The State of New York is the original trust decanting pioneer. The state enacted the first trust decanting statue in America in 1992.
Wisely, the state recognized that an irrevocable trust — where the terms of the trust could not change — might benefit from some flexibility. Consider the following example.
When something old wears out
A strategic part of a New York estate plan is to set up a revocable trust, also called a living trust. It ensures that the grantor, the person who establishes and funds the trust, can make changes or remove all assets and revoke the trust. Upon the grantor’s death, the trust becomes irrevocable (unable to change). This permanence ensured execution of the grantor’s wishes as to how and when funds would distribute—and who would receive them.
An unforeseen problem could sometimes arise before the era of trust decanting. Suppose that parents of three girls and a boy made a revocable trust with their children as the beneficiaries. The parents set terms for each child to receive 25% of the assets, a fair and equitable distribution. Unfortunately, one of the children became addicted to drugs and gave his 25% to a drug dealer. This is not what the child’s parents would have wanted for him. The trustee would have no choice but to give the money to the young man, even if he or she knew it was a bad idea.
When something old becomes something new
Other conditions could change. One child could become disabled, needing a larger share of the trust assets. Another child might marry into wealth and need less. The trustee could have put the drug-addicted child’s 25% into a drug treatment program. Tax laws change over time; the children may have lost assets as evolving tax laws undermined protection set up in the old trust. If it could change to a more favorable position, they could avoid a heavy trust burden.
The term “decanting” is as an analogy for pouring an old liquid into a new bottle, leaving behind unwanted sediment. The trustee of the original trust can transfer the old trust assets into one or several new trusts. By the same law, if there were several grantor trusts, they could now become a single trust.
When something new may need a change
Many grantor trusts are set up to deliver payments when a child turns a certain age. Alternatively, the full amount could make a series of disbursements at several ages. For a large trust, perhaps each child would receive a third of their total amount every ten years.
In 30 years, a lot can happen, so reviewing an irrevocable trust each year with an estate planner is a common practice. These days, tax laws and other impactful changes are fluid and sometimes rapid. Generally speaking, only an up-to-date analysis would truly tell whether the new irrevocable trust assets could be better maintained or grown by decanting.