Life changes, and the law changes with it. Although irrevocable trusts are commonly thought of as documents that cannot be revoked or changed, that isn’t quite true. There are ways you can change an irrevocable trust despite its unfortunate name.
Give Your Trust a “Do-Over”
One way to change an irrevocable trust is to decant the original trust. Decanting is a “do-over.” Funds from an existing trust with less favorable terms are distributed into a new trust with more favorable terms.
As the name may suggest, decanting a trust is similar to decanting wine: you take wine from one bottle and transfer it to another (decanter) – leaving the unwanted wine sediment in the original bottle. Just like pouring wine from one bottle to another, decanting a trust is relatively straight-forward.
North Carolina State Law
Twenty-nine states currently have decanting laws, including our own North Carolina statutes. If you are in a state that is not favorable to decanting a Trust or if your state doesn’t allow the desired modifications, consider whether you can move the trust to another jurisdiction.
A local attorney can help you move a trust, taking advantage of a new jurisdiction’s laws. You can even add one or more trustees or beneficiaries as long as the new trust beneficiaries consist of one or more of the original beneficiaries. If the law does not allow you to move the trust, an experienced estate planning attorney can petition the local court to move the trust.
Reasons to Change Trust Distribution
Often, trust decanting does not require a judicial hearing or court approval. Decanting a trust can change how the funds are distributed. There are many reasons why this could be important for the life of the trust and its purposes.
- Disability: Move a newly disabled beneficiary’s portion into a supplemental needs trust to qualify for federal or state government benefits. Receiving a lump sum benefit at the wrong time could cause someone to lose their benefits until the beneficiary has spent them all away to requalify. If the beneficiary is forced to spend all of their trust benefits, they lose the standard of living they could have had. The standard of living is often greatly improved by having a lifetime income coming in each month from the trust rather than receiving a lump sum that they must spend down to qualify for help again.
- Addiction: Move an addictive or destructive beneficiary’s lump sum payout(s) into a trust for lifetime distribution instead. Unfortunately, giving a large gift of money to someone with addiction issues can make their situation worse. Instead, you can decant a trust and restructure their benefits to pay out monthly, enabling them to quit when they are capable.
- Creditors & Ex-Spouses: If a beneficiary may lose money due to a creditor or marital issues, you can change the payout to a different time or distribution style.
- Wealth: Change terms so that a wealthier beneficiary receives less. If one beneficiary makes more than all of the others combined, they may not want or need to be a beneficiary any longer. The others could benefit from restructuring.
More Reasons to Decant an Irrevocable Trust
Decanting a trust can freshen up its purposes for a new generation. Often times, with cultural, legal, and familial change, a trust decanting can prove valuable for these reasons:
- Give trustees more authority to make discretionary distributions. A trustee may need or want the freedom to give funds out for reasons other than just education, medical, or any other named supportive role.
- Change the jurisdiction to gain more favorable tax terms. Different states can have different tax laws that could affect how you distribute the assets.
- Update to address changing circumstances. Perhaps the current trustees are getting older and need other trustees added, but your original document does not allow for this.
- Correct errors. If there are errors in the original documents that affected the trust’s terms, it is possible to correct them by decanting the trust.
- Avoid state income tax by changing trustees living in states that tax on trustee place of residency.
- Move to a non-grantor trust.
- Combine trusts for a single purpose
- Separate trusts so that there is more autonomy
Decanting the Trust
Decanting a trust is no small legal matter. Modifying an irrevocable trust by decanting is not quick or easy. There are laws to consider when working with an irrevocable trust. An experienced and knowledgeable attorney can prepare whatever documents are necessary to decant the trust by “pouring” the assets into a trust with more favorable terms. An attorney can draw up the new trust taking into consideration all legal requirements and state decanting statutes.
Transfer the Assets
After meeting with your attorney to set up the new trust, you will work together on transferring assets from the old trust into the new trust. While you, along with your attorney, can effectuate this in many different ways, the most common are by:
- Change of owner
- Change of Beneficiary forms
- Creation of new accounts
Get the Most from Your Trust
If you feel stuck with a less than optimal trust, we’d love to review the trust and your goals to determine whether decanting or other trust modification would help. Contact our experienced Estate Planning attorneys and get started with your plans today.