Trusts are a common addition to the average estate plan. When you create a trust, you must decide if you want the trust to be revocable or irrevocable. Important estate planning advantages often make an irrevocable trust the better choice; however, what happens if circumstances change, and an irrevocable trust needs to be modified? The Los Angeles trust attorneys at Schomer Law Group, APC explain whether you can decant a trust in California.
A revocable trust can be modified at any time and for any reason as long as the Settlor (creator of the trust) is living and capable of carrying out the desired modification. An irrevocable trust, however, is intended to be “irrevocable” from its inception, meaning it cannot be revoked and likely has strict limitations on the ability to modify (if it can be modified at all).
Why Might I Want to Modify an Irrevocable Trust?
There are an infinite number of reasons why you might want to modify an irrevocable trust, including changes in tax laws, the value of trust assets, and the life circumstances of the beneficiaries. One common reason, however, is when a spouse is the remainder beneficiary of a revocable trust that became irrevocable following the death of the Settlor. Although the Trustee may have significant discretion regarding distributions to the surviving spouse, the Trustee may decide that current circumstances call for a modification of the original trust. Because the trustee does not have the authority to make those changes, decanting the trust may be the best option. Other specific reasons why you might want to modify an irrevocable trust include things such as:
- To correct an error in the original trust agreement.
- Modifying the ages of distributions for the remainder beneficiaries
- Providing increased asset protection ability to the Trustee.
- Changing the jurisdiction of the trust for tax purposes.
- Adding a power of appointment
- Including or changing the successor Trustee
- Including provisions for a special needs beneficiary
What Does It Mean to “Decant” a Trust?
Even if you have never heard the term used in reference to a trust agreement, you have likely heard someone refer to a “decanter of wine.” A decanter is the glass bottle into which wine is “decanted.” Decanting wine means to pour the wine from one bottle into another to get rid of any sediment in the original bottle. Decanting a trust can be understood using the same analogy. The desirable parts of one trust are “poured” into another trust, leaving the undesirable parts of the original trust behind. A trust can be decanted in two ways:
- By creating a new trust with new terms and distributing the assets of the old trust to the new trust.
- By distributing the assets of the old trust to a pre-existing trust with more favorable terms.
California Law and Decanting a Trust
The legal authority to decant a trust can be provided by the Settlor within the trust terms or may be authorized by state law. About half of the states have laws in place that specifically allow for decanting a trust, including California. In 2018, California enacted the Uniform Trust Decanting Act (UTDA). The UTDA allows Trustees, under certain conditions, to modify the terms of a trust without court approval or the consent of the beneficiaries, by “decanting” the trust.
Even if a trust can legally be decanted, there are several reasons why decanting may not be possible, including:
- If the original trust agreement specifically prohibits decanting.
- If a beneficiary’s right to distributions is already effective.
- The Trustee’s authority/discretion is limited by the trust agreement. (Most trusts provide a least some discretion to the Trustee to make distributions for the “health, support, and education of the beneficiaries”).
Decanting a trust is a valuable estate planning tool; however, you should always consult with an experienced trust attorney before attempting to decant a trust to ensure that the trust can be decanted and to make sure you comply with the applicable laws and procedures required to successfully decant a trust.
Contact Los Angeles Trust Attorneys
For more information, please join us for an upcoming FREE seminar. If you have additional questions or concerns about decanting a trust, contact the experienced Los Angeles trust attorneys at Schomer Law Group APCby calling (310) 337-7696 to schedule an appointment.