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ABSTRACT
Historically, trusts have been created for primarily two purposes: (1) to reduce the estates' taxable liability, and (2) to protect the estates' assets from creditors. In order for the trust funding to occur, however, certain constraints must be met to not only protect the assets but to control how its assets are to be dispersed. But what can be done if some change in circumstances potentially, and or, fundamentally alters the situation(s) upon which the original trust was created thus causing the trust to fail its intended purpose? Or what if the restrictive provisions in the original trust no longer adequately address the present circumstances and current environment of the beneficiaries? If the trust was revocable, the granter simply amends or revokes the trust changing its provisions to address the present situation or purpose. But, if the trust were irrevocable, it could be extremely difficult and expensive, and/or impossible to change any of the key provisions. This is where a process called "decanting" could provide a suitable solution, (presently not in all states).
While it can be argued that decanting already exists under common law, 27 states have enacted "decanting" statutes. This gives the trustee stator authority to redistribute the trust's assets. There is a caveat however. While all of the states that have enacted decanting statutes give the trustee power to invade the trust corpus in order to decant, a couple of the states (Florida and New York) prohibit the trustee from decanting when the power to invade the trust's principal is limited to some defined standard. The difference between involving a court in the trust reformation and decanting is that under decanting, the trustee -can maintain the anonymity of the trustee 's-provisions which is not an option with the court.
This paper will examine the history of decanting, advantages/disadvantages of decanting, a list of circumstances where decanting might be a desired option, the steps to take in the decanting process, IRS rulings on decanting, and any regulatory limiting factors to be aware of in the decanting process. Again, not all states have decanting statutes, (as of the writing of this paper, only 27), and some have delimiting clauses that others do not have.
I. Introduction
There are a number of reasons...