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Trust Planning
Editor's Note: As discussed last month, modern trusts are, in general, more protective than trusts created even in the recent past. Whether a trust's funds may be reachable in a divorce proceeding will depend on several factors, such as whether it is a “support” trust or a “discretionary” trust, or whether the trustee has the power to change or add beneficiaries. Now, the author explains how an existing trust may be made more “divorce-proof,” offers some hypothetical examples of the treatment trust funds may be given in divorce, and describes some lesser-known trust-related problems to be avoided.
Improving Old Irrevocable Trusts: Decanting
Many existing trusts were designed in less than optimally protective manners. What can be done? While the presumption has historically been that if a trust is irrevocable, it cannot be changed, decanting can improve even old trusts that do not incorporate the flexibility of modern trust drafting discussed in last month's issue. Decanting is the process of merging, or pouring over, an old trust into a new and improved trust. This technique has grown significantly in popularity and use in recent years, and may provide a vital method for practitioners to guide clients to improve trusts before a matrimonial challenge. This might raise the issue of pre-divorce planning, an issue with which practitioners are familiar. Therefore, the brief discussion below will focus only on the decanting. Trust decanting may provide an efficient mechanism to salvage the trust purpose. Decanting can be accomplished in one of three ways:
- Pursuant to the terms of the trust, if the governing instrument permits a transfer of trust assets to the new trust.
- Under state statute. A growing number of states permit decanting pursuant to state statute. Alaska has a very robust statute and if the old trust is not presently located in Alaska, it may be feasible to move the situs of the old trust to that state and then take advantage of the Alaska decanting statute.
- Under state common law. For example, New Jersey common law has provided a basis to merge an old trust into a new trust.
Decanting may enable a trustee to:
- Extend the term of an existing trust, although generation-skipping transfer tax issues must be addressed. If a client is a beneficiary of a trust that is set to distribute all principal at age 40, and the client is 37, decanting the trust into one that is perpetual may insulate trust assets from a future claim that may have had a greater chance of success if the assets were owned directly.
- Change trustee provisions to incorporate some of the more modern clauses discussed above.
- Change governing law and situs to a state that is more favorable to achieving trust objectives, such as Nevada, which does not provide for exception creditors.
Types of Trust and Trust Transactions
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