Changing an Irrevocable Trust Through Trust Decanting

Changing an Irrevocable Trust Through Trust Decanting

When you established your irrevocable trust, the purpose was to guarantee your wishes were carried out even if your beneficiaries did not fully appreciate the terms you selected for the trust. There are times, however, when changed circumstances mean your well-planned trust will not do what you had planned. Nevada has adopted a favorable trust decanting statute that grants the Trustee broad discretion to decant an irrevocable trust. Decanting is less expensive and more private than the alternative of seeking trust reformation before the Court. The process of decanting a trust in Nevada is relatively simple. The Trustee essentially empties out the existing trust into a newly created trust. It can be helpful to have the consent of the beneficiaries, but this is not required under the Nevada statute. There are plenty of reasons to consider decanting, and the primary ones are to update or amend trust provisions, to address changed circumstances, for federal or state tax planning, or to change the trust situs.

The Outdated Trust

If your trust is outdated, decanting can be a means to update or modernize trust provisions, or to make clarifications in the law governing the trust document. Decanting can be used to improve administrative provisions such as changing a trustee’s ability to delegate specific functions or decisions. It can also be a tool for combining multiple trusts so that administrative costs are reduced. Decanting may also be used to clarify governing law and insure uniform requirements for administration when the trustee and beneficiaries live in several different states.

Changed Circumstances

When a trust has become irrevocable, but circumstances have changed, trust decanting can be a means to accommodate these changes. For instance, decanting permits the transfer of assets to a supplemental needs trust that will allow a disabled beneficiary to receive public benefits. Through decanting, the distribution provisions of a trust may also be changed. For instance, instead of the trust terminating when a beneficiary reaches a certain age, the trust can be continued throughout that beneficiary’s lifetime. A more mundane, but still important, reason to decant is to correct drafting errors.

Federal and State Tax Planning

In some circumstances, trust decanting may also be used to maximize generation skipping transfer taxes. It may also help reduce or eliminate state taxes by avoiding a state’s fiduciary income tax or the interplay of different state income tax provisions. These issues require more complex planning, but the results can be financially advantageous.

Trust Situs

Decanting may be used to “migrate” or “redomicile” an irrevocable trust to a new jurisdiction. If laws in the state where the trust was drafted no longer provided the expected benefits, changing the trust situs can remedy the situation. A trust’s situs has important consequences for tax, asset protection and other factors, so this may be a significant consideration in making sure the goals and purposes of your irrevocable trust are realized.