Can an Irrevocable Trust be Amended?
For high-net-worth families like yours, irrevocable trusts are integral to wealth management thanks to their benefits in areas like estate planning and tax minimization.
Their only issue, as the name suggests, is that they are very difficult to change once created.
That means any term in your trust could become outdated, tax-inefficient, or no longer aligned with your family’s circumstances. That’s why trust decanting is so useful.
Decanting a trust lets you modify it without starting from scratch.
What is Trust Decanting?
Trust decanting is a legal process that allows the trustee of an existing irrevocable trust (the "distributing trust") to distribute some or all of its assets to a new trust (the "receiving trust") that has different, more favorable terms.
Decanting a trust lets you get rid of problematic provisions while maintaining its core purpose and tax benefits. The updated terms should better serve the beneficiaries and accomplish the original grantor's goals.
How Does Trust Decanting Make Amending Irrevocable Trusts Possible?
Although irrevocable trusts are beneficial for a number of reasons, the difficulty of modifying them is a big disadvantage.
This inflexibility means families can be stuck with terms that made sense decades ago, but that now create obstacles or missed opportunities.
Trust decanting works because a trustee can use their discretionary distribution powers to distribute the trust’s assets to a new trust, rather than directly to the beneficiaries.
Trustees with discretionary distribution authority can choose when to distribute, how much to distribute, and the form of distribution. Again, in trust decanting their chosen form of distribution is distribution to another trust.
The new receiving trust will have better terms that still align with the original trust’s goals, and can include things like updated tax elections or modified beneficiary arrangements.
Because the original trust’s assets are still being distributed according to the trustee's discretionary powers, decanting doesn't violate the irrevocable nature of the original trust.
The Trust Decanting Process
Review Existing Trust & Decide to Decant
The process begins with a review of the existing trust, applicable state laws, and family goals. This determines whether decanting is possible and beneficial, identifies specific improvements that can be made, and ensures the desired goals will be achieved without unintended consequences.
Draft the Receiving Trust
The new trust should address the original trust’s shortcomings while maintaining its beneficial features. The receiving trust must follow state decanting regulations and cannot provide beneficiaries with rights they didn't have under the original trust.
Trustee Distribution
Then, the trustee distributes assets from the distributing trust to the receiving trust. This involves documentation like trustee resolutions, distribution agreements, and the new trust instrument. You need proper documentation to prove the decanting was done in accordance with the law and the trustee's fiduciary duties.
Transfer Assets
Physical transfer of assets from the old trust to the new trust must be completed, including: retitling accounts; updating beneficiary designations; transferring ownership of real estate or business interests. The original trust may continue to exist if not all assets were decanted.
When and Why is Trust Decanting Used?
As discussed, trust decanting can address a variety of challenges that come about over time. Understanding them helps you know when decanting might benefit your estate planning strategies.
Tax Law Changes
Federal and state tax laws are constantly changing. Decanting allows trusts to take advantage of new tax elections, updated generation-skipping transfer tax strategies, or changes in state tax laws. For example, a trust might be decanted to move its tax residence from a high-tax state to a no-tax state, potentially saving in income taxes over the trust's lifetime.
Administrative Improvements
Older trusts might have administrative provisions that are now outdated and create unnecessary costs and delays. By decanting, you can avoid those complications. For example, if you were to decant a trust today, you might add electronic signature capabilities.
Beneficiary Changes
Family dynamics change over generations. Decanting can adjust distribution standards, or add or remove beneficiaries where needed.
Although it can be beneficial, decanting might not be appropriate for every trust or situation. Some trusts have specific anti-decanting provisions, and some might have better results through other modification strategies like judicial modification or beneficiary agreement.
What does Trust Decanting look like in California?
California enacted trust decanting legislation in 2018, codified in Probate Code Sections 19501-19530. It provides flexibility but also provides protection for beneficiaries and other interested parties.
Under California law, decanting is allowed when the trustee has discretionary distribution authority over income, principal, or both. The statute distinguishes between "expanded distributive discretion" (where the trustee can distribute to anyone) and "limited distributive discretion" (where distributions must be made from a defined class of beneficiaries), with different rules applying to each scenario.
California's law allows decanting to modify administrative provisions, change trust situs, and divide a trust into multiple separate trusts. It also provides protection for trustees who engage in good-faith decanting by granting them immunity from liability for the decanting decision.
However, California law has some limitations. The receiving trust can’t reduce beneficial interests of current beneficiaries without their consent, and certain types of trusts (like those created by court order or holding S-corp stock) have restrictions.
California also requires notice to qualified beneficiaries before decanting, which gives them the opportunity to object.
The California statute does have some provisions to ensure that beneficial tax characteristics aren't inadvertently lost through the decanting process. For example, it requires that decanting preserves the grantor trust status and generation-skipping transfer tax exemption allocation of the original trust.
What does Trust Decanting look like in Idaho?
Compared to California, Idaho has a more restrictive approach to trust decanting. Idaho doesn’t have specific decanting legislation, so it relies on common law principles and existing trustee powers. This creates opportunities and challenges for Idaho families.
Without specific statutory authority, Idaho decanting relies on the trustee's discretionary distribution powers as outlined in the original trust. If the trust grants broad discretionary authority, decanting may be possible under general fiduciary principles. That being said, make sure decanting doesn't exceed the trustee's authority or violate Idaho trust law.
Without statutory protections, trustees face more liability if beneficiaries challenge the decanting. This makes proper documentation and compliance even more critical in Idaho.
The lack of decanting legislation also creates uncertainty about the proper procedure, like whether notices must be given to beneficiaries, and what modifications are allowed.
Idaho families interested in decanting may need to consider changing trust situs to a state with more favorable decanting laws, as long as doing so follows all tax and legal regulations.
Trust decanting involves complex legal, tax, and fiduciary considerations. The process must follow applicable state laws, preserve beneficial tax characteristics, and serve the best interests of the trust’s beneficiaries. Improper decanting can result in tax consequences, beneficiary disputes, or trustee liability.
As always, we recommend working with a tax professional who understands both tax strategies and wealth management.
Author: Rob Cucchiaro, CFP, CRPC, AAMS
Questions answered in this blog:
What is trust decanting?
How does trust decanting make amending irrevocable trusts possible?
What are the steps in the trust decanting process?
When would I decant a trust?
Why would I decant a trust?
Can an irrevocable trust be changed by the grantor?
Can an irrevocable trust be changed in California?
Can an irrevocable trust be changed in Idaho?
What does trust decanting look like in California?
What does trust decanting look like in Idaho?
How to change an irrevocable trust?
Can a trust be changed?
Can a trustee change a trust?
Can an irrevocable trust be amended?
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