Many irrevocable trusts that were drafted years ago contain life insurance polices that have lapsed or are close to lapsing. Many people often think there is nothing that can be done about an old life insurance policy that is in an irrevocable trust, but did you know that you can actually sell those policies through a secondary market? You can access thousands of dollars you didn’t know you had.

The process of trust decanting allows trustees to change certain terms by metaphorically moving the assets from an old trust into a new one with more favorable terms that meet their needs better. Altering a trust has become much simpler with the decanting process and gives trustees options that they didn’t have before.

Decanting is most commonly used to make changes to an irrevocable trust. This type of trust is often used because of its tax advantages and protection. It was extremely costly and difficult in the past to make any alterations to an irrevocable trust. However, decanting is less expensive and is done with a more simple and private process that does not involve the courts.

There are several other reasons a trustee may decide to decant. For example, the trustee can move the trust to a state that offers better flexibility in regards to taxes or managerial roles within the trust. They can also change the age at which payouts are received by the beneficiary or name a new trustee if they wish to retire. The trustee is not required to involve the beneficiaries. However, it is usually advised to get support so that the process runs smoothly.

So far there are 21 states with decanting statutes. It is important to note that the exact stipulations differ in each state and that not all trusts are eligible for this method. For example, in some states, the trustee is allowed to divide and delegate their role among multiple people. Dividing the roles would include someone to administrate paperwork, one to manage the investments and one to oversee payments to the beneficiaries.

There are limits to what decanting can do. One area that is unclear is taxation. In the instance that a trustee uses decanting to move a trust to a different state with better tax benefits, they might not necessarily be freed from taxation in the original state. If the new trust still has real estate that is generating income, then decanting the trust will not stop the state from taxing it. Other tax-related implications such as income taxes, gifts, and generation-skipping transfer taxes are also gray areas.

Luckily, there is a standard model being drafted that states can use as a template if they want to allow decanting. Some professionals in the industry also expect that states that already have decanting laws will use the template to modify their current statute or sections of it. Using this model as a template will give each state a sense of uniformity that make decanting laws more clear and consistent.

Rice Law Group is here to help.

If you have an irrevocable trust that you would like to make changes to, contact Rice Law Group. If you have a life insurance policy, you can access money you didn’t know you had and make necessary changes to an irrevocable trust. Contact us at (212) 944-1180 or by filling out our online contact form online.