Many people create irrevocable trusts for the tax benefits that they provide for both the grantor and the beneficiary. Placing your assets in an irrevocable trust allows you to avoid future unfavorable increasing tax rates that come along with your business increasing in value. Unfortunately, irrevocable trusts offer less flexibility than revocable trusts.  Unlike revocable trusts, irrevocable trusts generally cannot be terminated by the creator without professional assistance and generally can’t be modified except under certain exceptions. One of these exceptions is “trust decanting”. 

Life often throws us curveballs we do not see coming. Perhaps you created an irrevocable trust years ago, only to see circumstances change. Maybe you would like to consolidate your assets from different trusts into one trust containing everything. There are many reasons why people want to change their irrevocable trust. Decanting is one of the few ways one is able to do this.

What is Trust Decanting?

Trust decanting involves transferring assets from one trust to another. When you decant the assets, you are essentially pouring over the assets into a new trust. This new trust has different terms that are usually more favorable to your current circumstances. Decanting is an action which typically done by the trustee of your irrevocable trust.

When Should I Consider Trust Decanting?

As previously mentioned, life often deals us a hand which we did not see coming. Changes in circumstances often make it in our best interests to modify our trusts. You may be interested in extending the life of the trust so that your beneficiaries do not receive the assets in the trust until later in life. This may be due to the beneficiary’s lack of maturity or receiving wealth from another source. Perhaps the trust assets are appreciating and you would like to make sure they aren’t touched because you believe they will continue to increase significantly in value in the near future. Maybe you want to add or modify a spendthrift provision to the trust, which gives the trustee authority to act on the beneficiary’s behalf and prevents creditors from attaching the interest of the beneficiary until the interest is distributed.

Consolidating assets from multiple trusts into one single trust is often desirable as well, as is the wish to modify certain provisions of a trust pertaining to the trustee. Other reasons for wishing to modify a trust include correcting certain drafting errors and to adapt the trust for better tax and investment purposes. Different circumstances surround everyone, but whatever the reason may be, people often wish to modify their trusts and if the trust is irrevocable, decanting remains one of the only ways to do such.

How Does the Process of Decanting Work?

Unlike some other states, New Jersey does not have a statute that specifically allows trust decanting. Without a specific statute, trustees in NJ must rely on a provision placed in the majority of trusts that allows the trustee to distribute assets “to or for the benefit of” the beneficiary. New Jersey Courts have stated that this provision and similar provisions allow a trustee to distribute assets in a trust into a substitute trust so long as the substitute trust is for the benefit of the beneficiary. The Courts have not specifically stated whether the authority of the trustee to act in the beneficiary’s interest must be unlimited or if a trust creator can limit the trustee’s actions to a certain standard, but it is presumed that the trustee’s powers must be unlimited.

A trustee must act in the best interest of the beneficiary, so creating a different distribution standard pertaining to the assets is not allowed. The trustee therefore may only change other terms of the trust that do not affect the beneficiary’s interest, such as the length of the trust. To be sure the decanting is allowed, a trustee may want to consider getting court approval before doing it.

Decanting simply involves setting up an alternative trust with the new provisions you are seeking. The trustee then transfers the assets from the old trust into the new trust with the new terms. One must be careful to follow the strict guidelines and not change the distribution standard of the beneficiaries, or the decanting will be considered invalid. The actual decanting process involves many specifics and complicated language. It is best to seek the assistance of an experienced NJ trust attorney when you are trying to decant a trust.

Are There Any Other Ways Besides Decanting to Modify

an Irrevocable Trust?

Generally speaking, no. Irrevocable trusts receive tax benefits because they are unable to be modified or adapted. Besides decanting, the only other way to change an irrevocable trust is through a court proceeding. Courts may modify the administrative or dispositive terms of an irrevocable trusts due to unanticipated circumstances. They will only modify it if such modification will further the purposes of the trust. If the modifications are inconsistent with the material purpose of the trust, the Court will look at all of the circumstances surrounding the trust and will modify it only under extreme circumstances and with the consent of the settler and all of the beneficiaries.

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