Decanting a Trust

In decanting a trust, the assets of an existing irrevocable trust are transferred to a new irrevocable trust with more favorable terms.

A trust can be a powerful protection tool. If written properly by an experienced estate planning attorney, it can secure one’s wealth and property for the benefit of intended loved ones for generations to come.

But you can’t anticipate everything – including whether an heir will divorce, and possibly expose a large portion of trust assets to an unexpected division.

To further strengthen a trust, it’s worth considering whether you may want to authorize your trustee to take “any action necessary,” including decanting, to protect a trust’s assets.

In Arizona and several other states, a trustee may “decant” an irrevocable trust and transfer its assets into a new irrevocable trust that has more favorable terms, so long as certain conditions are met by the new trust. For example, although the new trust can have more favorable terms, it cannot have different or new beneficiaries from the old trust. 

Ferri v. Powell-Ferri

Decanting was addressed in a recent decision by the Massachusetts Supreme Court in Ferri v. Powell-Ferri. In that case, the court ruled that the trustees of an irrevocable trust that was created in 1983 could decant the trust’s assets into a new trust, even though at the time of the decanting the beneficiary, who was going through a divorce, had the right to withdraw 75% of the trust property. 

The trustees in the Ferri case apparently decanted the assets, without the knowledge of one of the beneficiaries, to protect the funds from that beneficiary’s soon-to-be ex-wife, who filed a lawsuit to reverse the decanting.

Decanting Provisions for Your Estate Plan

As of the writing of this article, 22 states, including Arizona, have enacted decanting statutes. For state-specific information, see “Trust Decanting Chart: State by State” (PartnersFinancial, 2015) and “Summaries of State Decanting Statutes” (Sidley Austin LLP, 2014).

When clients ask our firm to create a trust requiring an outright distribution to a beneficiary at a certain age, we often advise them to consider instead keeping the assets in trust for the benefit of the beneficiary during the beneficiary’s lifetime. Even if the beneficiary then becomes his or her own trustee at some point (at a suitable age), the assets held by the trust will be protected against “creditors” and “predators” (for example, divorcing spouses) if the assets continue to be held in trust.

This is true even if the beneficiary has control over the trust’s assets as trustee. This protection is particularly true if distributions under the trust are completely discretionary by the trustee or are subject to certain ascertainable standards for the health, education, maintenance or support of the beneficiary. When a trust provides for outright, mandatory, distributions to a beneficiary, or grants the beneficiary a withdrawal right, that creditor/predator protection is lost over the assets that are actually distributed, or over which the beneficiary has the right of withdrawal.

But every family is different, and there is no single solution for everyone. 

If you are open to the possibility of, down the road, making changes to an existing irrevocable trust to better protect its assets, you can include language in the original trust that permits decanting. Bear in mind, though, that granting the power to decant does not mean that the trustee must use or exercise that power.

Conversely, if you want the trust and its assets to be managed pursuant to your original intent, you can include a provision prohibiting any decanting.

Either way, that is a decision that is best made in consultation with an experienced estate planning attorney.

Adapted from the Daily Plan-It newsletter