Changing the Terms of an Irrevocable Trust
In the past, when an irrevocable trust was formed and funded, the terms were essentially locked in place. Now there is a popular strategy for changing those terms after the trust has been established called trust decanting, which can modernize and dramatically improve the flexibility of the trust.
Trust decanting is the process of moving assets from one trust to another. The term “decanting” derives from wine decanting, where wine is transferred from its bottle to another container allowing you to pour wine while leaving the sediment behind. The aspects of the trust that are beneficial are still found in the new trust, while the unhelpful provisions of the old trust are absent in the new trust.
In Nevada, all of this can be done without the requirement of time-consuming and costly court approval or notice to the beneficiaries.
Trust decanting allows a trustee to revise and improve the terms of the original trust to reflect new circumstances or when they’ve changed their mind about the historical terms of the old trust.
Why Decant a Trust?
There are many scenarios for which a trustee would want to decant a trust. In many cases, the original trust no longer serves the beneficiaries well or meets the grantor’s intent for the trust. Due to the evolving trust law landscape, trusts in individual states may not offer adequate asset protection and are paying taxes to a state where beneficiaries no longer live, or the trust may need other improvements.
Additional scenarios include:
- Moving the governing law to a more trust-friendly state like Nevada
- Converting a trust with scheduled distributions into a dynasty trust to protect multiple generations
- Transferring the trustee’s investment responsibilities to a separate investment adviser
- Revising who can serve as the trustee
- Converting a support trust into a full discretionary trust
- Correcting drafting errors or unclear terms in the original trust
- Combining multiple trusts into one trust for a shared beneficiary
- Converting a trust which terminates at a set date into a lifetime or dynasty trust
- Making adjustments to protect a special needs beneficiary
- Modifying powers of appointment
- Converting a single trust into multiple trusts to serve multiple beneficiaries
The Trust Decanting Process
The first step is moving the trust from its original jurisdiction to a state with friendly decanting statutes, such as Nevada. In addition to Nevada, South Dakota, Delaware, and Alaska also have flexible decanting statutes that are advantageous for trust decanting.
Nevada is ideal for trust decanting because there is a wider range of modifications that are allowed under Nevada statutes, and the process is much more flexible. For example, unlike other states, Nevada does not require the trustee to notify the beneficiaries of the decanting providing greater privacy for the trustee and beneficiaries.
Trustees will have the authority to decant most trusts in place today from the provisions in the trust itself, common law precedent, or state statute.
Once the trust has been moved to Nevada or another state with friendly trust decanting statutes, the attorney will decant the assets from the existing trust into a trust with new terms. A trust can be decanted into a new trust or an existing irrevocable trust.
To decant a trust under Nevada jurisdiction, at least one trustee must be one of the following:
- A natural person residing in Nevada
- A Nevada trust company, like Alliance Trust Company of Nevada
- A Nevada bank that possesses trust powers
Clients who do not live in Nevada can have their attorney add a trustee or co-trustee based in Nevada to take full advantage of Nevada’s trust-friendly jurisdiction.