Irrevocable trusts are set up so they can’t be changed or canceled by the creator; however, there are times when these trusts may not reflect the intent of the creator as time progresses. One of the hallmarks of an irrevocable trust is that the creator relinquishes control of the trust’s assets to the trustee.
If the trustee determines that the irrevocable trust isn’t serving the intended purpose, they may move to decant it. This means that the trustee can move the assets from the irrevocable trust into another trust, but this must be handled carefully. California is one of 27 states that allow decanting trusts to occur.
Specific restrictions occur
One of the most critical considerations when decanting a trust is that it must be done in the best interests of the beneficiaries without violating the intent of the creator. Statutory restrictions prevent the new trust from restricting or expanding distributions from the trust beyond the scope of what was present in the original trust. The decanting also can’t add new beneficiaries.
Tax implications
The United States Internal Revenue Service issued a key ruling that notes trust decanting certain grandfathered trusts doesn’t subject those trusts to any of the generation-skipping transfer liabilities as long as the original tax status of the trust is maintained and the perpetuities limitations remain the same.
Everything that has to do with estate planning, including decanting a trust, must comply with applicable laws. Because some of these circumstances are complex, it may be beneficial to work with an individual who is familiar with the circumstances and the laws.