An irrevocable trust is usually created to take assets out of the estate of the grantor mostly to:
When a trust is first created, the terms may seem sound and reasonable. However, over the years, there may be reasons why the trust no longer works or the circumstances have changed. In order to change the terms of the trust, the trustee usually has to go to court. However, there may be one option to modify a trust that doesn't require court approval -- it's called decanting.
Trust decanting, which is allowed in some states, is a method for modifying an irrevocable trust. What is beneficial is that you would not have to obtain court approval to modify the trust, which is what usually would have to happen to modify an irrevocable trust. With decanting, the trustee can distribute part or all of the trust principal to another irrevocable trust (called the "appointed trust"). In other words, you pour the assets from one trust to another trust that has different terms.
A list of some of the reasons why decanting might be desired, depending on the trust language and state law:
One caveat and something that should be considered when creating an original trust is that it must give the trustee the power to distribute trust principal. If there is no power to invade trust principal, the trustee cannot decant the trust.
What state is the best state for decanting a trust? It depends on various regulations and your specific needs. One state or another may be a better jurisdiction to create your trust or attempt to use decanting methods.
In states without a decanting statute, common law may provide the power to decant if the trustee has authority to invade the trust for the benefit of the beneficiaries. However, a trustee may find him or herself in court if an interested party believes the trustee did not have the authority to decant the trust.
In addition, there is a need to consider tax consequences that may stem from:
If decanting a trust seems right for you, discuss the option with your estate planning advisor or attorney. This is generally a complex strategy but may allow a trustee additional flexibility.
The strategy of decanting a trust is only permitted in some states. Even if states do allow it, there are certain restrictions. Here are some questions that should be answered if you are interested in decanting:
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