Many estate planners use irrevocable trusts to facilitate lifetime gifts and remove assets from an estate. But what can you do when the irrevocable trust contains a provision that you would prefer to amend or when changed circumstances call for changes to the existing trust? If the trust is “irrevocable”, are you stuck with the existing provisions?
Now, in these situations, planners are able to use a technique called “decanting” to cure substantive and administrative problems in irrevocable trusts. Decanting allows the trustee of an existing trust to distribute all or part of the trust principal to another irrevocable trust (the “appointed trust”). A number of states have enacted statutes specifically dealing with decanting.
In New York, EPTL 10-6.6 contains rules governing to which trusts can be decanted, what provisions may be changed and how to decant. In order to decant in New York, the existing trust agreement must give the trustee the power to invade the trust principal. The extent of that power determines what types of changes can be made in the appointed trust.
If the Trustee has unlimited power to invade principal then:
(1) The existing trust can be decanted to another trust for the benefit of any one or more beneficiaries of the existing trust;
(2) One or more of existing beneficiaries can be eliminated; and
(3) A beneficiary of the existing trust in whose favor principal can be distributed may be given a power of appointment in the appointed trust.
If the Trustee has limited discretion to invade principal then:
(1) The beneficiaries must be the same in the appointed trust as the existing trust;
(2) The principal invasion standard must remain the same during the term of the existing trust; and
(3) Powers of appointment that are not present in the existing trust cannot be granted in the appointed trust.
The New York statute also provides certain rules for all decanted trusts as follows:
- The trust cannot be decanted if the trust instrument prohibits decanting or if there is evidence that the grantor opposes decanting;
- The trustee must consider the tax implications of decanting, including all estate and gift tax consequences;
- The appointed trust may be an existing or newly appointed trust, but it must be irrevocable;
- The appointed trust agreement must be drafted and executed before the existing trust can be decanted;
- The appointed trust can be a supplemental needs trust;
- The rule against perpetuities cannot be violated;
- A current right of a beneficiary to receive income or principal cannot be eliminated;
- A trustee cannot be indemnified from liability;
- A right to remove or replace a trustee cannot be eliminated; and
- A trustee’s compensation cannot be changed.
Decanting is accomplished by an instrument in writing, signed, dated and acknowledged by either the grantor or the trustee of the existing trust. The instrument must state whether all of the existing trust assets or a percentage of them are being decanted. Then, either (1) a copy of the existing trust agreement, the appointed trust agreement and the executed decanting power must be served on all interested parties (the grantor of the existing trust (if living), the grantor of the appointed trust, the beneficiaries of the existing and appointed trust, anyone who has the power to remove and replace the trustee of the existing trust) either personally or by certified mail; or (2) written consent of all interested parties may be obtained after providing them with copies of all documents. The exercise of the decanting power becomes effective thirty (30) days after service is complete (unless the parties consent in writing to an earlier date).
An interested party can object in writing to the trustee. The decanting instrument only needs to be filed with the Court in the case of a testamentary trust or an inter vivos trust that was the subject of a prior court proceeding.
Although the decanting requirements summarized above are lengthy and specific, they offer planners an opportunity to remedy problematic provisions in irrevocable trusts.