What Does it Mean to Decant a Trust?
We have received a number of questions recently about trust decanting. What is it? Whom does it benefit? When is it a good idea? And just what does it mean to “decant” a trust?
Decanting a trust is done for the same reason you might decant a bottle of vintage wine: to leave something undesirable behind in the old container, while preserving the good in a new one. In the case of wine, what is left behind is residue in an old bottle. In the case of a trust, what is left behind is outdated or unhelpful provisions from the original trust instrument.
Trust decanting is generally done with irrevocable trusts, which are, as the name implies, difficult to amend or revoke. Not all states allow trusts to be decanted, but Ohio is one of about 25 that does. Of course, state law regarding trust decanting must be followed.
How Can a Trust Be Decanted?
In a nutshell, if a trustee has the authority to make distributions for the benefit of certain beneficiaries, he or she can make distributions in further trust for the benefit of those same beneficiaries. Under Ohio law, a trustee may have absolute power to make distributions of principal from the original trust; if this is the case, he or she will have fairly broad discretion regarding decanting into a new trust. If the trustee of the original trust does not have absolute power to distribute principal, his or her decanting powers will be more limited. The trust can only be decanted if doing so will not materially change the interests of the beneficiaries of the original trust.
Whether or not a trustee has “absolute power” to distribute trust principal, the power to decant a trust is subject to certain limitations. These limitations have three purposes: to prevent the new trust from eliminating any rights to mandatory distributions the beneficiaries had under the original trust; to avoid jeopardizing tax benefits that the original trust was set up to achieve; and to keep the trustee from either lowering his or her duty of care to the beneficiaries, or raising his or her own compensation.
The power to decant a trust belongs to the trustee, not the beneficiaries (although it is certainly possible that a trustee might decide to exercise the power at the request of the beneficiaries). Many people are surprised to learn that a trustee can decant a trust without having to go to court or even get the consent of the beneficiaries.
Why Decant a Trust?
There are many reasons one might choose to decant a trust. One is to protect the trust assets from beneficiaries' creditors by extending the terms of a trust. If the original trust called for making mandatory distributions of principal to beneficiaries at certain ages during their life, those distributions, once made, could be reached by creditors. If trust assets are decanted to a new trust, the term can be extended, and assets preserved from creditors.
Trust terms can also be extended through decanting if, say, a beneficiary was due to receive a distribution of principal at a certain age, but the trustee feels he or she is too immature to manage the assets if they are distributed. The trustee might, instead, decant the assets into a new trust that makes smaller distributions over a much longer period.
Creditor protection may also be achieved by decanting assets from a support trust (where the trustee has limited discretion to make payments for a beneficiary's education, health, welfare and support) to one where the trustee has absolute discretion over distributions. Where assets might be exposed to creditors under the standards of the support trust, they would not be if the distributions were wholly under the trustee's discretion. Of course, there must not be a material change to the beneficiaries’ interests such that decanting would be contrary to Ohio Revised Code 5808.18.
Another common reason to decant a trust is so that the trustee can update provisions if a new law is enacted or an old one is amended. If there are changes in the law that governs the trust instrument, it may make sense to update the provisions of the trust so that they continue to do what was intended in light of the changes to the law.
Still other reasons to decant a trust include the need to choose successor trustees or address unforeseen changes in a beneficiary’s circumstances, like an accident or illness; moving the trust to a state with more favorable trust laws; clarify ambiguous terms; or correct drafting errors. If there are multiple beneficiaries to one trust, it may make sense to decant into separate trusts to keep everyone’s assets separate and protect their interests. Or if there are multiple trusts, it may work better to decant them all into one trust for ease of administration. All of this depends, of course, on the unique needs of the parties involved.
If you are the trustee of a trust that could benefit from some updating, contact an experienced Ohio trust attorney to see if decanting is the right option for your situation.
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