In North Carolina, protecting the best interests of an individual through a trust can ensure that the assets set aside fund the needs of the beneficiary in the future. The guardian of the trust, called the trustee, handles the distribution of funds and may make changes to the document, but what happens when an irrevocable trust requires modifications or changes?
At Davis Curry Law, our Hendersonville estate planning attorney can assist with many legal needs, including decanting a trust and whether that is an option for your future goals.
What Does It Mean To Decant a Trust?
While irrevocable trusts protect the beneficiary from changes that may affect his or her financial future, these documents must sometimes undergo modifications if the grantor, or the creator of a trust, undergoes life events that might affect its funding.
However, North Carolina law allows for a process called decanting, which gives the trustee the ability to create a new trust by funding it with the assets from an existing trust or distributing assets in a new way from previous trusts.
Trust decanting can allow grantors and trustees to make any necessary changes to an irrevocable trust without breaking the conditions that protect the beneficiary, or receiver, of the trust funds.
Does North Carolina Law Allow Decanting?
According to the North Carolina General Assembly, Article 8B holds all the state’s decanting laws.
If a trustee wishes to decant the trust they control, circumstances must meet a number of criteria, including:
- The trust instrument allows the decanting.
- An in-depth review of the original trust is completed.
- The beneficiary list of the decanted trust must remain the same as the original trust.
The latter criterion may undergo modification if the courts allow it, such as when powers of appointment require updating or deleting.
Why Decant a Trust?
Many individuals who make irrevocable trusts in North Carolina may not realize that many terms and conditions may change over time, especially in trusts with long lives.
Not all trusts require decanting; however, several different circumstances may require it in order for the beneficiaries to best benefit from the terms and conditions laid out in the document.
Drafting and wording errors
An irrevocable trust may contain mistakes or require updates to its verbiage. This includes correcting dates, birth names and grammatical errors. If the trust demands very specific terms or needs repairing of any problems that may affect the beneficiary, then decanting an irrevocable trust allows a trustee to correct them without breaking any state trust laws.
Adding or modifying spendthrift provisions
Many trusts include spendthrift provisions, which prevent the beneficiary from receiving all their assets at once or before they reach a certain age, and from securing credit based on the trust’s future worth. These provisions protect the beneficiary from overspending and from damaging his or her future credit.
Amending trust terms or conditions
Some individuals create irrevocable trusts because they believe it best protects the funds they contain. While this type of trust does prevent common errors by both trustees and beneficiaries, the trust itself may fall out of date or the conditions of the trust could change depending on births, deaths and the grantor’s financial changes.
For example, if the assets within an old trust grow far beyond expectations, decanting allows the trustee to redistribute funds via the new trust.
How Does the Decanting Process Work?
Once trustees ensure that decanting in North Carolina is legally permitted, they can move ahead in several different ways.
One common procedure is to create a new trust with improved conditions and verbiage and then transfer the funds from the original account into the new one. Another decanting option depends on the existence of a previous trust, so the trustee can use it to distribute the funds from the outdated or incorrect irrevocable trust.
In most cases, trustees simply create a new trust so they can transfer over the desired conditions and leave the unwanted ones behind without breaking the law. While North Carolina trust law allows for most decanting procedures, it restricts decanting when a trust beneficiary is also the trustee.
Trustees may also want to avoid involving the grantor in any decanting procedures, as any changes to his or her rights within the new trust could cause tax consequences.
What Are The Pros and Cons Of Decanting?
Trustees should consider all the different facets of decanting an irrevocable trust:
- Pro: It protects the assets.
- Pro: Trustees can create new and more effective trusts.
- Con: There are possible gift tax consequences.
- Con: Decanting laws and guidelines may vary from location to location
While decanting can allow trustees to create new trusts or amend how they distribute the assets, not all trust funds benefit from this process. Before considering this action, trustees ought to carefully review the changes they intend to make and whether their position within the trust allows them to do so.
The trust decanting process can raise dozens of questions and leave you wondering if doing so is in the best interests of the beneficiary. If you need assistance with decanting a trust, then Davis Curry Law stands by to answer your questions and provide you with peace of mind for the future. Contact our estate planning attorney in North Carolina to begin.