While the word puts in mind fine wines and the enjoyment of taste and smell, decanting is a term applying also to distributing assets from an existing, often problematic trust into a new one. Done right, this is a valuable exercise, but if not handled correctly, there can be painful disputes.

“Decanting” is a term often associated with pouring red wine into a glass container with the purpose of making the wine breathe – to “open it up.” Even the more modest vintages can be improved this way, so some might argue. 

But the term can also convey transferring a broader range of things from one place to another. That includes assets held inside trust structures. Decanting is when a trustee exercises their authority to distribute assets from an existing, often outdated or problematic trust into a new trust with updated terms. The beneficiaries generally remain the same, but the governing terms can be meaningfully revised. (Ironically, that might even include a portfolio of collectible assets, such as fine wines.) 

With a multi-trillion-dollar intergenerational wealth transfer in the works, it is likely that a lot of assets could be decanted. It’s unsurprising that advisors and specialists in the trusts space are focusing on it. As the Wall Street Journal noted a few days ago, older US citizens are sitting on an estimated $110 trillion of wealth, but as lifespans expand, Generation X, Millennials and Generation Z might have longer to wait.

“Decanting is a fiduciary act, not a planning shortcut. Every trustee who decants is making a legally significant decision that will be judged against the standard of what a prudent trustee would have done for the benefit of all beneficiaries,” Melissa Rodriguez, a partner at Day Pitney, based in Miami, told Family Wealth Report in an interview. “Treat it with that gravity, get independent counsel, document everything, and communicate proactively. Done right, it's an extraordinarily powerful tool for preserving a trust's purpose across generations.”

Most of the action takes place in irrevocable trusts – particularly older dynasty trusts, generation-skipping trusts, and certain types of special needs trusts. 

“These are structures where the grantor is often deceased or incapacitated, the original drafting attorney is long retired, and the terms simply haven't kept pace with the family's reality or the legal environment. Delaware, South Dakota, and Nevada are the states where the most decanting activity occurs, because their trust statutes are permissive and their trust law jurisprudence is well developed,” she said. 

More US states are adopting decanting statutes. Several states have adopted the Uniform Trust Decanting Act (UTDA), a model law created by the Uniform Law Commission to standardize decanting procedures. States such as South Dakota and Nevada are known for their flexible decanting laws, while others like Delaware and Alaska impose stricter requirements.

Some states, such as New York, have their own decanting statutes independent of the UTDA. Modifying a trust may still be possible in states without decanting laws but typically they require court involvement and unanimous beneficiary consent, according to guidance from Withum, an accounting and advisory firm. 

The process
Decanting can be used to update outdated provisions, adapt to changing tax laws, or address evolving family circumstances. But when trustees alter trust terms, particularly without beneficiary consent, these changes can raise difficult questions about fiduciary duties, beneficiary rights, and the limits of trustee authority.

Rodriguez said the first driver of the trend is the adoption by more than 30 states of explicit decanting statutes – such as New York, Delaware, Nevada and South Dakota – meaning that trustees have clearer legal authority, reducing the risks of costly litigation. 

“That legal comfort level has unlocked usage. Second, families are living longer. A trust drafted in 1995 for a 65-year-old grantor may now be administered for a 95-year-old beneficiary in circumstances nobody anticipated. Life changes such as divorce, addiction issues, or a beneficiary with special needs who wasn't identified at drafting can make the original terms genuinely harmful rather than helpful,” she said. “Third, tax law keeps changing. The 2017 Tax Cuts and Jobs Act, and ongoing uncertainty about estate and gift tax exemptions, have prompted trustees and their counsel to consider whether existing trust structures are still tax-optimal.

“Decanting into a trust with a different situs (e.g., a high state income tax state to a no income tax state) can produce meaningful tax savings. Finally, there is simply more awareness. Trustees, trust companies, and advisors are more sophisticated than they were 20 years ago. Decanting has moved from an obscure common-law concept to a mainstream planning tool,” she said. 

The devil is in the detail, as is usually the case.

“Process and documentation are everything. The trustee needs a contemporaneous written record demonstrating that the decision served all beneficiaries. Where changes are significant or any beneficiary has signaled concern, seeking court approval or a non-judicial settlement agreement provides powerful protection against later challenge,” Rodriguez said. “The key substantive guardrail is this: decanting should never materially diminish the interests of a current beneficiary in favor of others. That's where most litigation originates.”

With remarriage after divorce or death of a spouse creating potential arguments between children and stepchildren and the like, this can cause tensions when trusts are in play. 

“A surviving spouse and children from a prior marriage have fundamentally opposing interests. One wants maximum access to trust assets now. The other wants to preserve what they'll eventually inherit,” Rodriguez said. “That tension exists in any trust administration, but decanting sharpens it because it gives the trustee the ability to restructure the rules – and whoever controls the restructuring can tilt the outcome.”

Trustees must be clear about what’s the point of decanting from one structure to another, Rodriguez said. 

“The trustee carries the heaviest burden. They must ask themselves with brutal honesty: Am I doing this for the benefit of all beneficiaries, or am I being influenced by a relationship with one faction of the family, or by my own administrative convenience? If a corporate trustee is proposing to decant into a trust that happens to extend their fee tenure, that needs independent review. Trustees should insist on independent legal counsel for the decanting process, separate from any attorney who represents the family or a particular beneficiary,” she said.

A different take
Christine Quigley a partner at ArentFox Schiff, and private clients, trusts and estate practice leader at the firm, told FWR that decanting is not, in her view, happening more than before.

One trend, she said, is the increasing popularity of Section 678 trusts. They are named for section 678 of the Internal Revenue Code which says, among other things, that a person who has a withdrawal right over a portion of a trust will be deemed the “owner” of that trust for income tax purposes. 

Quigley said these trusts come in two primary flavors:

-- A “BDIT,” or Beneficiary Defective Irrevocable Trust, sometimes referred to as a Beneficiary Defective Inheritor’s Trust. A third party creates a trust and funds it with a nominal amount (usually $5,000), granting the beneficiary a right to withdraw that initial contribution. That withdrawal right lapses, but the trust remains income taxable to the beneficiary. The beneficiary is usually the true wealth holder in these situations and will sell their own assets to the trust. The sale is not subject to income tax because the trust is deemed to be the same taxpayer as the beneficiary, but then the assets are expected to grow outside of the beneficiary’s taxable estate.

-- A “BDOT” or Beneficiary Deemed Owner Trust. These instead grant the beneficiary a right to withdraw taxable income which lapses over time – again making the trust income taxable to the beneficiary. In these trusts, the “beneficiary” is often an older, non-Dynastic Trust (not GST exempt). Old trust will then sell its assets to the BDOT in a non-taxable sale with the goal that the assets grow inside the BDOT and are GST exempt/dynastic.