Trusts are often used to administer a family’s wealth for many generations. So when you consider the fast pace of technology including advances in life expectancy and reproductive techniques—along with repeated changes in tax laws—it’s no wonder that trust law and successful trust drafting have been significantly impacted.
The question is, have your trusts kept up so they’ll still do what’s intended or wanted? If not, it may be time for you to take an action called decanting.
To understand why, it helps to look back—way back—to the 17th century. At that time, as a matter of public policy, the laws required trusts to terminate in accordance with the “rule against perpetuity.” Such rules typically allowed for trust terms of 90 years or, alternatively, 21 years “beyond lives in being” (that is, the trust would have to terminate 21 years after the death of the last affected person who was alive when the trust was created). And back then, life expectancy was only about 35 years. Today, many states have repealed this rule and permit trusts to continue forever.
Trusts written as recently as a few decades ago might not have considered some societal changes such as defining a spouse as someone who is married to another individual of the same sex. Or how would a trust written then be interpreted today with respect to terms such as “issue'” or “descendants”? Would such term include a child born posthumously using assisted reproductive technology such as IVF? There have already been a number of court decisions interpreting whether the trust creator’s intent was to include a child or grandchild born using cryopreserved eggs, sperm or embryos. One such case was Matter of Martin B., which involved a trust created in 1969 for the benefit of the grantor’s children and grandchildren. The court held in 2007 that the grandchildren born using the son’s sperm after the son had died should be included as beneficiaries.
More recently, we’ve seen significant tax law changes that could make trust grantors, upon reconsideration, wish their trusts had been drafted with greater flexibility.
But in cases like these and similar ones, all is not lost. Although trusts that are irrevocable generally do not permit the grantor to amend them, many states in recent years have enacted legislation that permits a trustee to decant the trust into a new trust with different terms.
If that seems like an end-run around irrevocability, it is—but it can be perfectly legal. And it can be very beneficial in the right circumstances.
The new trust can remove beneficiaries…change distribution provisions…and modify administrative provisions. Most of these decanting statutes require that the trustee, under the current trust, have unlimited discretion to make distributions of principal and income to one or more of the beneficiaries. And even where there is such discretion, there may be adverse tax consequences that must be considered such as loss of the generation-skipping tax exemption for trusts settled before 1986.
Nonetheless, the flexibility afforded by decanting can be a net benefit. Situations in which I have advised clients to consider decanting include…
- Eliminating mandatory distributions when a child attains certain ages (e.g., 25, 30) and providing for exercise of discretion for the child’s lifetime. This would protect the child from divorce claims or potential creditors.
- Changing the situs (where the trust is legally located) and governing law of the trust to avoid state income taxes.
- Adding administrative provisions such as appointment of successor trustees, trust protectors and investment advisors.
- Granting powers of appointment (to “appoint” the property to someone else) to beneficiaries to allow for change in circumstances that may not have been considered when the trust was settled.
- Correcting drafting errors that might otherwise result in adverse tax consequences.
Although not every state permits a decanting, there are several states that offer the possibility by simply appointing a trustee resident in a state that does permit decanting. So if you have a trust that you may wish to make some changes to, speak with your trust attorney about the possibility of decanting.