Decanting is Not Just for Wine: “Revoking” an Irrevocable Trust

My how things have changed, or at least, how my understanding of things have changed. I graduated from law school in 1980 thinking that irrevocable meant just that. Once a trust became irrevocable–generally upon the death of the settlor–its terms turned to stone, fixed and barely movable. The only way to turn that stone back into something more malleable was a cumbersome process in which the trustee needed to secure the agreement of all the beneficiaries and then the court, before implementing any change to the trust. Again, that was my understanding at the time. I’m guessing it might be yours as well.

If trust law was ever that way in the past, it is certainly not that way today. The Uniform Trust Code (UTC) and various state “decanting” statutes have insured that. The UTC, implemented by a number of states, including both Wyoming and Utah, allows for judicial modification of trusts in a variety of circumstances, including “modification to achieve settlor’s tax objectives” and “modification or termination because of unanticipated circumstances.” But for our purposes here, I’m more interested in decanting, a process for modifying a trust somewhat analogous to decanting wine.

decanting

With wine, decanting involves pouring wine from one container to another in order to separate the wine from any sediment in the bottle, sediment that can ruin the taste. The process also infuses the wine with oxygen as the liquid passes from one container to another. Apparently–I don’t drink–pouring old wine into new bottles can improve the drinking experience.

With trusts, decanting involves “pouring” the old, irrevocable trust into a newer, more flexible trust, a trust better fitted to the needs of the parties to the trust at the time of the decanting. Maybe the decanting will result in the trustee having more flexible powers to better administer the trust. Maybe it will lead to better state and federal tax benefits. Maybe asset protection is the goal. For these reasons and more, trustees (often encouraged by beneficiaries) are looking to decanting as a way to deal with circumstances and issues unforeseen by the settlor of the original trust.

Decanting is not a new idea. Some argue that it has been allowed under the common law for a long time–at least since 1940–on the theory that if a trustee has discretionary authority to make distributions to a beneficiary from a trust, that trustee also has authority to make distributions in “further trust,” that is, into a new trust. But common law can be finicky and is subject to the whims of the local judiciary, so it’s with some relief that at least 22 states have enacted decanting statutes, codifying what was once only in the casebooks.

Wyoming’s decanting statute (Utah doesn’t have one), enacted in 2013, is short but illustrative:

§ 4-10-816. Specific powers of trustee 

(a) Without limiting the authority conferred by W.S. 4-10-815, [a statute that essentially frees the trustee from court supervision] a trustee may:

. . .

(xxviii) On distribution of trust income or principal pursuant to authority in the trust instrument to make discretionary distributions to a trust beneficiary, whether or not the discretionary distributions are pursuant to an ascertainable standard, make distributions of all or any portion of trust income or principal in further trust. (emphasis supplied)

Notice that there’s no mention of court supervision. No, this is a specific power granted trustees by statute, so the trustee can act on his or her own. That’s not to say that the court should never be involved. In fact, if the new trust contains provisions that might raise the hackles of one or more beneficiaries, the trustee would be wise to seek the court’s  blessing.

Now there are limitations to decanting, and it’s not something to do willy nilly. That said, if you’re a trustee or beneficiary of an irrevocable trust and if the old trust creaks and sways under the weight of today’s needs and demands, maybe it’s worth looking at decanting as a way to resolve those issues.

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