Skip to content Back to news. The best time to brighten tomorrow is today. Let's Talk. Changing trustee provisions: Many trustee provisions do not allow for a succession of trustees or for a list of people who can name successors, while other trusts have a succession of trustees who the settlor may have wanted at the time the trust was established, but who would now not be selected by the settlor if the settlor could redo the trust today.
This can be changed through decanting. Combining trusts for greater efficiencies: Many of our clients set up trusts at different times, and sometimes with different law firms over the years. Ultimately, the family has more trusts than are needed. Separating trusts: Many trusts have been drafted so the entire family benefits from one large pot trust. Although this sometimes makes sense in certain situations, more often than not it creates problems because different beneficiaries have different needs and different investment philosophies.
A large pot trust can be decanted into separate trusts for each beneficiary so the beneficiaries have their own autonomy. Creating a special needs trust: It may not have been contemplated when the initial trust was drafted that there would be a beneficiary that has special needs and will require a trust that preserves eligibility for public benefits. A trust can be decanted to add this language. Qualifying a trust to own S corporation stock: Many trusts have been drafted without the trust scrivener contemplating the possibility that the trust would need to be able to own S corporation stock at some point.
This includes other forms of business entities that elect to be taxed as an S corporation. Decanting can be used to save taxes, to protect assets from creditors and divorcing spouses, to fix drafting errors and to make many other modifications that historically were unavailable to estate planners. Please see more information about the offering. Affiliated Councils. For more information on the federal gift tax and the rules for making tax-free gifts, see Practice Note, Federal Gift Tax.
What are the income tax consequences of a decanting? For income tax purposes, the grantor of the Distributing Trust generally will be treated as the grantor of the Receiving Trust see Treas. If both the Distributing Trust and Receiving Trust are grantor trusts as to the same person, then there should be no income tax consequences see Rev.
In general, a decanting will be a nonrecognition event unless the decanting either:. Commissioner U. Involves property with liabilities in excess of basis or partnership interests with negative capital accounts. A decanting from a grantor trust to a non-grantor trust generally does not result in gain or loss recognition to the grantor. Where a Distributing Trust is exempt from GST tax, practitioners should proceed with caution when decanting so as not to jeopardize its GST exempt status.
A trust may be exempt from the GST tax for three reasons:. An allocation of GST exemption was made to the trust so that the trust has an inclusion ratio of zero Category 2 Trust. The GST Regulations provide four safe harbors, two of which are relevant to decanting:. The discretionary distribution safe harbor.
The discretionary distribution safe harbor provides that a decanting of a GST exempt trust to a new trust will not taint GST exempt status if both:. First, either:. This requirement is difficult to satisfy because most Category 1 GST exempt Distributing Trusts did not expressly authorize decanting and state decanting statutes were not enacted until the early s though state common law could provide a basis to satisfy this requirement.
Second, the terms of the new trust do not extend the time for vesting of any beneficial interest in the trust beyond:. This allows the trustee to extend the term of a GST exempt trust for example, by eliminating mandatory distributions provided that the new term does not extend beyond this safe harbor. See Treas. Under the trust modification safe harbor, a decanting that is valid under state law will not taint GST exempt status if both:. The modification does not shift a beneficial interest in the trust to any beneficiary who occupies a lower generation than the person or persons who held the beneficial interest prior to the modification.
The modification does not extend the time for vesting of any beneficial interest in the trust beyond the period provided for in the original trust. This is because the modification did not increase the amount of the GST transfer under the original trust or create the possibility that new GST transfers not contemplated in the original trust may be made.
The GST Regulations further clarify that an administrative change that indirectly increases the amount transferred to a beneficiary such as by lowering administrative costs does not constitute a shift in beneficial interests see Treas. The transfer of assets from one trust to another is not a sale or exchange of property, nor is the property received materially different from that which was given. However, if the distribution from the old trust causes there to be a relief of liabilities e.
Decanting a trust has gift and estate tax implications which require careful consideration. Assuming the trustee is not a beneficiary, it can be argued that since the gift is initiated by the trustee and because beneficiary consent was not required, this would not qualify as a gratuitous transfer. However, since the beneficiary had expected to receive the gift and failed to object to the transfer of trust assets to the new trust, these two factors support the claim that this would be a taxable gift.
To help avoid this issue, under the new trust the beneficiary should be given a limited testamentary power of appointment, making the gift incomplete and not taxable. Altering the terms in the new trust can provide many state tax benefits as well, such as effectively avoiding state fiduciary income tax or limiting exposure to state real property transfer tax.
Just as there are many situations in which decanting a trust can be advantageous, there are many resulting issues and tax concerns that need to be addressed. Utilized appropriately, with the proper tax and estate planning, decanting a trust can be significantly beneficial to trustees, beneficiaries and most important of all, the settlor, whose original wishes can, once again, be realized. Adam focuses his practice in all aspects of estate planning and asset protection for both individuals and business entities.
Adam also concentrates on charitable planned giving, involving private foundations and tax-exempt organizations. Recently, in Matter of Mulderig v.
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