Planners are increasingly using a technique called decanting
to deal with outdated or overly rigid terms in trusts that can’t be changed. As
the term suggests, decanting involves moving assets from an old trust to a new
one in much the same way a bottle of fine wine might be poured into a decanter.
It can be used to add flexibility and, often enough, to correct mistakes that
may have resulted from hasty planning.
As the federal government worked on changing estate-tax
rules in late 2012, lots of wealthy families rushed to protect their money and
other assets in legal maneuvers that, it turned out, weren’t needed. In the
end, the government set a high threshold for paying estate tax, now at $5.34
million for an individual.
While many states don’t have laws allowing the practice, a
growing number are enacting legislation authorizing courts to grant approval
under certain circumstances. In all, 22 states had passed or were considering
decanting statutes as of March, according to the American College of Trust and
Estate Counsel. That’s up from just five states with decanting statutes in
2008, says Mr. Mitch Drossman, the national director of wealth planning
strategies at Bank of America’s U.S. Trust private banking unit.
Decanting, most often used with irrevocable trusts, can
clear the way for a change in the trustee who oversees the assets or for a move
to a more tax-friendly or trust-friendly jurisdiction. It also can enable
changes in how the trust’s assets are distributed, among other things.
As an example, planner Jon Persson cites the case of a
client who came to him with a trust that had been established decades earlier,
by a now-deceased relative, at a local trust company in New Jersey. The company
had since been bought out by a regional bank, and the trustee was located in
Pennsylvania, much farther from the family.
The trustee also wanted a high fee for managing investment
of the trust’s relatively modest assets, says Mr. Persson, who works for New
York-based Geller Family Office Services, which manages more than $2.1 billion
for its wealthy clients. Mr. Persson helped the client establish a new trust in
a jurisdiction with a lower state income-tax burden. The terms also allowed for
investment management to be separated from the duties of the trustee.
The flexibility gained from decanting can be especially
beneficial for multigenerational trusts. Over the many decades that such a
trust exists, a family’s circumstances can greatly change and the trust’s terms
often no longer fit.
But decanting isn’t always the best option when a trust
needs changing or updating. Some trusts, for instance, have the ability built
into them to amend them, which is typically a much easier and quicker process
than decanting.
Decanting can be time consuming but can be worth the time
and cost if it helps a family achieve their goals.
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