Decanting a trust is the process of transferring assets from an existing trust into a new trust, often with modified terms, to better meet the needs of beneficiaries.
This strategy allows trustees to adapt old or inflexible trusts without requiring court approval in many cases.
This article explores:
- What is the procedure for decanting a trust?
- When can a trust be decanted?
- What are the pros and cons of decanting a trust?
- Which states allow decanting of trust?
Key Takeaways:
- Decanting allows trustees to modify trust terms to better suit beneficiaries’ needs.
- The process can improve flexibility, tax planning, and asset protection.
- Trust decanting risks include beneficiary disputes, unintended tax outcomes, or fiduciary liability.
- Decanting laws vary among states, making legal and tax advice essential before proceeding.
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The information in this article is for general guidance only. It does not constitute financial, legal, or tax advice, and is not a recommendation or solicitation to invest. Some facts may have changed since the time of writing.
What Does It Mean to Decant a Trust?
Decanting a trust means moving assets from one trust into another trust with different terms, similar to pouring wine from one bottle to another.
The new trust can adjust distributions, extend terms, or add protections that the original trust lacked.
This is often used when the original trust’s terms are outdated or too restrictive.
What Happens When a Trust Is Decanted?
When a trust is decanted, the assets of the original trust are transferred into the new trust. The original trust may remain in existence but typically holds no active assets.
Beneficiaries of the original trust generally receive similar rights under the new trust, though some terms can be altered if permitted by state law.
Why Do You Decant a Trust?
Trusts are decanted to enhance flexibility, protect beneficiaries, and address changes in law or family circumstances. Common reasons include:
- Modifying distribution provisions to accommodate changing needs
- Adjusting trustee powers or succession rules
- Improving tax planning opportunities
- Addressing issues in poorly drafted or older trusts
What Are the Benefits of Decanting a Trust?
The primary advantages of decanting a trust include increased flexibility to update outdated terms and enhance tax or estate planning strategies. These allow trustees to better meet the needs of beneficiaries while optimizing the trust structure.
Key advantages include:
- Flexibility: Decanting allows trustees to modify outdated or overly rigid trust terms without court intervention. This can help align the trust with current laws, family needs, or changing circumstances, ensuring it remains effective over time.
- Tax Planning: By decanting, trustees can restructure the trust to take advantage of estate or generation-skipping tax strategies. This can reduce overall tax liability, maximize wealth preservation, and provide more efficient transfers to beneficiaries.
- Asset Protection: A decanted trust can be structured to offer enhanced protection against creditors or legal claims. This ensures that the trust assets are better shielded while still being accessible to intended beneficiaries.
- Beneficiary Considerations: Decanting allows adjustments to distributions to better meet the needs of minors, special needs beneficiaries, or other family members. This flexibility ensures that each beneficiary receives support in a way that reflects their circumstances and long-term welfare.
What Are the Risks of Decanting a Trust?
One of the main risks of decanting a trust is potential legal challenges, and trustees must also be aware of other important considerations. These include:
- Legal Challenges: Beneficiaries may contest the trustee’s authority to decant, arguing that changes exceed the trustee’s powers. Such disputes can lead to costly litigation and delays in trust administration.
- Tax Consequences: Altering trust terms through decanting may unintentionally trigger gift, estate, or generation-skipping taxes if the transfer is not properly structured. Trustees must carefully plan and consult tax professionals to avoid unexpected liabilities.
- Fiduciary Liability: Trustees have a duty to act prudently and in accordance with the trust document and state law. Improper decanting decisions can result in breach-of-trust claims and personal liability for losses or mismanagement.
- State Limitations: Not all states allow decanting, and some impose specific restrictions or procedural requirements. Trustees must ensure compliance with local laws to validate the decanting process and prevent legal challenges.
What States Allow Decanting of Trusts?
Most US states now allow decanting of trusts, with South Dakota, Nevada, and Tennessee offering the broadest flexibility.
The rules, notice requirements, and trustee powers vary by jurisdiction, as summarized in the table below:
| State | Has Decanting Statute? | Notice to Beneficiaries Required? | Flexibility Level |
| South Dakota | Yes | No | Broad |
| Nevada | Yes | No | Broad |
| Tennessee | Yes | No | Broad |
| New Hampshire | Yes | No (except charitable trusts) | Moderate |
| Delaware | Yes | No | Moderate |
| Ohio | Yes | Yes | Moderate |
| Alaska | Yes | Yes | Moderate |
| Arizona | Yes | No | Limited |
| Virginia | Yes | Yes | Limited |
| Illinois | Yes | No | Moderate |
| Missouri | Yes | No/Yes | Limited |
| Indiana | Yes | Yes | Moderate |
| South Carolina | Yes | No/Yes | Moderate |
| Kentucky | Yes | No/No | Moderate |
| Michigan | Yes | Yes | Limited |
| North Carolina | Yes | No/No | Moderate |
| Texas | Yes | No/No | Moderate |
| Florida | Yes | Yes | Limited |
| Rhode Island | Yes | Silent/No | Limited |
| Wyoming | Yes | No | Limited |
| New York | Yes | Yes | Limited |
| Wisconsin | Yes | No/No | Limited |
Does a Decanted Trust Need a New EIN?
Yes, in most cases, a decanted trust is treated as a new legal entity for federal tax purposes, which generally requires obtaining a new Employer Identification Number (EIN) from the IRS.
However, if the decanting is considered a continuation of the same trust under state law and the trust retains the same grantor and tax attributes, the IRS may allow the old EIN to remain.
Trustees should consult a tax advisor to confirm whether a new EIN is necessary based on the specific structure and type of decanting.
Can You Decant an Irrevocable Trust to a Revocable Trust?
Generally, an irrevocable trust cannot be decanted into a revocable trust because revocable trusts allow the grantor to retain control—an outcome contrary to the nature of an irrevocable trust.
Some jurisdictions may allow modifications of an irrevocable trust via decanting into another irrevocable trust, but converting into a revocable trust is typically not permitted and carries significant tax and legal risks.
Conclusion
Decanting a trust is a strategic tool that empowers trustees to adapt estate plans to evolving family needs, tax considerations, and legal changes.
While it offers flexibility and potential benefits, its use requires careful planning, awareness of state-specific rules, and attention to fiduciary responsibilities.
Done correctly, decanting can modernize a trust and enhance protections for beneficiaries, but it should always be approached with professional guidance to navigate legal and tax complexities effectively.
FAQs
What is the 2 Year Rule for Trusts?
The 2-year rule allows certain appointments or modifications made within two years of a grantor’s death to be treated as if they were part of the deceased’s will.
This ensures that such changes are included in the estate for tax purposes, potentially reducing inheritance tax (IHT) liabilities.
Some states also limit trustee decanting powers during the first two years of a trust’s existence to prevent premature or imprudent modifications.
What Type of Trust Is Best for a Family?
A revocable living trust is generally the best option for most families.
It allows the grantor to manage and adjust assets during their lifetime while avoiding probate after death.
However, for families seeking greater asset protection or tax advantages, an irrevocable trust may be more suitable, as it removes assets from the taxable estate and safeguards them for long-term beneficiary support.
What is the Best Way to Leave Property Upon Death?
Using a combination of wills and trusts is often ideal. A living trust can avoid probate, control distributions, and provide continuity, while a will addresses residual assets and personal bequests.
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