Decanting a trust is one of the methods of amending an irrevocable trust allowed under Georgia law. Learn more in this complete overview.
The Basics of Trust Decanting
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You may be familiar with the word “decanting” when it applies to a bottle of wine, which refers to the process of pouring wine from the original bottle into another container. The purpose is to separate the wine from the sediment that has developed within it. Basically, you pour off the good stuff and leave the bad stuff behind.
Similarly, through the Uniform Trust Decanting Act, you can pour assets from an old trust instrument with unfavorable or out-of-date conditions into another trust, leaving the unfavorable conditions behind. This essentially allows you to create a new trust for one or more of the original trust’s beneficiaries and finance it with assets from the previous trust.
Decanting a Trust and Trust Assets
Decanting can be an excellent strategy to increase the flexibility of irrevocable trusts. Decanting permits trustees to amend the conditions of an existing irrevocable trust by depositing the assets into a new trust with modified terms, in addition to resolving ambiguities, or clarifying trust wording.
Decanting a trust can also be used to correct drafting errors, extend the life of the trust, as well as for asset protection. However, the trustee is subject to all necessary fiduciary duties required by the law.
Tax Consequences of Decanting a Trust
Most people assume that decanting is not a taxable occurrence for income tax, estate tax, gift, or generation-skipping tax purposes. However, because many of the tax concerns surrounding decanting remain unresolved, caution must be exercised while attempting to decant a trust, even if working under the rules of state law.
The IRS has concluded that decanting is not a capital gains tax recognition event in general for income tax purposes. Nevertheless, in some cases, decanting might result in benefits. If a company with liabilities in excess of the trust asset base is decanting to convert it from a grantor to a non-grantor trust, the decanting will almost certainly result in a gain.
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Trust Decanting Provisions
Decanting an existing (first) trust into a new (second) trust entails offering the following advantages:
- Change to take advantage of new tax legislation in accordance with the grantor’s initial desire for tax benefits
- Dividing a trust instrument into many trusts or combining numerous trusts into one to simplify management
- When unanticipated events emerge that may jeopardize the grantor’s objectives, achieve the grantor’s aim.
- If trust administration might benefit from the appointment of an extra trustee or the establishment of a special fiduciary administrator, do so.
Circumstances for Decanting a Trust
To prolong the trust’s term: A trust may allow the beneficiary to receive trust assets at a specific age or at various times during their lifetime. Decanting the trust enables changes that allow many generations to benefit from creditor, divorce, and bankruptcy protection. Extending the terms may also be a useful alternative because the assets will not be included in the beneficiary’s estate. In addition, extending the trust terms and eliminating a beneficiaries’ rights of withdrawal at a certain age may result in greater protection from creditors as well as saving estate taxes.
Changing a support trust into a discretionary trust: Support trusts are primarily structured to make distributions to pay the beneficiary’s support, education, health, and upkeep. However, assistance trusts are not immune from the beneficiaries’ creditors in certain states. Decanting a support trust into a discretionary trust allows the trustee to make payments at their discretion, shielding the trust assets from the beneficiaries’ debtors.