Trust Decanting: Updating Irrevocable Trusts Without the Court

Traditional wisdom holds that irrevocable trusts are, well, irrevocable. Once established, their terms cannot be altered—or so many believe. In recent decades, states have enacted decanting statutes that allow trustees to “pour” assets from an old trust into a new trust with updated terms. Like decanting wine, the goal is to preserve the valuable contents while replacing the outdated container. This post explains how decanting works, when it makes sense, and what trustees must consider.

What Is Trust Decanting?

Decanting is the process of transferring assets from one trust to another trust. The new trust may include revised provisions, modernized powers, or corrected errors. A trust can be decanted only if state law or the original trust document permits it. Decanting is typically used when the original trust’s terms no longer fit the beneficiaries’ needs or comply with current laws.

Analogy and Origin

The term comes from wine service—pouring wine from a bottle into a decanter to separate sediment and improve clarity. Similarly, decanting an outdated trust removes problematic language and clarifies the grantor’s intent.

Why Decant a Trust?

Trust provisions drafted decades ago may not reflect today’s laws, family dynamics, or tax environment. Reasons to decant include:

• Changing Beneficiary Circumstances: A beneficiary’s needs may evolve due to marriage, divorce, disability, or addiction. Decanting can add safeguards such as spendthrift provisions or third‑party oversight.

• Legal and Tax Changes: Laws change frequently. Decanting allows trustees to incorporate new state statutes, adjust to tax reforms, and benefit from tools like directed trusts or powers of appointment.

• Correcting Errors: Drafting mistakes or ambiguous language may create confusion. Decanting lets trustees rectify such issues.

• Modernizing Terms: Trustees can modernize administrative provisions—adding digital asset authority, clarifying trustee succession, or incorporating mediation clauses.

• Consolidating Trusts: Families with multiple trusts can combine them for easier administration and reduced costs.

The Legal Framework

States vary widely in their decanting laws. Some, like New York (where decanting is permitted), offer broad discretion to trustees. Others require court approval or limit the changes a decanted trust can make. Key legal considerations include:

• Statutory Authority: Check whether your state has a decanting statute. If not, decanting may be possible only if the original trust document expressly allows it.

• Trust Terms: Some trusts explicitly authorize decanting or grant the trustee a broad distribution power. A trustee can usually decant only if they have authority to distribute assets outright to beneficiaries.

• Beneficiary Interests: Decanting cannot be used to eliminate or reduce a beneficiary’s vested interest. Trustees must ensure the new trust protects the same beneficial interests, though it may change how or when distributions are made.

• Fiduciary Duties: Trustees must act prudently and in the best interests of all beneficiaries. Decanting solely to reduce a trustee’s administrative burden, increase fees, or favor one beneficiary over another could violate the duty of loyalty.

How Decanting Works

The decanting process typically involves:

1. Reviewing the Existing Trust: Assess whether the trust terms are outdated, ambiguous, or problematic.

2. Drafting a New Trust: Create a new trust document with updated provisions aligned with the grantor’s intent.

3. Transferring Assets: Execute a trustee’s distribution or assignment of assets from the old trust to the new trust.

4. Notifying Beneficiaries: Some statutes require notice to beneficiaries; others permit silent decanting. Providing notice fosters transparency and reduces disputes.

5. Documenting the Process: Keep detailed records of the rationale for decanting, the steps taken, and the legal authority relied upon. This documentation helps defend against future challenges.

Benefits of Decanting

Flexibility and Adaptability

Decanting offers flexibility, enabling a trust to evolve with changing circumstances. Trustees can add discretionary distribution standards, remove outdated restrictions, or grant powers of appointment to beneficiaries. This adaptability ensures the trust remains effective.

Cost‑Effective Modifications

Decanting often costs less and is faster than court‑ordered reformation. It avoids litigation and associated legal fees. Trustees and beneficiaries save time and resources while achieving the same goal—modernizing the trust.

Enhanced Asset Protection and Tax Planning

By modifying the trust’s terms, trustees can strengthen asset protection—adding spendthrift clauses or directing distributions through third parties. Decanting can also optimize tax outcomes: for example, moving assets into a jurisdiction with favorable trust taxation or adjusting language to avoid inclusion in the beneficiary’s estate.

Drawbacks and Challenges

While decanting is powerful, it has pitfalls:

• Complex Legal Requirements: Decanting statutes are complex and vary by state. Trustees must navigate these rules carefully.

• Beneficiary Objections: Changes may upset beneficiaries, leading to disputes or litigation. Trustees should communicate openly and explain the benefits.

• Tax Implications: Inadvertent changes could trigger gift or estate taxes. Seek tax advice before decanting.

• Irrevocability of the New Trust: Once assets are poured into a new trust, further changes may be limited. Trustees should draft the new trust to allow future modifications where possible.

Example: Updating an Outdated Spendthrift Trust

A grantor created an irrevocable trust in 2000 for her grandchildren, with strict distribution terms. In 2024, one grandchild developed a substance‑abuse disorder, and another married into a high‑risk business. The trust lacked provisions to protect against creditors or adjust distributions. The trustee, with broad discretionary powers, decants the trust into a new trust that includes spendthrift clauses, delays distributions until age 35, and allows small discretionary payments for rehabilitation and educational expenses. The decanting ensures the grandchildren still benefit, while protecting assets from creditors and mismanagement.

Practical Tips for Trustees

1. Assess the Need: Only decant when the benefits outweigh the risks. Minor administrative issues may not justify the complexity of decanting.

2. Consult Professionals: Work with experienced trust attorneys and tax advisors to ensure the decanting complies with state law and does not inadvertently trigger taxes.

3. Communicate with Beneficiaries: Explain why decanting is necessary and how it benefits them. Transparency builds trust and reduces objections.

4. Document Everything: Keep thorough records of the decision‐making process, legal authority, and notices provided. Documentation protects trustees from claims of breach of duty.

5. Consider Future Flexibility: When drafting the new trust, include provisions for future modifications, such as powers of appointment or further decanting rights.

Conclusion

Decanting is a modern tool that allows trustees to adapt irrevocable trusts to current circumstances without court intervention. When used appropriately, it offers flexibility, cost savings, and enhanced protection for beneficiaries. Trustees must, however, respect state laws, honor fiduciary duties, and communicate openly with beneficiaries. By understanding the legal framework and potential pitfalls, trustees can use decanting to preserve and strengthen trust assets for generations to come.