How to ‘Fix’ a Trust that Isn’t Working as Intended

Sometimes, despite everyone’s best efforts, things change and the terms of an older, irrevocable trust just don’t work as well as they could in the present circumstances. But there’s a movement afoot to allow people in such a situation to solve the problem by moving the assets from an older trust into a newer one with more appropriate rules.

This is sometimes called “decanting” a trust, because you’re basically pouring the assets from an older container into a newer one.

Today, some 22 states allow decanting of irrevocable trusts in some circumstances. That’s up from 11 states just three years ago, so there’s a lot of momentum behind the change.

Of course, even in states that allow decanting, not all trusts are eligible. For one thing, decanting generally works only if the trust agreement gives the trustee discretion over the principal, not just over income distributions.

Here are some examples of ways that decanting a trust could be beneficial to everyone concerned:

  • A trust designed to terminate at a certain point and distribute assets to a beneficiary could be recast to keep assets in trust for the beneficiary and future generations, which could save taxes.
  • A trust could be redone to provide stronger protection against creditors and divorcing spouses.
  • A trust could be moved to another state that has more favorable laws, or that allows you to avoid state income taxes.
  • A trust could be changed to include a power of appointment, which can reduce your capital gains tax.
  • Decanting can be used to combine a number of small trusts into one, or to divide a larger trust into separate trusts for each beneficiary.
  • If a trustee dies or is unable to serve, a new trust can solve this problem.
  • If a beneficiary becomes disabled or has special needs, a revised trust could continue to provide help while also allowing the person to qualify for Medicaid and Social Security benefits.