What is Trust Decanting?

What is Trust Decanting?

Trust decanting is very similar to wine decanting in that you move the contents from one vessel to another. In the case of trust decanting, instead of moving wine from one bottle or barrel to another in order to leave behind the unwanted sediment that forms at the bottom, assets are moved from one trust to another when the original trust cannot be changed

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When is Trust Decanting Used?

Trust decanting is used when the conditions of a trust need to be changed, but cannot be done. Usually this occurs when a person has set up an irrevocable trust.

Where the trust cannot be changed, the only option is to set up a brand new trust with more favorable terms. There are a variety of different reasons why you might want to do this.

1. Correcting Errors

In some cases, such as when a trust has been set up without the assistance of an attorney, some mistakes can be made. These mistakes can be anything from basic spelling errors to ambiguities that might prove to negatively affect the beneficiary.

2. Changing Circumstances

In the case of an irrevocable trust being set up after poor planning, various changes may need to be made in order to better benefit the beneficiary. This can be done through trust decanting.

Some of these changes can be small, such as the period of the trust. In other circumstances, the wrong type of trust might have been chosen entirely.

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Some other changes that you might want to make through trust decanting include an amendment in trust appointment in the case of a death or falling out, or even combining multiple trusts into one.

3. Changes in Laws

The laws that would predominantly lead to considering trust decanting would be tax laws, specifically regarding state tax. In cases where the state tax laws change drastically a trust may have to be updated, and can even be moved to another state if it proves to be beneficial.

When can Trust Decanting not be Used

There are some instances where trust decanting is not possible if it will affect the income of the beneficiary. Some of these include marital trusts, charitable remainder trusts, grantor retained annuity trust, qualified subchapter trusts, and more

In cases where you are considering the possibility of trust decanting in the future, especially regarding changes in beneficiary income, it is important to consider the type of trust that you are setting up initially. In most cases this information is readily available online. 

However, if you wish to protect your beneficiaries against trust decanting related income loss, then these trusts can also be used to your advantage. Although, choice of trustee is just as important as the choice of the trust itself.

Additionally, there are restrictions in place if the beneficiary still has withdrawal claims, the quantity of which cannot be altered in the new trust.

Advantages of Trust Decanting

In some cases, a trustee will be allowed to initiate trust decanting even after the creator of the trust has passed on. This means that changes to the trust that can benefit the beneficiary can be made to ensure that those you are trying to look after receive the optimal financial care after you pass.

This takes a lot of pressure off the person trying to set up the trust. Instead of needing to get all parameters of the trust right, they just need to get the trustee right.

Some may worry about granting this much power to a trustee, and may think that they will be able to use this to benefit themselves, rather than the beneficiary. However, there are many parameters in place when it comes to trust decanting that prevent this. The trust decanting process must comply with state laws. In some cases multiple trustees can be appointed to prevent this. 

However, in cases where a beneficiary has had a falling out with the grantor of the trust, or if they have shown that they are not capable of using the financial assistance provided by the trust responsibly, they can be completely removed from the list of beneficiaries. If this is a concern, then perhaps it is best to consider giving the trustee power of distributions.

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Disadvantages of Trust Decanting

Trust decanting can prove to be a complex process. Additionally, it is not recommended that trust decanting is done by yourself unless you have training and experience in the field.

Due to this complexity, it is best to hire a professional in trust and estate planning in order to ensure that the second trust is set up correctly, this means that there will be additional expenses in the creation of a second trust and the fees associated with it. 

Additionally, if the original trustee is not appointed with excessive foreplanning, then they may be able to use the process of trust decanting for their own benefit.

In cases where the trustee is reliable, trust decanting may still not be possible due to state laws.

Should you Consider Trust Decanting?

Trust decanting is a very useful tool that can prove to be beneficial when there is absolutely no other way to alter the terms of a trust. However, it is only to be used as a last resort.

It is an expensive and time consuming process that may not even be possible in some states. Additionally, there are some ways in which trust decanting can prove to be detrimental to the beneficiaries. 

For this reason, it is recommended that proper estate planning with a financial advisor and attorney specializing in setting up trusts is done the first time around, in order to prevent simple mistakes that might be made if you try to set up the trust yourself.

In cases where the trust is set up through professionals, you can also ensure that the trust is flexible, and allows changes to be made for quite some time without all the additional expenses that may be associated with trust decanting. 

It is a useful last resort, but it is best to set up a trust correctly first.

You might be also interested in knowing Spendthrift Trust Pros and Cons and What are the Advantages and Disadvantages of a Generation Skipping Trust?

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