Decanting trusts: an underused technique
Decanting trusts – the act of distributing assets from an old trust to a new one with more favorable terms — is a practice that’s catching the attention of estate planners and attorneys.
“I had a revelation about six weeks ago that this is the greatest thing out there now and the most underused technique,” said Steven J. Oshins, an attorney at the Law Offices of Oshins & Associates LLC. “I told the lawyers at my firm to look at opportunities to decant trusts, and within four weeks of telling them that, I brought in six or seven new clients.”
In recent years, more states have added to their statutes to permit decanting. There are about 20 that permit it so far, and five of those jurisdictions were added last year (Virginia, Rhode Island, Kentucky, Michigan and Illinois).
Essentially, decanting is what you get when you assess an old trust — typically an irrevocable trust — and distribute all of the assets to a new trust that will meet the client’s needs better. But it should be noted that not all trusts are eligible for this technique.
“The trust agreement must allow the trustee to exercise discretion over the principal,” said Shawn Wilson, a managing director in the personal trust services division at Charles Schwab Bank. “The agreement cannot be limited to discretion over income distributions only.” Instead, the principal is being distributed from the old trust to a new one with updated provisions.
There are a number of scenarios that might call for decanting: For instance, a trust might have staggered distributions at different ages for the beneficiary. It might make better sense to draw up that trust anew as a dynasty trust so that multiple generations in the future can receive creditor, divorce and bankruptcy protection, as well as protection from estate taxes, Mr. Oshins noted.
“The biggest driver of decanting is often the inadequacy of the drafting attorney,” he added. “We’re taking inadequate trusts and fixing them.”
Another scenario: The client wishes to bifurcate the trustee’s responsibilities so that an investment adviser can oversee the trust’s investments.
“You can decant and divide the duty to allow the adviser to direct the investments and the trustee holds all non-investment related activities,” Mr. Wilson said. The RIA on the trust doesn’t have to be based in the domiciliary state of the trust.
With that introduction, Mr. Oshins presents his top ten reasons to consider decanting an irrevocable trust.
(By Darla Mercado)