What does trust decanting mean?
Irrevocable does not mean immovable. Decanting, in its most basic sense, means “to gradually pour (liquid, typically wine or a solution) from one container into another, especially without disturbing the sediment.”
In the context of trusts, trust decanting refers to a trustee, who has discretionary power over the distribution of a trust, using that power to distribute the trust property to a new trust with updated provisions. This process allows the sediment of the old trust to be left behind, while enhancing the purposes or goals of the trust.
Residents from other states have the unique opportunity to leverage South Dakota’s advantageous trust laws through a process known as decanting. Decanting involves transferring assets from an existing trust to a new trust with more favorable terms. South Dakota’s permissive decanting laws make it a preferred destination for trust management.
Decanting At Common Law
Trust decanting has roots in common law, as evidenced by landmark cases such as Phipps v. Palm Beach Trust Company (1940) and Morse v. Kraft (2013). In the Phipps case, it was established that “a power vested in a trustee to create an estate in fee includes the power to create or appoint any estate less than a fee unless the donor clearly indicates a contrary intent.” Similarly, in the Morse case, the court recognized that the trustee had “discretion to distribute property directly to, or apply for the benefit of, the trust beneficiaries.” Although decanting is arguably authorized by common law, many states have since enacted decanting statutes to provide clearer guidance.
The first decanting statute was enacted in 1992, and now, 29 states have decanting statutes in place. These states include South Dakota, Nevada, Delaware, Tennessee, New Hampshire, Ohio, Missouri, Alaska, Illinois, Colorado, Georgia, Kentucky, Arizona, Minnesota, New York, Wisconsin, Indiana, South Carolina, Texas, Wyoming, Rhode Island, Florida, Alabama, California, New Mexico, North Carolina, Virginia, Washington, and Michigan.
Why Would someone want to decant a trust?
There are several reasons why someone might choose to decant a trust. These include:
- Changing trustee provisions
- Changing powers of appointment
- Correcting drafting errors
- Changing governing law
- Modernizing tax provisions
- Changing a support trust into a discretionary trust
- Creating a special needs trust
- Combining or separating trusts
To move a trust to a state with statutory decanting, such as South Dakota, this can be done through a NJSA (Non-Judicial Settlement Agreement).
Determining The Best State Statute For Decanting
When considering which state statute would be best for decanting, it’s important to first determine what changes are needed. Key questions to ask include:
- Can you decant a trust with an ascertainable standard?
- Is notice to beneficiaries required?
- Can a trust with an ascertainable standard be decanted into a discretionary trust?
- Can a decanting process remove mandatory income interests?
- Can a decant allow a power of appointment in the new trust to a non-beneficiary?
- Can a decant accelerate a remainder beneficiary’s interest?
Additionally, it’s important to consider other trust laws of the state that may be advantageous in a decanted trust.
How Can A Professional Trustee Help You?
Our solution-focused staff are at your service.
- Providing comprehensive reports that won’t overwhelm,
- Sharing clear statements reflecting performance of all trust assets,
- Working with CPAs specializing in trust accounting for accurate tax preparation,
- Assisting with filing annual state and federal trust tax returns,
- Addressing tax matters related to the trust,
- Providing timely asset distributions to beneficiaries,
- Reviewing all documents thoroughly and promptly,
- Reinvesting with our eye on support of many generations to come.