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Decanting: How to “Open Up” an Irrevocable Trust

You’ve got an irrevocable trust, but our world and your life have changed dramatically. Maybe your family doesn’t look the same as when you first created the irrevocable trust. Maybe the law has changed and it makes the administration of trust financially unreasonable or the distribution would now be considered financially wasteful. Maybe you simply want a new trustee.

Are you stuck with this irrevocable trust? Is there a do-over?

What’s the Difference Between a Revocable vs. Irrevocable Trust

A revocable trust is established during your lifetime to hold a majority of your assets and can be modified or revoked entirely, hence the title “revocable.” A revocable trust can be changed as many times as you would like before you die to reflect changes that may occur in your family, your asset holdings, and net worth. While you’re alive, everything in the trust is considered your personal property. When you die, the assets in the trust are considered part of your estate, and the successor trustee you assigned controls distribution. The trust no longer exists after everything has been given away. A revocable trust’s primary purpose is to avoid probate court. It is able to do this because the revocable trust, not you individually, owns the assets.

While the benefit of avoiding probate is large, a revocable living trust does not protect your assets from creditors because you, as the trust creator, maintain ownership of the trust while you are alive and the trust can be changed or terminated at any time during your lifetime. Therefore, a creditor could force the owner of a revocable living trust to terminate the trust and surrender the assets.

An irrevocable trust, however, is less flexible, but creditor protected. An irrevocable trust cannot be changed once it is created. When an irrevocable trust is established, the assets become property of the trust and are no longer yours, so you will not be subject to estate taxes. Because the assets are no longer yours, assets in an irrevocable trust are creditor protected and cannot be pursued by creditors seeking payment of a debt.

What Does Wine Decanting Have to do With All of This?

According to Webster’s Dictionary, to decant means to pour (a liquid, such as wine) from one vessel into another. While most of us are not sommeliers, or wine stewards, we have seen a crystal decanter. Wine decanters serve a particular function, they allow for oxidation and the removal of sediment from the the wine. By allowing the wine to come into contact with more oxygen, the wine is opened up, softened and has its tasting notes enhanced, making it more palatable and pleasing for all who drink the wine. Like wine decanting, trust decanting empowers a trustee to modify and theoretically “open up” an old irrevocable trust by “decanting” the old trust assets into a new trust. If a trustee has the discretionary power to distribute trust assets to and for the benefit of a beneficiary, decanting enables a trustee to use this power to dictate the terms of a new trust. 

When Does It Make Sense to Decant a Trust?

Decanting a trust might make sense under various circumstances, including when you’d like to:

  • Address administrative issues and to change the law governing the trust administration;
  • Add the ability to remove or appoint trustees without court approval;
  • Expand the power of the trustee to enter into more sophisticated investments or permit the trustee to not diversify assets when the trust holds a family business;
  • Make changes to beneficial interest when a beneficiary has substance abuse problems
  • Remove beneficiaries;
  • Divide a trust for multiple beneficiaries into separate trusts;
  • Create a special needs trust for a beneficiary who requires government assistance; or
  • Tax planning such as moving a trust to a state with no income tax.

Is Decanting Allowed in Oklahoma?

Oklahoma S.B. 162 created the Oklahoma Decanting Act and provided for an authorized trustee with full discretion to distribute the principal of the trust to distribute all or part of the principal of that trust in favor of a trustee of a second trust for the benefit of the current trust. Up until this point, if a trustee needed to change a trust that was irrevocable for the aforementioned reasons, they had to take the trust and the proposed changes to court. Now rather than going through a lengthy court proceeding, the trustee might have the authority to use power given to her under the Oklahoma Decanting Act.

Specifically, the statute requires that an authorized trustee give notice 90 days before the creation of the new trust and that describes the way in which the trustee will exercise the power and include the expected date of funding of the new trust. This notice must be given to the affected beneficiaries, and must include a statement that the authorized trustee intends to exercise the power of distribution, that the beneficiary has the right to object to the exercise of power, and the beneficiary may petition a court to approve, modify or deny the exercise of the trustee’s power to make a distribution under the act.

Are you a trustee of a trust that was created a long time ago and it’s distribution doesn’t make much economical sense or did you create an irrevocable trust that you needed to change? It’s never too early to begin estate planning or too late to check in and update your estate plan to accommodate for changes in our world and economy. No one knows what the future holds, but with a plan in place that provides for your own future needs and those of your loved ones, you can proceed with peace of mind. If you or a friend or loved one are considering estate planning for the first time, or are in need of updating an existing plan, please contact the attorney at Skillern Law Firm, PLLC by phone at 918-805-2511 or contact@skillernlaw.com. Feel free to also book an appointment with our firm using our Book an Appointment Online page!

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