Modernizing an Existing Irrevocable Trust
Posted on December 19, 2024 by Amanda Whitely
Many savvy estate plans include the use of an irrevocable trust that was established many years ago. However, the very nature of an irrevocable trust means that once the trust agreement is finalized, the terms of that trust cannot be amended or modified. Over the years, tax laws have changed and, depending on when the irrevocable trust was created, those trusts likely do not have the latest language to be the most tax efficient. The decanting process is a powerful way to modernize and update an existing irrevocable trust with the latest tax and administrative provisions.
In 2017, and amended in 2020, Washington enacted a trust decanting law that is based on the Uniform Trust Decanting Act. Essentially, the process of decanting involves the trustee of the irrevocable trust distributing the trust assets from the original trust into a new trust with updated administrative provisions. Decanting is a non-judicial process that provides the trustee with a way to modify and modernize an irrevocable trust in a relatively simple and efficient manner without involving the courts. Decanting is primarily used to modernize the irrevocable trust to achieve a variety of favorable tax or non-tax results and to address unforeseeable changes in state law or other circumstances involving the management or administration of the irrevocable trust.
Possible modifications to an irrevocable trust through the decanting process include:
- Modifying administrative provisions, such as restrictions on investment powers or adding the authority to create a “directed trust;”
- Updating the trustee powers to provide greater flexibility;
- Adding special provisions regarding life insurance policies owned by the irrevocable trust;
- Adding trust protector provisions; and
- Adding investment advisor provisions.
There are risks involved in the decanting process because this is a relatively new area of law and the tax consequences of decanting are somewhat unclear. These risks include income tax issues, gift and estate tax issues, and GST tax issues. In general, decanting does not result in a realization event if the decanting is authorized by the trust agreement or under state law. Here in Washington, decanting is specifically authorized by state law. In addition, decanting may cause gift and estate tax issues if the beneficiary of the irrevocable trust consents to or agrees to a decanting that reduces the beneficiary’s interest in the trust, such as by shifting the beneficial interest in the trust or delaying the vesting of the beneficiary’s property interest in the trust. Further, there could be GST tax issues involved with the decanting of a grandfathered GST trust and there should be a review of the safe harbor provisions for grandfathered GST trusts to confirm that the decanting of the trust will not affect the GST exempt status of the trust. These are just a few of the potential tax risks involved in decanting and an experienced estate planning attorney should be retained to review and advise on these risks.
The Estate Planning Attorneys at Lasher Holzapfel Sperry & Ebberson PLLC are available to meet with you to discuss your current estate plan and irrevocable trusts and draft an estate plan that best matches your goals.
