Though it is common for many wines to improve as they age, the same is not true for some irrevocable trusts. Perhaps you are the beneficiary of a trust created by your great grandfather sixty years ago that no longer makes sense. Or maybe you created an irrevocable trust several years ago that does not work as it should. Is there any way to fix an irrevocable trust that has turned from a fine wine into vinegar? You may be surprised to learn that under certain circumstances the answer is yes, by “decanting” the old broken trust into a brand new one.
What Does It Mean to “Decant” a Trust?
Wine lovers know that the term “decant” means to pour wine from one container into another in order to open up the aromas and flavors of the wine. In the world of irrevocable trusts “decant” means the legal process through which the trustee appoints or distributes trust property in further trust for the benefit of one or more of the beneficiaries. In other words, the trustee transfers some or all of the property held in an existing trust into a brand new trust with different and more favorable terms.
When Does It Make Sense to Decant a Trust?
Decanting a trust makes sense under many different circumstances:
- Tweaking the trustee provisions to clarify who can or cannot serve as the trustee.
- Expanding or limiting the powers of the trustee.
- Converting a trust that terminates when a beneficiary reaches a certain age into a lifetime trust.
- Changing a support trust into a full discretionary trust in order to protect the trust assets from the beneficiary’s creditors.
- Clarifying ambiguous provisions or drafting errors in the existing trust.
- Changing the governing law or trust situs to a less taxing or more beneficiary-friendly state.
- Adding, modifying or removing powers of appointment for income tax or other reasons.
- Merging similar trusts into a single trust for the same beneficiary.
- Creating separate trusts from a single trust to address the differing needs of multiple beneficiaries.
- Providing for and protecting a special needs beneficiary.
What is the Process for Decanting a Trust?
First of all, decanting must be allowed under applicable state case law or statutory law. Aside from this, the trust agreement may contain specific instructions with regard to when or how a trust may be decanted.
Once it is determined that a trust can and should be decanted, the next step is for the trustee to create the new trust agreement with the desired provisions. The trustee must then transfer some or all of the property from the existing trust into the new trust. Any assets remaining in the existing trust will continue to be administered under its terms, otherwise the empty trust will terminate.
Florida’s “Decanter” Statute
Section 736.04117, Florida Statutes provides specifics on a Trustee’s powers to invade the principal in a trust. The statute requires the Trustee to have absolute power, under the terms of the trust (the “first trust”), to invade principal of the first trust, to make distributions to or for the benefit of one or more persons. To properly exercise this power, there must be an instrument in writing, signed and acknowledged by the Trustee, and filed with the records of the first trust. Fla. Stat. § 736.04117(1).
Further, notice must be provided to the qualified beneficiaries of the first trust at least 60 days before the proposed exercise of the power. This notice must provide how the power is to be exercised, i.e. by attaching a copy of the second trust. All qualified beneficiaries may waive the notice requirement, but such waiver must be in writing and delivered to the trustee. The transfer of trust assets to the second trust is barred until the tolling of the notice period. However, the notification period does not allow the beneficiaires to block the decanting.
Beware: Decanting is Not the Only Solution to Fix a Broken Trust
While decanting may work under certain circumstances, it is not the only way to fix a “broken” irrevocable trust. Our firm can help you evaluate all of the options available to fix your broken trust and determine which ones will work the best for your situation.
Matt Goodwin is an Estate Planning and Real Estate attorney in Naples, FL. Contact him today to discuss how he can help you plan for your future or for your next real estate transaction. Call (239) 302-1700. matt@swfloridaestatelaw.com
