Articles | Dec 01, 2023

Not-So-Irrevocable Trusts: Utilizing Decanting to Amend an Irrevocable Trust

Buffalo Business First

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Assets of an Existing Irrevocable Trust Can Be Decanted Into New Irrevocable Trust

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

“Decanting” pursuant to New York Estates, Powers and Trusts Law section 10-6.6 (the “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.

Limitations Based Upon Terms of Invaded Trust

The Statute authorizes a trustee with unlimited discretion to invade trust principal to decant assets from an Invaded Trust to an Appointed Trust.  The Appointed Trust must be 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).  Subject to certain conditions, an authorized trustee may also grant a power of appointment in the Appointed Trust to one or more of the current beneficiaries of the Invaded Trust.

Where the trustee has limited discretion to invade trust principal, the current, successor, and remainder beneficiaries of the Invaded Trust must remain the same in the Appointed Trust, as must the provisions governing distribution of income and principal.  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 in the Invaded Trust.

Document and Notice Requirements

Court approval of decanting is not required but may be sought by the trustee. A decanting must be evidenced in a written instrument that states whether all, or merely a portion, of the Invaded Trust assets are being decanted.

The creator of the Invaded Trust, anyone with a right to remove or replace the decanting trustee, and any persons interested in the Invaded Trust and the Appointed Trust (i.e., beneficiaries) must be given notice of the decanting.  The notice must include a copy of the decanting instrument and copies of the trust instruments.

Decanting becomes effective thirty days after all interested parties have received notice, unless those entitled to notice consent in writing to an earlier effective date. Before the decanting becomes effective, a person interested in the Invaded Trust may object to the decanting by serving a written notice of objection upon the trustee.  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., increasing trustee compensation or decreasing 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.  If all assets of the Invaded Trust are decanted, the trustee of the Invaded Trust should also consider finally settling his or her account as trustee.

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.

Attorneys in the Phillips Lytle LLP Trusts and Estates Group provide advice and guidance to corporate and individual executors and trustees, as well as beneficiaries regarding all aspects of estate and trust administration and litigation. Kenneth A. Grossberg, partner, can be reached at 716-847-7017 or kgrossberg@phillipslytle.com; Benjamin S. Cranston, attorney, can be reached at 716-847-7079 or bcranston@phillipslytle.com. Special thanks to Madeline J. Drechsel, law clerk, for her assistance with this article.