Benefits of Decanting a Trust

In this article, we discuss the benefits of decanting a trust and answer the following questions:

• What does it mean to decant a trust?
• Who has the power to decant a trust?
• Are there limitations on decanting a trust in Illinois?
• What are some good reasons to decant a trust?

The ability to decant a trust in Illinois is fairly new, just having come into law in 2013, and many who would benefit from the service may not even know the option exists. However, the process comes with many regulations, and depending on the language, many irrevocable trusts may be ineligible for decanting. 

What Does It Mean To Decant A Trust?

Simply put, decanting a trust involves moving the principal from one trust into a different trust that has more advantageous terms. This power to decant a trust usually requires three factors to be true: 1) according to the language of the trust it can legally be decanted, 2) those affected by the trust are not opposed to the action, and 3) decanting the trust does not reduce any income interest of any beneficiary.

Who Has The Power To Decant A Trust?

Other than the settlor, only an authorized trustee has the power to decant a trust. If a trust is not prohibited from being decanted it will usually indicate if the trustee has absolute or limited discretion to decant the trust. The trust does not need to list that the authorized trustee has absolute authority, but rather it must not list any limitations to the trustee’s right to distribute to or for the benefit of the beneficiaries. 

A trustee without absolute discretion to distribute the principal can still decant a trust but only if the second trust makes no changes to the beneficiaries or income and principal distribution language from the first trust. The second trust must essentially be the same as the first trust with reference to the beneficiaries and any stipulations surrounding them but can be changed to be more financially beneficial to the parties involved.

Are There Limitations On Decanting A Trust In Illinois?

As long as the trust does not expressly prohibit the trustee from decanting the trust instrument the trustee should be able to proceed if the result will be beneficial to all parties involved. However, even if the trustee has absolute discretion to distribute the principal into a new trust there are still some limitations under the Illinois decanting statute, including not being able to use the decanting power for:

1. Reducing, limiting, or modifying the against perpetuities provision in the first trust, unless clearly allowed by the first trust;
2. Reducing, limiting, or modifying a beneficiary’s current distribution of funds, or ability to withdrawal principal or interest (except when creating a supplemental needs trust);
3. Modifying fiduciary liability except to move fiduciary responsibility from one party to another;
4. Changing the right to remove, replace or modify an authorized trustee;
5. Certain stockholder modifications;
6. Changes to aspects of the trust’s property interests to subvert IRS rules; and
7. Solely changing the trustee’s compensation.

What Are Some Good Reasons To Decant A Trust?

Decanting a trust should ultimately improve the provisions of the trust creating a more favorable agreement for all parties involved. However, there are myriad reasons a trustee or beneficiary might suggest a trust be decanted. Below you will find some of the most common:

• Merging separate trusts or splitting one trust. If one individual is the beneficiary of multiple trusts, decanting those trusts down into one can save on administrative costs. Or, if multiple individuals are the beneficiary of one trust, but have different needs, the trust can be decanted into several that better serve each beneficiary.
• Creating a separate trust for a special needs beneficiary. Sometimes the original trust is not tailored for a special needs individual causing them to lose out on government benefits.
• Improving an old trust that has errors or is ambiguous. Sometimes when a second or further generation inherits a trust they find that the original trust contains language that is detrimental to the overall effectiveness of the trust.
• Protection from creditors. Decanting the original trust into a second trust can allow the second trust to better protect the trust assets from creditors of the beneficiary, especially if the beneficiary is being sued.
• Moving the trust to another trust. As laws change in a given state, the taxation and administration cost of a multi-generational trust may become unfavorable. Decanting the trust and moving it into a different trust that is governed under the laws of another state is one way to make the trust more financially effective.

If you have questions about decanting or modifying a trust please give us a call at 630-324-6666.