Decanting a trust is what the name implies: the assets of an existing trust are poured into a new trust, just like a bottle of wine. New York State has one of the most liberal decanting statutes in the United States. In most cases, there is no need for court approval.
There are certain scenarios where deciding to decant a trust is a wise move. Here’s one:
A trust has existed for many years. There are multiple trust beneficiaries. The trust can be a testamentary or inter vivos (lifetime) trust. One beneficiary incurs a disability and faces insurmountable costs of care going forward. Depending on the language of the trust, that beneficiary’s portion of the trust may need to be depleted for the beneficiary to qualify for available government benefits to help cope with the costs of the disability.
New York law is clear: the beneficiary’s trust may be decanted into a Special Needs (Supplemental Needs) Trust. Decanting prevents the trust assets from being an available resource, which would disqualify the beneficiary from government benefits, yet the trust assets can provide additional care and benefits above those available through government benefits.
It is important to note this strategy does not imply that a spouse is a beneficiary of a lifetime trust; the trust must be a testamentary trust for this strategy to work.
Here’s another example. Assume the same trust provides that the beneficiary receives the balance of their trust fund when they attain the age of 35. The beneficiary is involved in a troubled marriage, has numerous creditors or other outstanding claims against him.
If the trust can be decanted into a new trust for the life of the beneficiary before attaining age 35, the beneficiary can continue to receive income and other benefits of the trust yet the trust principal would be exempt from almost any claim against the beneficiary other than child support.
If a divorce occurs anytime during the beneficiary’s lifetime, the trust is not subject to division. If properly drafted, creditors, including the IRS, bankruptcy court, and business creditors cannot attach the trust assets. However, the beneficiary can still receive the benefits of the trust.
Is it time to decant your (or your client’s) trust?
The decision to decant a trust should not be done lightly. In addition to reviewing the existing trust documents, it is necessary to review the overall estate plan and ensure that decanting the trust will align with tax planning and the family’s goals.
Coming next - Can You Trust Your Trust – Part 3 – Unitrust Conversion