Decanting a trust is one of the methods of amending an irrevocable trust allowed under Georgia law. Learn more in this complete overview.
Author: Paul Black
Paul’s experience as the son of two parents with big health challenges is what led him to the work he does today and gives him first-hand knowledge of the challenges that many caregivers and family members face. After graduation from GSU Law, Paul was chosen from dozens of applicants nationwide as one of three 2010-2011 Borchard Foundation Law & Aging Fellows. Paul has been named as a SuperLawyers “Rising Star” in the area of Estate Planning and as a member of Georgia’s “Legal Elite” by Georgia Trend magazine. Published on: December 02, 2021. Last updated on: December 21, 2021.
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through the Uniform Trust Decanting Act, you can pour assets from an old trust instrument with unfavorable or out-of-date conditions into another trust, leaving the unfavorable conditions behind.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.
What Is Decanting a Trust?
If a trustee has the ability to make payouts for the benefit of specific beneficiaries, they can also make disbursements in further trust for the same beneficiaries. If a trustee has absolute ability to distribute principal from the old trust, they will have rather extensive discretion when it comes to decanting into a new trust.
If the original trust’s trustee lacks ultimate power to distribute trust principal, their decanting rights will be more constrained. The trust can only be decanted if it does not fundamentally alter the interests of the original trust’s beneficiaries.
What Does Decanting a Trust Mean?
As part of estate planning, an individual (referred to as the grantor) may establish an indestructible trust to provide tax benefits to his or her estate tax, as well as other desirable benefits to beneficiaries specified in the irrevocable trust.
There was a time when terminating or changing the terms of trust needed extremely particular requirements. Unless special circumstances indicate otherwise, irrevocable trusts become non-modifiable upon the death of the grantors.
Even yet, irrevocable trust modifications necessitate costly and time-consuming judicial proceedings. Please contact an estate planning attorney if you have any concerns about Georgia’s decanting laws or other estate planning issues.
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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Requirements of Decanting a Trust
The new legislation allows for the modification of current trust agreements and the modification of a trust agreement through what is known as “decanting,” which is the transfer of assets from one trust into another trust. Until HB 121, Georgia’s Trust Code did not have to decant legislation. The rule prohibiting perpetuities cannot be extended to decant a trust under this act, O.C.G.A. 53-12-62, and the recipients must be the same.
While O.C.G.A. 53-12-62 controls decanting, there is a second code part, O.C.G.A. 53-12-61, that governs trust modifications without decanting. If the trust can be changed in accordance with its provisions, no judicial permission is necessary under Section 53-12-61. (a).
Nevertheless, because the other modification/termination procedures of Sec. 53-12-61 require court approval or consent, it may be simpler to just decant an old trust into a new one without going to court.
If the trust did not grant alteration while the Grantor is alive, the trustee and the beneficiaries should petition the court for the change, but the court must grant the modification (O.C.G.A. 53-12-61(b)).
Following the Grantor’s death, the court must grant a petition to alter the trust provided all beneficiaries consent. The trustee has been notified. The court decides that the modification is compatible with the trust’s material purposes. To terminate the trust, the court must decide that the trust’s continuation is not required for any material purpose of the trust (O.C.G.A. 53-12-61(c)).
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.
How to Change Trustee on Irrevocable Trust
Depending on the trustee’s distribution authority under the original trust, the trustee’s ability to amend the trust provisions is limited. Trust modification is most straightforward when both parties agree, as it is in many other instances.
If the grantor and all potential beneficiaries agree, a noncharitable irrevocable trust can be modified or terminated with a single “consent modification” instrument. The grantor and beneficiaries may agree to take any action in accordance with the conditions of the trust, even if such activity is contrary to the trust’s objective.
How Can You Modify a Trust Decanting Without Going to Court?
Georgia’s HB 121 trust statute change, enacted into law on May 3, 2018, allows for the modification of an irrevocable trust that no longer fulfills the grantor’s original objective or imparts the opportunity to correct drafting errors without the need for a judicial appeal.
As noted, the phrase “decanting” refers to the process of “pouring” the original irrevocable trust into a new trust while leaving the undesired components of the previous trust behind. This new capability enables the trustee to modify an existing trust on behalf of trust beneficiaries by putting it into a new or second trust, including specifications that increase trust advantages in light of shifting tax laws or other changes that eliminate some or all of the grantor’s anticipated benefits.
Those who are considering to decant a trust and change how trust assets are administrated under the existing irrevocable trust should first determine whether that is an option. Even if that is an option, it should also be considered whether decanting a trust would result in a conflict between the parties involved.
If you are considering ending your grantor trust status, an estate planning attorney near me can assist you in assessing the income and estate tax implications. Contact the Law Office of Paul Black at 404-410-6820 for more information, and receive a free initial 15-minute consultation phone call to discuss your case.