Decanting a Trust

Trust_Docs

The Basics

A trust is a legal relationship where someone (the grantor) arranges with another (the trustee) to hold property for the benefit of a third-party (the beneficiary). The grantor transfers a split ownership of property–legal ownership to the trustee and beneficial ownership to the beneficiary.

The grantor names the beneficiary and trustee and establishes the trust rules, which are typically spelled out in a trust agreement. The trustee is legally responsible for managing the property according to the trust rules. The beneficiary receives the financial benefits (income, principal, use, and enjoyment) from the property.

Trusts can be established for many reasons including tax savings and wealth transfers to subsequent generations. Other trusts known as revocable trusts are easier to modify, but don’t provide the same potential estate tax savings.  The remainder of this article will focus on irrevocable trusts which have been very difficult to modify in the past even if the changes were in the beneficiary’s best interest.  In the past, changing an irrevocable trust involved a lengthy and costly trip to court with costs potentially reaching tens of thousands of dollars.

Decanting

Decanting let’s trustees change certain terms of the trust by figuratively pouring the assets from an old trust into a new one.  Trustees have limits as to what they can do. For example, they can’t change a beneficiary’s already vested interest in a trust. Trustees can, however, push back the age at which a beneficiary receives a payout from the trust or move the trust to a state that offers greater flexibility regarding taxes or administrative roles.  If the trustee wants to resign, decanting can make it easier to name a new trustee.  Decanting a trust takes place outside of court making it far less expensive than court proceedings. Costs typically range from $2,500 to $10,000.

A group of trust lawyers and academics are currently drafting a model law that could serve as a template for states that want to allow decanting. So far, 21 states have adopted decanting laws.  There are many estate tax and income tax issues related to decanting a trust. It is very important to consult with your wealth manager, your estate attorney, and your tax professional before considering this strategy.

About Mark Rioboli

Mark A. Rioboli, CFP®, CFS is Director of Wealth Management for Independence Advisors, bringing over 25 years of experience in the wealth management industry. Have a question for Mark? CLICK HERE TO ASK MARK

, , , , , , , , ,