Using Trust Decanting to Adapt Old Trusts to New Laws

How decanting evolved and why it matters

Trust decanting began as a common‑law practice and has been formalized in many states through statutes such as the Uniform Trust Decanting Act and state decanting laws. The technique gained wider use as estate-tax rules, retirement and asset‑protection approaches, and beneficiary expectations changed. For trustees and families, decanting is a way to correct outdated language, add flexibility, and address issues without court‑supervised reformation or needless litigation.

Decanting matters because older trusts often contain provisions that were appropriate at creation but are now problematic. Examples include rigid distribution rules, outdated tax allocation language, naming of obsolete fiduciaries, or terms that unintentionally trigger creditor, tax, or Medicaid problems. Decanting can help preserve the grantor’s intent while aligning the trust with modern legal and financial realities.

The legal basis: statutes, common law, and limits

Availability and scope of decanting are state‑specific. Many states have enacted decanting statutes or adopted the Uniform Trust Decanting Act (UTDA), while others rely on judge‑made (common) law or have limited authority. Key points:

• Trustee authority is required: Decanting depends on whether the trust instrument grants the trustee the power to make distributions to beneficiaries, because that distributive power is often the basis for transferring assets into a new trust.
• State law governs: Some states allow broad changes (e.g., changing beneficiaries, adding spendthrift protection, changing situs), while others restrict changes or require beneficiary consent or court approval.
• Cases and statutes differ: The Uniform Law Commission and state legislative materials explain options, but consult state statutes and recent case law for the correct standard (see Uniform Law Commission and state resources).

Authoritative references: Internal Revenue Service (IRS) pages on estate and gift tax planning, the Uniform Law Commission’s materials on decanting, and state statutes. For general consumer guidance, see the Consumer Financial Protection Bureau (consumerfinance.gov).

When decanting is an appropriate solution

Decanting is commonly used to:

• Fix drafting mistakes or ambiguities in an older trust.
• Add or clarify tax allocation clauses following legislative changes. (Do not rely on decanting as a sole substitute for tax filings—consult a tax advisor.)
• Change distribution standards (for example, converting rigid percentage distributions into discretionary distributions to meet current beneficiary needs).
• Update fiduciary appointments (replace or add trustees or trust protectors).
• Improve spendthrift protection, asset protection planning, or dynasty planning where state law permits.

Decanting is not always appropriate when the trust expressly forbids modification, when state law forbids certain changes, or when a decanting would clearly contradict the grantor’s expressed intent.

Step‑by‑step: How the decanting process typically works

1. Review the trust document: Confirm trustee powers, distribution language, and any express anti‑decanting clauses.
2. Check governing law: Determine the trust’s governing law and applicable state decanting statute or case law.
3. Consult professionals: Engage an estate planning attorney and tax advisor experienced in your state’s decanting rules. In my practice, early collaboration between counsel and the trustee reduces surprises.
4. Prepare the new trust: Draft a new trust instrument that corrects deficiencies, uses modern drafting language, and includes any desired protections (spendthrift, discretionary distribution standards, trustee succession, trust protector powers, tax allocation language).
5. Notice and consent (if required): Some states or trust instruments require notice to beneficiaries, and others require beneficiary consent or court approval.
6. Transfer assets: Re‑title assets into the new trust. Maintain clear accounting and documentation.
7. Post‑decanting administration: Provide required accountings and comply with any statutory reporting or tax filings.

Document every step. If the trust is a nongrantor or grantor trust for income‑tax purposes, work with a tax specialist to determine whether decanting alters the trust’s tax status.

Common uses and practical examples

• Tax‑law changes: Where estate‑tax or generation‑skipping transfer (GST) planning needs to be updated, decanting can allow new provisions that take advantage of current exemptions and allocation rules. Note: exemptions and rules change; use current IRS guidance when planning (IRS.gov).
• Beneficiary needs: Convert fixed equal shares into discretionary trusts to protect a beneficiary who is disabled, has creditor issues, or needs means‑tested benefit protection.
• Trustee replacement: Remove or add trustees, create successor trustee provisions, or add a trust protector with specific powers.
• Investment strategy: Change distribution standards to allow different investment or segregation strategies (for example, allocating illiquid assets to a separate trust).

Example: A trustee decants an older irrevocable trust that provided equal distributions to adult children into new trusts that provide discretionary distributions for a spendthrift beneficiary and direct distributions for another beneficiary pursuing active business ventures. The result reduced litigation risk and aligned distributions with each beneficiary’s situation.

Risks, tax consequences, and pitfalls

• State law traps: Not all jurisdictions allow the same degree of change. Some states limit changes to non‑material terms; others permit broad changes. Verify governing law first.
• Beneficiary rights and objections: Beneficiaries may object if decanting reduces their rights. Some decanting statutes require notice or allow beneficiaries to seek court review.
• Tax issues: Decanting is often not a taxable event for estate or gift tax in straightforward transfers, but it can affect GST allocation, grantor trust status, and income‑tax attributes. Always coordinate with a tax advisor to understand potential changes in tax treatment and any required elections.
• Creditor claims and Medicaid: Decanting can affect creditor exposure and government benefit eligibility. Transfers into new trusts may be scrutinized under state fraudulent transfer laws or Medicaid look‑back rules.
• Altering grantor intent: While decanting aims to preserve the grantor’s intent, courts scrutinize transfers that appear to contradict explicit grantor wishes. Where possible, document the rationale tied to the grantor’s original objectives.

When decanting is NOT a good idea

• If the trust expressly prohibits modification or contains anti‑decanting language that is enforceable under governing law.
• If a court is likely to find the decanting inconsistent with the grantor’s intent.
• If the new trust would unintentionally trigger adverse tax or Medicaid consequences.

Practical tips and best practices

• Start with a written memorandum explaining how the decanting preserves the grantor’s intent — this is useful if beneficiaries or a court later question the change.
• Use a check‑the‑box process: confirm trustee authority, state law, beneficiary notice requirements, and tax consequences before funding the new trust.
• Consider adding a trust protector in the new trust to provide future flexibility without repeated decanting (see our article on Using Trust Protectors to Maintain Flexibility in Long‑Term Trusts).
• For multi‑generation planning, consider implications for GST tax and use professional GST allocation strategies.
• Keep thorough records of asset transfers, valuations, notices, and trustee resolutions.

Checklist to begin decanting

• Obtain trust document and any amendments
• Confirm governing law and trustee powers
• Identify beneficiaries and contact information
• Engage estate counsel and tax advisor
• Draft and circulate the proposed new trust and notices
• Prepare accounting and asset transfer documentation

Related reading on FinHelp.io

• For a general primer, see “What is Decanting a Trust?”: https://finhelp.io/glossary/what-is-decanting-a-trust/
• To explore alternatives that preserve flexibility, read “Using Trust Protectors to Maintain Flexibility in Long‑Term Trusts”: https://finhelp.io/glossary/using-trust-protectors-to-maintain-flexibility-in-long-term-trusts/
• For distribution scheduling alternatives, see “Phased Trust Distributions: A Practical Guide”: https://finhelp.io/glossary/phased-trust-distributions-a-practical-guide/

Frequently asked questions

Q — Is decanting the same as amending a trust?
A — No. Decanting transfers assets into a new trust with different terms; amendment usually changes the terms of the same trust if the grantor reserved amendment power.

Q — Do beneficiaries need to consent?
A — It depends. Some states require notice only; others require consent or allow court review. Always confirm statutory requirements.

Q — Will decanting create tax liability?
A — Often it does not create an immediate estate or gift tax event, but it can affect GST allocation, grantor trust status, and income‑tax treatment. Obtain tax advice before and after decanting.

Q — Can decanting be undone?
A — Generally no — once assets are distributed into the new trust, undoing the transfer may require beneficiary agreement or court action and can be complex.

Sources and further reading

• IRS — Estate and Gift Taxes: https://www.irs.gov/businesses/small-businesses-self-employed/estate-and-gift-taxes (check current guidance and exemption amounts)
• Uniform Law Commission — Materials on trust decanting and the Uniform Trust Decanting Act: https://www.uniformlaws.org/
• Consumer Financial Protection Bureau — Consumer guides on estate planning basics: https://www.consumerfinance.gov/

Professional disclaimer: This article is educational and not legal or tax advice. Trust decanting rules vary by state and facts matter. Consult a qualified estate planning attorney and tax advisor before taking action.

Author note: In my 15+ years advising families on trusts and estates, early coordination between trustee, counsel, and tax advisors prevents common decanting pitfalls and preserves the grantor’s intent—document decisions and keep beneficiaries informed to reduce the risk of disputes.