As the name implies, an irrevocable trust is generally difficult to modify, once created. Despite this, irrevocable trusts can be a helpful way to protect assets as well as assure eligibility for public benefits, like Medicaid. In the event a family establishes an irrevocable trust and circumstances change, decanting may be an option.
Decanting a Trust?
Whenever a trust is created, the trust instrument, often referred to as the trust agreement, lays out the specifics about how the assets are to be managed and distributed. When a revocable trust is established, the grantor who creates it, retains control of the assets and can make changes to the trust at any time. On the contrary, when an irrevocable trust is created, the grantor relinquishes ownership of the designated assets–and this is why those assets are shielded from creditors and make eligibility for public entitlements possible. Nonetheless, sometimes life takes twists and turns and a family may regret the permanency of an irrevocable trust. Wilson & Wilson point out that in some circumstances, decanting can be a useful solution:
“Decanting” in this context is the process of starting with an existing irrevocable trust, creating a new trust with the desired terms and provisions, and moving the assets of the initial trust to the new trust.
Decanting a trust can be useful for a number of reasons, one of the most common being to correct drafting errors that were made in the original trust document. In some cases, changes may also need to be made to better reflect the grantor’s intentions for the trust if there are any misunderstandings about what the grantor intended.
Other reasons for decanting a trust may include modifying the administrative provisions of the trust, combining two trusts in order to maximize administrative efficiency, or to take advantage of investment opportunities. Often there is simply a change of circumstances that hadn’t been considered when the trust was first created.
Consider The Circumstances
Establishing a trust requires careful attention to details, including the type of trust that will best meet family goals and a trust agreement that comprehensively and specifically explains how the assets placed in the trust are to be managed and distributed. Nonetheless, even with great care at the onset, life’s twists and turns can lead families to rethink a trust. For example, location may play a factor in a familial effort to decant an irrevocable trust and start again. Other changes may involve decisions about the beneficiaries, trustee or distribution standards. Wilson & Wilson share this list of situations that may make decanting an irrevocable trust advisable:
- A change in the legal jurisdiction of the trust is desired in order to enable more liberal investment or asset management powers.
- A change in jurisdiction is desired due to more simplified trust administration rules or more advantageous income tax treatment.
- A grantor wishes to move to a different jurisdiction, such as to where trust disclosure is less onerous or to one that allows more privacy.
- A grantor/settlor wishes to change a beneficiary designation or the age of when a beneficiary comes into control of assets
- A grantor/settlor wishes to modify the terms of trusteeship in order to change their succession order, investment powers, how they are compensated, or to create a power to remove trustees.
- A merging of multiple trusts can be done to reduce costs and create a better management structure.
- A trust termination date may need to be extended in order to protect one or more beneficiaries.
When trusts are established, trustees are named to administer the assets in them, based on the arrangements specified in the trust agreement. Though professional trustees can be hired, most families opt for a relative. Generally, this works out just fine, but it is important for trustees to know the role is not “a favor,” to be taken lightly: JD Supra reminds us that trustees have fiduciary obligations and are held to exceptionally high legal standards,“the most important of which are the duties of loyalty and care, and the duty to act in accordance with the terms of the trust agreement.”
Given the gravitas of the role of trustee, trustee bonds are sometimes required. A trustee bond is a specific type of fiduciary bond that protects the interests of the trust and its beneficiaries in accordance with applicable state law. As a leading national provider of many types of fiduciary bonds, Colonial Surety makes it easy and efficient to obtain a trustee bond. Just get a quote online, fill out the information, and enter a payment method. Print or e-file the bond from anywhere.
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