An irrevocable trust is supposed to be permanent, and that is exactly the problem when tax law changes, a beneficiary develops special needs, or a provision drafted thirty years ago stops making sense. New York was the first state in the country to enact a decanting statute, and its law lets a trustee move the assets of an irrevocable trust into a new trust with updated terms, often without going to court. We advise trustees deciding whether to decant, beneficiaries who have received a decanting notice, and grantors looking at an outdated trust.
What Is Trust Decanting?
Decanting is the process by which the trustee of an irrevocable trust pours the assets from one trust into a new trust with different, usually more favorable, terms. The name comes from decanting wine: the liquid is poured from one vessel into another and the sediment stays behind. In the trust context the sediment is the outdated, problematic or undesirable provisions that no longer serve the trust’s purpose.
New York pioneered statutory decanting in 1992. The current statute, EPTL 10-6.6, remains one of the most comprehensive and trustee-friendly in the country, and its long track record gives a certainty that newer decanting jurisdictions cannot match.
Why Decant a Trust?
The reasons fall into a few groups. The first is drafting age: trusts written decades ago may contain provisions that no longer reflect the grantor’s intent or current practice, and scrivener’s errors or ambiguous language can be fixed by decanting without a court reformation proceeding. The second is tax: federal and New York estate tax law has changed significantly, and decanting can bring the trust into line with current planning. The third is the beneficiaries: a trustee can add spendthrift provisions, convert a trust into a supplemental needs trust so that a disabled beneficiary keeps government benefits, or use New York’s generation-skipping rules to extend the trust to additional generations.
The rest are administrative. Decanting can modernize trustee succession, investment authority and administrative powers, move the trust to a more favorable situs or governing law, and combine several trusts for efficiency or divide one trust to serve beneficiaries with different needs.
Two Kinds of Decanting Authority
EPTL 10-6.6 draws a line based on how much discretion the trustee has under the original trust.
| Trustee’s power under the original trust | What the trustee may do in the new trust |
|---|---|
| Unlimited discretion to invade principal for one or more current beneficiaries | Broad authority: eliminate beneficiaries (other than current beneficiaries entitled to mandatory distributions), modify powers of appointment, change administrative provisions substantially, and adjust the duration of the trust within the applicable rule against perpetuities. |
| Limited discretion to invade principal | Narrower authority: the new trust generally must have substantially the same beneficiaries and distribution standards as the original, but the trustee may still update administrative provisions and make other changes that do not materially alter beneficial interests. |
The Procedure
The statute must be followed exactly. A defective decanting can be invalidated and exposes the trustee to liability.
-
Notice
The trustee gives written notice of the proposed decanting at least 30 days before it takes effect. Notice goes to the grantor if living, to everyone with a current interest in the trust, to the presumptive remainder beneficiaries, to anyone holding a power of appointment over the trust, and to any co-trustees. The notice includes a copy of the proposed new trust instrument and explains the trustee’s reasons. Beneficiary consent is not required, but thorough notice is what heads off later disputes.
-
The instrument
The decanting is done by a written instrument signed and acknowledged by the trustee. It references the original trust, identifies the new trust and transfers the assets. That record is what tax authorities, future trustees and any later challenger will look at.
-
Court involvement
Court approval is generally not required, which is one of the main advantages of the New York statute. In a complex case, or where a beneficiary objects, a trustee may nonetheless bring a proceeding in Surrogate’s Court or Supreme Court to confirm that the decanting is proper.
What Decanting Cannot Do
The power is broad but bounded. A trustee cannot use decanting to reduce or eliminate a current beneficiary’s fixed income interest, to reduce or eliminate a vested remainder, or to add beneficiaries who are not current beneficiaries or permissible appointees of the original trust. The trustee cannot lower their own standard of care or eliminate the fiduciary duties owed to the beneficiaries, cannot violate the rule against perpetuities that applies to the original trust, and cannot jeopardize tax benefits such as the marital deduction, the charitable deduction or grantor trust status where doing so would frustrate the grantor’s intent.
Tax Consequences
For federal income tax, IRS guidance suggests that most decantings are not recognition events, but changes that affect grantor trust status or beneficial interests can have income tax consequences. For federal gift and estate tax, a decanting that alters beneficial interests may be treated as a taxable gift by the affected beneficiary, and particular care is needed with trusts that qualify for the marital or charitable deduction, generation-skipping transfer tax exempt trusts, and trusts with grandfathered status.
For New York, decanting can change the trust’s residency for state income tax purposes. A properly structured decanting may move a resident trust to nonresident status, which can produce significant state income tax savings on undistributed income.
The Trustee’s Duty
Statutory authority to decant does not suspend fiduciary duty. A trustee considering decanting must act in good faith, in accordance with the terms and purposes of the trust, and in the best interests of the beneficiaries. The trustee should document the reasoning, consider every beneficiary’s interest and get professional advice before proceeding. A decanting that complies with the statute can still lead to personal liability if the trustee fails these obligations, and a beneficiary who receives a notice is entitled to ask whether they were met.
Alternatives to Decanting
Decanting is not always the right tool. Depending on the circumstances, an irrevocable trust may instead be changed by the written consent of all persons beneficially interested under EPTL 7-1.9, a judicial reformation proceeding, the exercise of a power of appointment, a trust merger, or amendment or revocation under EPTL 7-1.9 with the consent of everyone beneficially interested. We compare these routes on our trust modification page. The right choice depends on who has to agree, what the tax effect is, and whether a court order is worth the cost.
How We Help
For a trustee, the work starts with the original instrument: does decanting authority exist, and how far does it reach. From there we set the objectives, draft the new trust so that it fixes the identified problems while preserving what still works, analyze the federal and New York tax effect, and prepare and serve the notice that EPTL 10-6.6 requires. Where a court proceeding is needed, we bring it in Surrogate’s Court or Supreme Court.
For a beneficiary who has received a decanting notice, we explain what the trustee is proposing, whether it is within the statute, and what the options are, including objecting before the 30 days run. Where a decanting is contested, we represent either side in the resulting litigation.
When to Call
You should talk to us if a trust contains provisions that no longer serve their purpose, if tax changes have made its structure inefficient, if a beneficiary has developed special needs, if the administrative or trustee succession provisions are unworkable, if you want the trust to reach additional generations, or if you have received notice of a proposed decanting and want to understand your rights. Call 212-233-1233 or email [email protected].
