The “Do-Over” Button: Trust Decanting Strategy
The “Do-Over” Button: Trust Decanting Strategy
“Irrevocable” does not mean “Unchangeable.” How to move an outdated, high-tax trust from New York or California to a modern jurisdiction like South Dakota, firing the bank and rewriting the rules without going to court.
Executive Summary
- The Problem (Zombie Trusts): Your grandfather set up a trust in 1990. It is domiciled in a high-tax state (e.g., CA/NY), pays a bank trustee excessive fees, and mandates “Income Only” distributions that starve the beneficiaries. You are told it is “Irrevocable” and cannot be changed.
- The Solution (Decanting): Just as you pour wine from an old, corked bottle into a fresh decanter to let it breathe, a Trustee with “Decanting Power” can pour the assets from the **Old Trust** into a **New Trust** with better terms.
- The Upgrades: Through decanting, you can:
1. **Move Jurisdiction:** Escape state income tax (e.g., move CA to SD/NV).
2. **Modernize Governance:** Convert a rigid trust into a **Directed Trust** (allowing you to fire the bank and manage investments yourself).
3. **Extend Life:** Fix “Rule Against Perpetuities” issues to make the trust last forever (Dynasty).
The “Beneficiary Interest” Rule
The Guardrail: Decanting allows you to change administrative rules (Trustees, Location, Investment Powers), but you generally **cannot maintain the same tax benefits if you fundamentally change the beneficiaries’ economic interests**.
👉 Example: You cannot decant a trust for “Son A” into a trust for “Son B.” However, you can often decant a trust giving “Mandatory Income” into a trust giving “Discretionary Income” to protect the assets from the son’s creditors or divorce.
Mechanic: The Jurisdiction Arbitrage
Simulation: Fixing a 1990 New York Trust ($10M Portfolio)
| Feature | Court Modification | Decanting |
|---|---|---|
| Privacy | Public Record (Court Filing) | Private (Trustee Action) |
| Cost/Speed | High / Slow (months/years) | Low / Fast (weeks) |
| Flexibility | Limited to Judge’s whim | Broad (Rewrite the document) |
An irrevocable trust is only irrevocable in the state where it was born. By decanting to a modern jurisdiction like South Dakota or Nevada, you are effectively performing a ‘jurisdictional transplant’—giving an old trust a new body and a longer life.”