Irrevocable trusts are powerful estate planning tools – and a lot of people use them to protect their assets and control what happens to their wealth after they are gone. However, life circumstances, laws and financial situations can change over time, and that can make the terms of an existing trust less useful than might be desired – or even inoperable.
Fortunately, New York state law provides methods to amend irrevocable trusts through a process known as “decanting.”
What does it mean to decant a trust?
In simple terms, decanting a trust involves transferring the assets from an existing trust into a new one with revised terms. In New York, the decanting process is governed by the Estates, Powers, and Trusts Law (EPTL) §10-6.6.
This provision allows trustees to take the assets in an old trust and “pour them over” into a new one, which is where the term “decanting a trust” draws its name. The new trust can then incorporate changes to adapt to the evolving circumstances that made the old trust impractical. That allows the spirit of the original trust and the grantor’s goals to be sustained while improving the situation for the trust’s beneficiaries.
When might decanting be necessary?
Numerous situations may make decanting a trust advantageous, but here are three of the most common:
- Accommodating a special needs situation: Sometimes a trust is created with a specific beneficiary in mind – but that beneficiary later develops a condition that leaves them disabled and qualified for government assistance, such as Supplemental Security Income (SSI) and Medicaid. The terms of the original trust could unintentionally interfere with the beneficiary’s eligibility for needs-based benefits. By decanting the original trust into a Special Needs Trust, the beneficiary can still receive financial support from the trust without losing the protection of the federal and state benefits.
- Enhancing asset protection: Sometimes trusts are overly generous in their discretionary terms – and that can be a problem if the beneficiary faces certain financial and legal issues, such as creditor claims or divorce. Decanting may allow a trustee to move the assets to a new trust with a spendthrift clause that limits the beneficiary’s control over the assets, which can better insulate the assets against claims.
- Modernizing outdated terms: Times change and trusts that were created decades ago can lack the flexibility or provisions common in modern estate planning. This can make it difficult for a trustee to keep up with a beneficiary’s lifestyle needs, the latest tax laws and even useful financial products. Decanting an outdated trust can help bring an outmoded trust up to date and change administrative restrictions that make effective asset management difficult or impossible.
It’s important to note that while decanting is an invaluable tool, it does have its limitations. For example, the trustee cannot decant a trust to eliminate the vested interests of beneficiaries, and certain tax implications may arise if the terms of the trust are substantially changed. Additionally, if the decanting process deviates significantly from the grantor’s original intentions (the “spirit” of the trust), it may be subject to legal challenges.
As with any significant change to an estate plan, decanting should be approached with thorough planning and legal guidance. If you have questions about the viability of a trust or what might be done to make a trust more efficient, it may be time to seek a consultation.
