Decanting a trust, particularly an irrevocable trust, is a popular estate planning strategy for modernizing an outdated trust or addressing unforeseen issues, such as changing circumstances, legal requirements, or beneficiary needs, without requiring court approval in many cases.
This article explores the concept of decanting a trust, outlining the process, explaining why someone might choose to do it, answering frequently asked questions, and offering practical tips for those considering this option.
If you are interested in trust decanting, please call an ARQ Wealth financial advisor at (480) 214-9572 to get personalized guidance.
What Exactly is Decanting a Trust?
Decanting a trust is a strategy used to change the terms of a trust that cannot be easily modified or terminated.
It’s used by estate planning attorneys or advisors as a workaround to update terms that are no longer practical or effective due to changes in tax laws, family circumstances, or financial goals.
The process, governed by state-specific laws (not all states permit trust decanting), involves transferring assets from the original trust to a new trust with different or updated terms.
The term “decanting” is used because the process is similar to pouring a fine wine from one container to another to separate the sediment and improve the wine’s quality. With trust decanting, the trustees “pour” assets into a new trust to enhance its functionality and better serve the beneficiaries’ needs.
Why Should You Decant a Trust?
The flexibility of trust decanting allows it to be used in a number of circumstances where trustees and grantors (the person who created the trust) need to address specific issues, including:
- Updating outdated provisions: A trust created decades ago may contain terms that no longer apply to you or the beneficiaries’ circumstances due to changes in tax laws, investment strategies, or family dynamics. Trust decanting can modernize these provisions to reflect current needs.
- Correct drafting errors or ambiguities: If the original trust contains drafting errors, ambiguous language, or provisions that no longer serve the intended purpose, decanting can clarify or correct these issues.
- Adapting to beneficiary needs: Changes in a beneficiary’s circumstances, such as disability, financial irresponsibility, or new family members, may necessitate adjustments to how trust assets are distributed. Decanting an irrevocable trust can modify distribution schedules or conditions to better support beneficiaries.
- Tax optimization: Tax laws frequently change, and decanting can help align the trust with current tax strategies, such as minimizing estate, income, or generation-skipping transfer taxes.
- Changing trust administration: Trust decanting can be used to change the trustee, modify trustee powers, or relocate the trust to a state with more favorable trust laws (a process sometimes called “trust migration”).
- Consolidating trusts: If a grantor has multiple trusts, decanting can combine them into a single trust for simplified management and reduced administrative costs.
- Enhancing asset protection: Decanting can strengthen asset protection by moving assets into a trust with more robust creditor protection provisions, especially in states with strong trust laws.
- Responding to legal changes: New state or federal laws may impact the trust’s effectiveness. Decanting enables trustees to adapt to these changes without having to start from scratch.
Given the complexity of these decisions, individuals considering trust decanting should consult with a qualified wealth advisor or estate planning attorney to help ensure compliance with legal requirements and alignment with their financial goals.
The Trust Decanting Process
The process of decanting a trust varies depending on state laws, the terms of the original trust, and the trustee’s authority. Here is a general outline of the steps involved:
Review the original trust
The trustee must carefully review the original trust document to determine whether decanting is permitted. Some trusts explicitly allow or prohibit decanting, while others are silent, requiring reliance on state law.
Check state decanting statutes
Not all states have decanting laws, and those that do have varying requirements. For example, some state statutes allow decanting only if the trustee has discretion over distributions, while others permit it under broader circumstances. States like Delaware, Nevada, and South Dakota are known for their flexible decanting statutes.
Identify the purpose of decanting
The trustee must clearly define the reasons for decanting, such as updating terms, addressing beneficiary needs, or optimizing taxes. This purpose will guide the drafting of the new trust.
Draft the new trust
A new trust agreement is created with the desired changes, such as updated distribution rules, trust provisions, or administrative powers. The new trust must comply with state law and align with the original trust’s intent to the extent required.
Obtain necessary approvals
Depending on state law, the trustee may need to notify beneficiaries, obtain their consent, or seek court approval. Some states allow decanting without beneficiary notification, while others impose strict requirements.
Transfer assets
The trustee transfers the assets from the existing irrevocable trust to the new trust. This may involve retitling assets, such as real estate or investment accounts, and maintaining continuity of management.
Notify relevant parties
Beneficiaries, co-trustees, or other interested parties may need to be informed of the decanting, depending on state law and the trust’s terms.
Document the process
Proper documentation is critical to demonstrate compliance with legal requirements and to avoid future disputes. This includes recording the trustee’s rationale for decanting and maintaining records of asset transfers.
Because decanting an irrevocable trust can have significant legal and tax implications, it’s essential to work with an experienced estate planning professional. Wealth advisors can provide guidance on navigating state-specific regulations and ensuring the process aligns with the grantor’s intentions.
What are Arizona’s Requirements for Trust Decanting?
Arizona has a specific statute (A.R.S. § 14-10819) pertaining to trust decanting, which gives a trustee with discretionary authority over principal distributions the power to move assets into a new trust with updated terms. Arizona does not require court approval for decanting a trust, but it does require beneficiary approval.
The law also includes several safeguards to prevent trustees from misusing their authority, including:
The same individuals who benefited from the existing trust must also benefit from the new trust.
- Any rights granted to a beneficiary in the original trust must be preserved in the new trust.
- Trust decanting cannot be used to reduce or eliminate a beneficiary’s fixed income interest.
- The new trust cannot designate new beneficiaries unless it is explicitly allowed by the original trust.
Frequently Asked Questions (FAQs) About Decanting a Trust
Is trust decanting legal in every state?
As of 2025, thirty states have statutes that allow trust decanting, with varying requirements. If decanting is not permitted in the trust’s jurisdiction, the trustee could consider establishing it in a state with favorable statutes.
Can any trust be decanted?
Not all trusts can be decanted. The ability to decant depends on the trust’s terms, the trustee’s authority, and applicable state law. For example, trusts that explicitly prohibit decanting or grant the trustee limited discretion may not be eligible.
Does decanting a trust require the beneficiary’s consent?
It depends on state law and the terms of the trust. Some states permit trustees to decant without the beneficiary’s consent if they have sufficient discretion over distributions. Others require notification or consent, particularly if the decanting significantly alters beneficiary rights.
What are the tax implications of decanting a trust?
Decanting can have complex tax consequences, including potential income, estate, or gift tax issues. For example, transferring assets to a new trust may trigger capital gains or generation skipping transfer (GST) taxes or affect the trust’s tax-exempt status. Consulting a tax professional is crucial for navigating these issues.
How long does the decanting process take?
The timeline varies based on the complexity of the trust, the number of assets, and state requirements. Simple trust decanting may take a few weeks, while more complex cases, involving court approval or multiple beneficiaries, could take several months.
Can the decanting of a trust be reversed?
Once assets are transferred to the new trust, reversing the decanting process can be challenging and may require court intervention. This underscores the importance of careful planning and legal advice before decanting.
How much does it cost to decant a trust?
Costs can vary, depending on the complexity of the trust, legal fees, and administrative expenses. Drafting a new trust, transferring assets, and obtaining legal or tax advice can range from a few thousand dollars to significantly more for complex trusts.
For personalized answers to these or other questions, we encourage you to contact an ARQ wealth advisor or an estate planning attorney who can provide tailored guidance on trust decanting.
Helpful Tips for Decanting a Trust
To help ensure a smooth and effective trust decanting process, consider the following tips:
- Work with professionals: Engage a qualified estate planning attorney and wealth advisor to guide you through the legal, tax, and administrative aspects of decanting. Their expertise can prevent costly mistakes and ensure compliance with state laws.
- Understand state laws: Research the decanting laws in the trust’s governing state or consider moving the trust to a state with favorable decanting statutes, such as Delaware or Nevada.
- Communicate with beneficiaries: Even if not legally required, informing beneficiaries about the decanting process can foster transparency and reduce the risk of disputes.
- Document everything: Maintain detailed records of the decanting process, including the rationale for changes, asset transfers, and communications with beneficiaries or advisors.
- Consider tax implications early: Work with a tax professional to evaluate potential tax consequences before decanting, as certain changes could trigger unexpected tax liabilities.
- Align the new trust with the grantor’s intent: Confirm that the new trust’s terms align with the original grantor’s intentions to the extent possible, as significant deviations may lead to legal challenges.
- Review regularly: Trusts should be reviewed periodically to help ensure they remain effective. Decanting can be part of a broader estate planning strategy to adapt to changing circumstances.
- Plan for contingencies: Anticipate potential challenges, such as beneficiary objections or asset transfer issues, and develop a plan to address them proactively.
Bottom Line
Trust decanting is a versatile and powerful tool for updating and modifying irrevocable trusts to meet current needs, whether due to changes in laws, beneficiary circumstances, or evolving financial goals.
By understanding the process, reasons, and legal considerations for trust decanting, trustees and grantors can make informed decisions to protect and enhance their estate plans. However, the complexity of decanting an irrevocable trust requires careful planning and professional guidance.
If you are considering trust decanting, it is advisable to consult with a wealth advisor or estate planning attorney as a critical next step. These professionals can provide personalized advice, navigate state-specific regulations, and ensure that the decanting process aligns with your financial and family objectives.
To learn more about trusts and decanting, we invite you to contact a qualified wealth advisor at ARQ Wealth today to discuss your unique situation.