Trust Decanting

Trust decanting is the exercise by a trustee of a power to invade trust principal, by appointing that principal to the trustee of a new trust with different terms, rather than distributing it outright to a beneficiary. The original trust is the invaded trust and the new one is the appointed trust. It is a way of changing an irrevocable trust without going to court and without asking the beneficiaries to agree.

The word appears in no statute. New York's provision, one of the more detailed in the country, is captioned "Exercise of a power of appointment; effect when more extensive or less extensive than authorized; trustee's authority to invade principal in trust," and its operative text speaks of an authorized trustee appointing principal from an invaded trust to an appointed trust. Lawyers call it decanting because the image is apt, and because no state supplied a shorter name.

The logic underneath is a greater-includes-the-lesser argument. If a trustee may hand principal outright to a beneficiary, the beneficiary could then put it into a trust themselves, so the trustee is treated as able to direct it into a trust for that beneficiary directly. That reasoning is why the reach of the power tracks the breadth of the trustee's discretion to distribute principal, and why a trustee with no such power cannot decant at all.

The unlimited-discretion split is the whole architecture. Under New York's statute, an authorized trustee with unlimited discretion to invade principal may appoint part or all of it to a new trust for, and only for, one, more than one or all of the current beneficiaries of the invaded trust, and may exclude any of them. The successor and remainder beneficiaries of the new trust may likewise be some or all of those of the old one. A trustee with a power to invade but without unlimited discretion may still decant, but the new trust must keep the same current beneficiaries, the same successor and remainder beneficiaries, and the same language authorizing distributions of income and invasions of principal. The second version is a tool for fixing administration and structure; the first can genuinely redraw who benefits and by how much.

"Unlimited discretion" is defined, and more generously than the phrase sounds: it means "the unlimited right to distribute principal that is not modified in any manner," and the statute adds that words such as best interests, welfare, comfort or happiness are not treated as modifying it. A power limited to health, education, maintenance and support is a different matter, and falls on the narrower side.

What the trustee may and may not build into the new trust. The term of the appointed trust may run longer than the invaded trust's, including for a current beneficiary's lifetime, and where a limited-discretion trustee extends the term, the statute allows unlimited discretion to invade principal during the extended period. A trustee exercising the broader power may grant a beneficiary a discretionary power of appointment in the new trust, but only where that beneficiary could have received the principal outright under the invaded trust, and the permissible appointees may be narrowed only in specified ways. The exercise is itself treated as the exercise of a special power of appointment.

Five things a decanting may not do. It may not reduce, limit or modify a beneficiary's mandatory right to income or principal, a mandatory fixed-dollar or unitrust payment, or a right to withdraw a percentage or a stated dollar amount, once that right has come into effect. It may not reduce or indemnify a trustee's liability or excuse a failure to exercise reasonable care. It may not strip out a provision letting someone else remove or replace the trustee doing the decanting, unless a court says otherwise. It may not conclusively fix the value of an asset. And it may not jeopardize a deduction or exclusion originally claimed for a contribution to the invaded trust, including the annual exclusion, the marital deduction and the charitable deduction, nor the qualification of a transfer as a direct skip, nor any other specific tax benefit a contribution originally qualified for. A separate paragraph requires the trustee to consider the tax implications of the exercise.

One carve-out inside the first prohibition matters a great deal. Despite the bar on reducing a mandatory distribution right, the statute expressly allows an appointment to a supplemental needs trust conforming to the state's own provision. That is the case decanting is most often reached for: a beneficiary's circumstances change, a mandatory payment now disqualifies them from means-tested benefits, and the trust as drafted cannot stop paying.

The duty, and the limit the duty imposes. A trustee exercising the power has a fiduciary duty to act in the best interests of one or more proper objects of the power and as a prudent person would in the circumstances. The trustee may not exercise it where there is substantial evidence of a contrary intent on the creator's part, unless it can be established that the creator would likely have changed that intention in the circumstances now existing. The statute adds a clarification worth noticing: the provisions of the invaded trust are not by themselves substantial evidence of a contrary intent, unless the trust expressly prohibits the exercise. A general prohibition on amendment, or a spendthrift clause, does not block it.

The procedure is administrative rather than judicial. The exercise is evidenced by a written instrument, signed, dated and acknowledged by the trustee. It takes effect 30 days after the instrument is served on the people entitled to notice, unless they consent in writing to an earlier date, and it is irrevocable from then. No consent from the creator or the beneficiaries is required, and no court approval, though the trustee may seek approval if it wants the comfort. Copies go to the living creator, to anyone with the right to remove or replace the trustee, and to the persons interested in both trusts. An interested person may serve a written objection before the effective date, though failing to object is not consent, and nobody loses the right to compel an accounting.

1. Check that a statute exists in the state whose law governs the trust, and read it, because the powers differ sharply between states.

2. Establish the trustee's power to invade principal, and whether it is unlimited within the statute's meaning or narrower.

3. Identify the permitted beneficiaries of the new trust, which can be the current beneficiaries of the old one or a subset, never a wider group.

4. Draft the appointed trust within the constraints: no reduction of a vested mandatory right, no dilution of trustee liability, no removal of a removal power, no loss of a tax benefit the original contribution qualified for.

5. Test it against the creator's intent. The trustee owes a fiduciary duty and may not act where there is substantial evidence of a contrary intent that the circumstances do not overcome.

6. Execute and serve the instrument, signed, dated and acknowledged, and wait out the statutory period before it takes effect.

For example, with invented figures. A trust created for Nadia in 1998 holds $2,000,000 and requires the trustee to distribute 4 percent of principal to her every year, which is 0.04 x $2,000,000 = $80,000. The trustee also has unlimited discretion to invade principal for her benefit. Nadia has since become disabled, and the mandatory $80,000 a year now disqualifies her from means-tested public benefits that would otherwise cover a substantial part of her care. The trust cannot be amended, and stopping the payment is exactly what the instrument forbids.

Ordinarily the statute's first prohibition would block a decanting here, because it bars reducing a mandatory distribution right that has come into effect. But the same paragraph carves out an appointment to a supplemental needs trust conforming to the state's own provision. The trustee signs and acknowledges an instrument appointing the full $2,000,000 to a new trust drafted as a supplemental needs trust for Nadia, serves it on the people entitled to notice, and the exercise takes effect 30 days later. The corpus has not changed. What has changed is that distributions are now discretionary and supplemental, Nadia's benefits are preserved, and the money can be spent on things the benefits do not cover.

Now vary the trustee's power. Had the trustee's authority been limited to distributions for Nadia's health, education, maintenance and support rather than being unlimited, the narrower branch of the statute would have applied. The new trust would have had to keep the same current, successor and remainder beneficiaries and the same distribution language, which is precisely the language causing the problem. The route that solved it would not have been available.

What decanting is good for

• It fixes drafting problems in a trust nobody can amend, without a court petition and without asking beneficiaries to agree.
• It can respond to a change in a beneficiary's circumstances, including the supplemental needs case that a mandatory distribution would otherwise wreck.
• It can modernize administrative terms: trustee succession, investment powers, notice provisions and situs.
• It can extend a trust's term, in some cases for a beneficiary's lifetime, which is useful where the original end date no longer makes sense.
• Neither a general prohibition on amending the trust nor a spendthrift clause blocks it, so the routine boilerplate does not close the route.

Where it is limited or risky

• It may not exist. The route depends on the governing state having a statute, and those statutes vary in what they permit.
• It cannot expand the beneficiary class, so it is no answer to an omission the creator made about who should benefit.
• A trustee without unlimited discretion to invade principal can change very little, and that is the common case in carefully drafted trusts.
• A vested mandatory distribution right, a fixed-dollar or unitrust payment right, or a withdrawal right cannot be cut back, outside the narrow carve-outs.
• It can destroy tax attributes if done carelessly, and the statute both bars that outcome and separately obliges the trustee to consider tax consequences.
• It is irrevocable once effective, and a trustee who misjudges the creator's intent is exposed to an accounting proceeding brought by an interested person.