What is decanting?
Decanting is when a trust distributes to another trust or trusts with similar provisions to the trust they are coming from. While the successor trust(s) will have similar provisions to the original trust, the new trust may correct provisions in the previous trust that are no longer workable.More frequently decanting is used to subdivide a trust into decanted trusts for individual beneficiaries and allows the trust investments to be responsive the tax situation of the trust beneficiaries and maintain a level of privacy concerning distributions from the trust.
The Power to Decant:
“Decanting” is a statutory trustee power to distribute an entire trust into a new trust. South Dakota is one of a handful of states that has a statutory power to decant.
Why would you want to decant a South Dakota trust?
The multiple beneficiaries of some trusts have different income tax issues and distribution needs. Decanting allows the decanted trusts to make investments that are responsive to the tax situation of the trust beneficiaries and that maintain a level of privacy concerning distributions from the trust. A beneficiary with great financial needs may not wish their siblings to know what is being distributed for their benefit. Some irrevocable trusts have errors, or circumstances have changed so that the trust is not fulfilling its purpose. Decanting can be useful to change such an irrevocable trust and restores some flexibility.
What are some of the trust terms that can be changed through decanting?
The list of terms that can be changed is very broad, and includes amending administrative provisions, combining or segregating trusts,modifying powers of appointment or trustee succession provisions, and placing the share of a disabled beneficiary into a special needs trust.
What is required to decant a South Dakota trust?
South Dakota law simplifies the process of decanting so that it does not require the approval of a court or of the beneficiaries. South Dakota requires only that 20 days’ notice be given to the beneficiaries and that the trustee make a written record of the decanting.
May the trustee seek approval of the South Dakota court?
Yes, court approval is optional. If the trustee believes a beneficiary might challenge the decanting, court supervision may be invoked and the decanting maybe approved.
Are there tax consequences to decanting?
South Dakota has no state income tax consequences, and there should be no federal income tax consequences from decanting. Generation-skipping taxes and gift taxes need to be considered but should be avoided with careful planning.