In California, trusts fall into two general categories. The first type is the revocable trust, which can be altered or dissolved by the grantor with little issue. The second type is the irrevocable trust. As the name indicates, these trusts are not intended to be altered after they are established. The grantor cedes full control and ownership of the assets within the entity in exchange for no longer being responsible for the associated income and capital gains taxes.
However, there are certain circumstances when a grantor may wish to change the terms of an irrevocable trust. Under California’s Uniform Trust Decanting Act of 2018, this is now possible without the court’s intercession. In this article, we discuss what it means to decant a trust, the eligibility requirements for decanting, and how to decant trusts correctly.
What Does Decanting a Trust Mean?
Decanting is not the same as modifying an entity. Modifications alter the established terms under the guidance of the court. In contrast, decantation is the process of either dissolving one trust and placing its assets in a new entity with new terms or modifying it so that the terms would be considered materially different, without the court’s intervention. The original terms no longer apply in favor of the new terms, but the court was not required to intervene.
The difference seems minor, but it significantly affects the ease of altering the administration of an irrevocable trust’s assets. In most cases, irrevocable trusts cannot be modified without the agreement of all beneficiaries or their representatives. In some circumstances, even with full agreement, seeking a court order to alter the terms may be necessary.
In contrast, the Decanting Act permits trustees to decant trusts without the direct input of beneficiaries, grantors, or the court. As such, decanting is now the preferred method to alter the terms of irrevocable trusts in California.
Eligibility for Decanting in California
The Decanting Act permits trustees to decant trusts only in certain circumstances. Trustees may do so if the entity is either irrevocable or revocable only with the consent of the trustee or a third party holding an adverse interest. Furthermore, they may only decant it if it is in accordance with their fiduciary duties.
Additionally, certain trusts may not be decanted. Reasons that one may be ineligible for decanting include:
- It was established only for charitable purposes.
- It is revocable without the consent of a trustee or third party
- The original language specifically prohibits decantation
- The trustee has limited authority or discretion
- One or more beneficiary’s right to distributions is already in effect
An experienced trust administration lawyer can assist trustees and grantors in determining if they are eligible to decant.
How to Decant an Irrevocable Trust
If you want to alter the terms of a trust, decantation is simpler than the standard modification process. However, “simple” is relative.
- Develop the New Terms: Before going any further, you should determine what you want to change about the current entity and draft the prospective new terms.
- Consider Filing a Decanting Petition: If you have any concerns about your liability or the permissibility of a proposed decantation, you may file a petition in probate court to resolve potential legal problems before altering the entity.
- Provide Notice to Relevant Parties: Once you have committed to decantation, you must notify the grantor, beneficiaries, parties with power of appointment or the right to replace the trustee, all trustees of any involved trusts, and the attorney general. You must inform all parties about your intent to alter the terms, the reason for the proposed changes, and their impacts on all parties.
- Wait for Potential Court Actions: Any party involved may bring a court action within 60 days to contest the decanting.
- Exercise the Decanting Power: If no court actions are brought, you may exercise your right to decant by drafting and signing a written document explaining the change per Probate Code § 19510.
The complex and detailed nature of the Decanting Act means that any grantor or trustee seeking to decant should consult an experienced attorney. At The Dayton Law Firm P.C., we can help. Schedule your consultation today to discuss your needs and learn how our skilled trust administration attorneys can assist you with decanting your trust to better accomplish your goals.