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One of the basic purposes of trusts is protection. It may be the protection of a spouse, child, parent or dependent that is desired. It may be the protection of a beneficiary against his or her own possible errors of judgment in the management of trust property. Trusts are also used as a device to reduce estate taxes and shield assets from potential creditors.
Often, to achieve these goals an irrevocable trust is required. With an irrevocable trust the trust creator (sometimes referred to as the grantor or settlor) completely relinquishes title to the property and does not retain a right to alter, amend or revoke the trust. Irrevocable trusts are permanent. Since the grantor gives up all control and dominion over the transferred property, the assets of an irrevocable trust are not includible in the grantor’s gross estate for state and federal estate tax purposes.
But what happens if someone needs to "change" an irrevocable trust? Can this be done? Yes!
Trust decanting is the process of pouring the assets of one irrevocable trust (the “original trust”) into a second irrevocable trust with more desirable terms (the “new trust”). There are many restrictions on when and how a trust may be decanted, but decanting can be a very useful tool when unforeseen circumstances arise in the course of the life of a trust.
Common reasons to decant include:
Modifying a trust’s administrative provisions.
Changing a trust’s dispositive provisions to address unforeseen circumstances.
Changing the governing law of the trust.
Modifying provisions to achieve tax benefits.
Correcting drafting errors.
Before decanting a trust, the trustee must thoroughly review the "original trust" and answer the threshold question: Does the trustee have the requisite power necessary to decant?
If the decanting will be effectuated under the applicable state decanting statute, the trustee must confirm that the exercise of the decanting power meets all statutory requirements.
New York Decanting Statute
New York was the first state to adopt a decanting statute. Full text: N.Y. EST. POWERS & TRUSTS § 10-6.6