Decanting—The Efficient Solution for Updating a Trust

No one knows what the future holds, but that doesn’t mean we shouldn’t try to plan for it. 

A key piece of every attorney’s job is to protect against future contingencies—the “what ifs.”  A major part of estate planning is creating flexibility in the trust document to cover those “what ifs.”  But what if circumstances occur which are unforeseeable, and the trust instrument fails to account for this new situation?

When this occurs, different states offer different solutions.  Every state allows judicial modification of a trust, whether by statute or by common law, which requires a court order to modify the terms of the trust document.  But standards for when judicial modification is appropriate vary between jurisdictions. 

Many states also offer modification by consent.  Again, different states have different standards for when this is allowed and who must give consent.  In South Dakota, an irrevocable trust may be modified if all the beneficiaries consent to the modification unless the trust must continue under its existing terms in order to carry out a material purpose of the grantor.  If, however, all beneficiaries and the grantor consent to the modification, then modification is permitted regardless of whether modification would be contrary to the grantor’s original purpose.  If one of the beneficiaries is unable or unwilling to consent to the modification, then judicial modification must be sought.

Finally, a few states offer an easier and more efficient solution—decanting.  Decanting is the act of the trustee transferring trust assets into a new trust with different, more favorable terms (i.e. terms that account for the new status quo).  It also serves as an efficient way to transfer a trust from one state’s jurisdiction to another, if needed.  Decanting is performed by a trustee, and no consent is required from the grantor, the beneficiaries, or the court.  But each state’s decanting statute is different, and different requirements must be met in order for a trustee to exercise this power. For instance, many states that offer decanting require the trustee to provide notice to trust beneficiaries of the change.  But South Dakota has no such requirement, although it authorizes notice if the trustee chooses to provide it.

In order to decant, the original trust instrument must give the trustee discretionary authority over distributions.  South Dakota’s decanting statute allows a trustee to distribute trust assets into a new trust with different beneficiaries under certain circumstances.  The primary beneficiaries of the new trust must be someone named in the first trust as a primary, remainder, or contingent beneficiary, or an entity authorized to receive distributions on their behalf.  One common use of South Dakota’s decanting statute is to accelerate a remainder beneficiary’s interest. 

While South Dakota’s decanting statute also contains several limitations on a trustee’s authority to decant, it consistently ranks among the best decanting statutes in the country and was again named as the best in 2018.[1]

Decanting is an efficient and inexpensive option for changing trust terms to fit your current circumstances.  Building in flexibility to your estate plan by ensuring decanting is allowed will help your beneficiaries adjust to those unforeseen “what ifs” while still carrying out your wishes.  If you are a beneficiary or a trustee and need a way to make the trust more conducive to your circumstances, or if you’re considering whether to allow this option as part of your comprehensive estate plan, contact one of our South Falls estate planning attorneys today.

[1] Steve Oshins, 5th Annual Trust Decanting State Rankings Chart, 2018; https://www.oshins.com/state-rankings-charts.