Asset Pouring: California Enacts New Decanting Statute.

• Author: Allmon, Michael
• Position: Regulatory update

trusts are a common estate planning tool in California to direct assets after someone's death. Assets held in a trust are still potentially subject to estate tax, depending upon the total estate value, but should avoid a probate proceeding for their disposition and management.

Most grantor trusts, treated as the taxpayer for lax purposes, are written such that they become irrevocable in whole or part at the "grantor's" death. Sophisticated estate planning also often utilizes irrevocable trusts to remove assets from the grantor's estate (for example, by making gifts to the trust) to avoid payment of estate tax on those assets.

Unfortunately, many people do not update their trusts to reflect current law or personal changes, and the irrevocability of these trusts can be problematic.

In California, changing such trusts before the new decanting law typically involved getting the consent of all beneficiaries, which might not be possible, or petitioning a court, which might result in an unfavorable outcome. Many estate planning attorneys routinely include '*decanting" language in their trust documents, ensuring that the trust has built-in options that allow for change.

Many other states are more flexible with respect to such modification. While decanting statutes exist in many other states, California did not have one until it enacted the Uniform Trust Decanting Act in the fall. The act applies to all California trusts unless the trust instrument expressly elects out.

The Details of Decanting

Trust decanting provides a trustee the ability to modify or remove trust provisions from a trust, including an irrevocable trust. Such decanting takes place by "pouring" trust assets from an old trust into a new one, or by modifying the actual trust. In all cases, the trustor's original intent must be honored.

Unfortunately, the new statute is limited in scope; thus, only some trusts may be decanted or have certain provisions changed. Subject to restrictions, a trustee can also use the decanting powers to change a grantor trust to a non-grantor trust, or vice versa.

Two categories of modification, or decanting, are allowed: those relating to trustees with "limited distributive discretion" and those applicable to trustees with "expanded distributive discretion." The more discretion allowed to the trustee with respect to principal distributions, the greater the decanting modification options permissible.

Very often, a trust grants a trustee the power to...