When to Decant A trust?

While irrevocable trusts were once thought to be untouchable this may no longer be true as the practice of “decanting” a trust becomes more commonly used. Decanting lets a trustee, or the manager of the trust, change certain terms by figuratively pouring the assets from an old trust into a new one. So far, 21 states have adopted decanting laws and a group of trust lawyers and professors are drafting a model law to serve as a template for states to use in the future as a model.

Many families use irrevocable trusts to pass wealth to their beneficiaries because of the tax advantages and other benefits the trust offers. So far there are some limits to what decanting can do, as, for instance, trustees cannot change a beneficiary’s already vested interests in a trust.

So what can the act of decanting do?

Decanting can allow trustees to alter some of the simpler trust terms. For instance decanting can be used to push back the age at which a beneficiary receives a payout, or to alter the trust terms to allow greater flexibility regarding taxes and the administrative roles within the trust.

The old rule used to be that to change an irrevocable trust, a trustee or beneficiary would have to petition the probate court for a judicial modification. This process could take some time and could be quite costly, whereas decanting can be done outside of court and is usually much less expensive.

Decanting under Florida law falls under Florida Statute section 736.04117 and allows a trustee given absolute power to invade a trust’s principal as the equivalent of a donee of a special power of appointment. Thus, “the rationale underlying decanting is that if a trustee has the discretionary power to distribute property to or for the benefit of one or more current beneficiaries, then the trustee, in effect, has a special power of appointment that should enable the trustee to distribute the property to a second trust for the benefit of such beneficiaries.”  William R. Culp, Jr. & Briani Bennett Mellen, Trust Decanting: An Overview and Introduction to Creative Planning Opportunities, Real Property, Trust and Estate Law Journal, Spring 2010, p. 3.

In 1940, the Supreme Court of Florida allowed a trustee, who had the ability to appoint trust property at his or her sole discretion, to create a second trust for the benefit of the beneficiaries funded with property distributed from the first trust. Phipps v. Palm Beach Trust Co., 196 So. 299 (Fla. 1940).

The issue of decanting was recently brought up in Harrell v. Badger, where the Fifth District Court of Appeal of the State of Florida invalidated a trust decanting. The court held that pursuant to statute 736.04117, a trustee must provide notice to all qualified beneficiaries of his or her intent to invade the principal of the trust at least 60 days prior to the invasion. The decanting was also ruled invalid because the principal of the first trust was transferred to a second pooled trust that included other beneficiaries not present in the first trust.

As the case above shows, decanting can be a great estate-planning tool, but should be done by an experienced estate planning attorney. For more information on how to decant a trust, contact the Law Office of David M. Goldman today at 904-685-1200.