One of the primary questions people have about trusts is, what is the difference between an irrevocable trust and a revocable trust (sometimes called a “living trust”)? The surface level answer, not to be flippant, is one is revocable, and one is not revocable, or in another word, one is irrevocable.
To dig a little deeper on the answer though, the difference is that in a revocable trust you are not giving anything up, you can change the terms as often as you would like, you retain essential ownership of all trust assets, and you do not get any benefits we typically associate with long term care planning or estate tax planning. The primary purpose of a revocable trust is to act as a Will substitute and avoid probate.
With an irrevocable trust you give something up, such as the ownership of the trust assets, to get something, such as the value of the trust assets not counting towards your resources for purposes of qualifying for Medicaid for nursing home care or the value of the trust assets being removed from your taxable estate for estate tax planning. One trade off in getting these benefits, is you give up the ability to amend the trust, which makes the trust irrevocable.
But what if I told you1, in New York, sometimes irrevocable does not really mean irrevocable, because New York allows for a process called “decanting”, which under certain circumstances can allow you to effectively amend or revise a trust that by its terms cannot be amended or revised.
What is Decanting?
Decanting is an estate planning tool whereby a trustee transfers assets from one irrevocable trust to another irrevocable trust. New York State gives express statutory authority to a trustee to move assets from one irrevocable trust to a second irrevocable trust without court intervention, as long as the trustee has certain powers over distributions of trust principal, which will be discussed below.2 By decanting a trust, trust assets are transferred from the original irrevocable trust into a second irrevocable trust, often with more desirable terms or to correct drafting errors or typographical errors in the original trust.
Reasons One Might Decant a Trust
A trustee might seek to decant a trust to accomplish one or more of the following objectives:
- Change the distribution standard to obtain increased asset protection
- Add or remove a power of appointment
- Create a supplemental needs trust for a beneficiary who has become disabled
- Extend the duration of the trust
- Get a different estate tax result based on a change in the estate tax laws
- If the power to amend was limited to the grantor who is now deceased
- Correct drafting errors
- Resolve ambiguities in the trust
- Change the trust situs (the state where the trust is administered)3
Suppose you have an irrevocable trust, but the state has passed a law which raises income taxes on income within a trust. Trust decanting could be viable solution that would allow the trustee to move the trust property into a trust created in another state with lower state income taxes assessed against the trust. Here, decanting the trust protects the value of the property for the benefit of the beneficiaries.
Suppose a beneficiary of the original trust has become disabled or changes in circumstances has resulted in the beneficiary having special needs. To preserve eligibility for government assistance, a trust can be decanted to add a Supplemental Needs trust for that beneficiary.
Suppose the trust states that at age 40 the trust beneficiaries are to receive their share outright. The trust could be decanted to change the age when the beneficiaries get their share to age 50, or the trust could be decanted to a new trust that provides that the trust beneficiaries’ shares are held in trust for their lifetime.
New York Decanting Statute
When a trustee has unlimited discretion to invade the trust principal, i.e. distribute the trust principal to the beneficiaries, in favor of one or more current beneficiaries, New York State’s decanting statute allows trustees the most flexibility in decanting, including transferring the trust assets to a new trust that excludes one or more of the trusts current or future beneficiaries. Essentially, when a trustee has unlimited discretion over the trust principal the trustee can effectively remove a trust beneficiary through decanting. The rationale is that if the trustee has absolute discretion to distribute all of the trust principal to one beneficiary, moving the trust assets into another trust which favors one beneficiary over another beneficiary achieves the same result.
Trustees may also decant even if they do not have unlimited discretion. However, more restrictive rules apply in this situation. The new trust, or “appointed trust” must have the same current beneficiaries, successor, and remainder beneficiaries as the original trust. The appointed trust must also include the same authority to distribute as the original trust. If beneficiaries of the original trust, or the “invaded trust” are described by a class, the beneficiaries of the appointed trust must include present or future members of such class. If the invaded trust grants a power of appointment to a beneficiary, the appointed trust must grant that same power of appointment to the beneficiary and the class of permissible appointees of the power must be the same.
Decanting has many potential benefits for trustees whose find themselves administering a trust that for one reason or another is no longer meeting the trust creator’s original intent. In that situation a trustee should consider decanting to accomplish the intended goals of the creator of the trust. The estate planning attorneys at Twomey, Latham, Shea, Kelley, Dubin & Quartararo are available at your convenience to answer your questions about decanting, review your current trust to determine if it can be decanted, and to discuss and strategize the best method of decanting.
1 To steal a line from ESPN’s excellent “30 for 30” commercials.
2 EPTL § 10-6.6.
3 For example, change a New York trust to a Florida trust.