A Guide to Decanting, 1114 SCBJ, SC Lawyer, November 2014, #18

AuthorDouglas O'Neal and Aaron Nelson, J.

A Guide to Decanting

Vol. 26 Issue 3 Pg. 18

South Carolina BAR Journal

November, 2014

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0 Douglas O'Neal and Aaron Nelson, J.

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Individuals create irrevocable trusts for various reasons. Some trusts are created solely for tax purposes, while others are formed for creditor protection, or to provide for minor, disabled or irresponsible children. However, over the term of a trust's existence circumstances change, and the trustees or beneficiaries of a trust may determine that it is best to alter certain provisions of an irrevocable trust that for one reason or another are no longer desired. Perhaps the federal tax laws have changed, or unanticipated family situations have arisen.

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Irrevocable trusts cannot be amended easily. Modifications and amendments to irrevocable trusts generally require court involvement, which can result in substantial costs to the trust. However, in South Carolina, altering the terms of an irrevocable trust is now possible through a process called "decanting." Effective November 1, 2014, South Carolina's Trust Code was amended to add S.C. Code § 62-7-816A (referred to herein as the "statute"), which statutorily authorizes the decanting process.

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Decanting means the pouring from one vessel to another. When wine is decanted, it is poured from its bottle into another vessel. Similarly, trust decanting is the pouring (or distributing) of the property of one trust into another trust. While some practitioners argue that the common law authorizes decanting in every state, decanting statutes are a growing trend around the nation. The National Conference of Commissioners on Uniform State Law has established a committee on trust decanting that has prepared drafts of a uniform decanting act. The rationale behind the statute granting a trustee the authority to decant a trust is based on the principle that a trustee who has the discretion and authority to distribute the property held in a trust (the "distributing trust") outright to a trust beneficiary; the trustee also has the discretion and authority to distribute the same property to a second trust (the "receiving trust") for the benefit of the same beneficiary.

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Under the statute, the receiving trust may be different in limited ways from the distributing trust. Thus, altering the terms of the distributing trust can be accomplished by drafting the receiving trust in a manner that removes any undesired provisions from, or adds any desired provisions to, the distributing trust. When the distributing trust distributes its assets to the receiving trust, the management and distribution of those assets become subject to the terms of the receiving trust, effectively amending the terms of the irrevocable distributing trust.

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Decanting process in South Carolina

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0The action of decanting is the means by which changes may be made to an irrevocable trust. As such, a trustee and its advisors must ensure each of the steps discussed in this section comply with the statute.

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Decanting instrument

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Decanting is an action by the trustee of the distributing trust pursuant to the trustee's discretionary powers granted in the...

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