide a solution.
What does it mean to “decant” an irrevocable trust?
Essentially, the process involves moving assets from one irrevocable trust (the original) to another (the new one with updated terms) – much like you’d decant wine by pouring it from one bottle to another to enhance its flavor. The idea is to update the terms of the original trust to more favorable ones.
Decanting an irrevocable trust might be necessary to:
- Update distribution rules: If the original trust requires mandatory distributions to beneficiaries who don’t need or want the assets or beneficiaries who are no longer able to manage things on their own, the new trust can create more flexible distribution terms.
- Address changing needs: Financial changes, health issues and personal situations can change over time, and decanting can make it easier to support a beneficiary’s current (unanticipated) needs. This is particularly helpful when a beneficiary has special needs due to disability and needs to remain on income-based benefits like Supplemental Security Income or Medicaid.
- Preserve assets for the future: Sometimes, decanting a trust can allow the trustee to make changes to the way the trust is managed so that the trust can provide for the beneficiaries for longer than originally anticipated.
- Modify tax provisions: Tax laws change all the time, and the original trust may no longer be optimized for tax efficiency. Decanting can allow a trustee to minimize estate taxes, gift taxes and more, which can be a huge relief to the beneficiaries.
If you’re concerned about some aspect of a trust and think that decanting might be beneficial, seeking legal and financial guidance can be critical to your success.
