Client Alerts  - Trusts and Estates Dec 14, 2023

Decanting to Amend Irrevocable Trusts and 2024 Federal and New York Transfer Tax Updates

Utilizing Decanting to Amend an Irrevocable Trust

As its name suggests, the provisions of an irrevocable trust are intended to be permanent. However, changes in circumstances may render certain irrevocable trust provisions inoperable, impractical or undesirable. Fortunately, New York State law provides methods to amend such trust provisions.

“Decanting” pursuant to New York Estates, Powers and Trusts Law § 10-6.6 (“Statute”) is one such method. The Statute authorizes the assets of an existing irrevocable trust (“Invaded Trust”) to be appointed, or poured over (“decanted”), into a new irrevocable trust (“Appointed Trust”), which may contain different provisions than the Invaded Trust, in effect amending the initial trust.

Limitations Based Upon Terms of an Invaded Trust

In accordance with the Statute, a trustee with unlimited discretion to invade trust principal may decant assets to an Appointed Trust for the benefit of at least one of the current beneficiaries of the Invaded Trust (potentially to the exclusion of other beneficiaries, including successor and remainder beneficiaries).

In contrast, where a trustee has limited discretion to invade trust principal (i.e., distributions limited for health, education, maintenance or support), the current, successor, and remainder beneficiaries of the Appointed Trust, as well as the provisions governing distribution of income and principal, must remain the same as the Invaded Trust. However, the term of the Appointed Trust may be extended beyond that of the Invaded Trust, and the distribution provisions applicable during the extended term may differ from those of the Invaded Trust.

Document and Notice Requirements

Court approval of decanting is not required but may be sought by the trustee. The creator of the Invaded Trust, anyone with a right to remove or replace the decanting trustee, and the beneficiaries of the Invaded Trust and the Appointed Trust must be given notice of the decanting.

Decanting becomes effective 30 days after all required parties have received notice unless those entitled to notice consent in writing to an earlier effective date.

Before the decanting becomes effective, a person entitled to notice may object to the decanting, and may seek a judicial stay of the decanting. The trustee has the option to revoke the decanting prior to the effective date or may continue with the decanting without consent from the interested parties. The decanting becomes irrevocable as of the effective date.

Changing the Terms

Not all provisions of an irrevocable trust may be modified via decanting. A beneficiary’s current right to a mandatory distribution or withdrawal right cannot be altered. Additionally, decanting cannot jeopardize existing tax benefits of an Invaded Trust or improperly benefit the trustee (e.g., increase trustee compensation or decrease trustee liability).

The trustee may decant to modify any provision not otherwise prohibited under the Statute. While decanting is often used to remove or change beneficiary provisions, it is also frequently used to alter trustee succession and to add or restrict trustee powers under the instrument.

Post-Decanting Considerations

After decanting, the decanted assets should be properly retitled to the Appointed Trust.

Decanting can be an efficient way to modify a trust, offering many potential benefits to trustees who might be frustrated administering an outdated irrevocable trust.

2024 Estate, Gift and Generation-Skipping Transfer Tax Updates

Beginning in 2024, the following changes to federal estate, gift and generation-skipping transfer tax exemptions will go into effect:

Federal Estate and Gift Tax

  • The federal unified exemption (applicable toward federal estate and gift taxes) will increase to $13,610,000 per person.
  • Annual exclusion gifts will increase to $18,000 per person.

Federal Generation-Skipping Transfer Tax

  • The federal generation-skipping transfer tax exemption will increase to $13,610,000 per person.

The federal estate, gift and generation-skipping transfer tax exemptions are scheduled to expire after December 31, 2025, and revert to a $5,000,000 basic exemption, indexed for inflation.

New York Estate Tax

The New York estate tax exemption will increase to $6,940,000 per person in 2024.

New York estate tax considerations remain important as New York does not offer a “portable” estate tax exemption. In addition, the New York estate tax exemption is lower than the current federal unified exemption and will only increase each year based on a cost of living adjustment tied to inflation. Therefore, allocating assets between spouses, both during life and via testamentary provisions, remains an important estate tax planning strategy.

Additional Assistance

If your current estate plan is affected by any of the foregoing, or if you would like us to review and assist you in updating your plan, please contact a member of our Trusts and Estates Practice Team or the Phillips Lytle attorney with whom you have a relationship.