March, 2019 Newsletter
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Steve Oshins Releases 6th Annual Trust Decanting State Rankings Chart with 29 Decanting Jurisdictions Ranked!
"Just like last year’s Chart, the 6th Annual Trust Decanting State Rankings Chart includes links to each state’s decanting statute.
The states are ranked based on the ease of use and amount of flexibility provided by their statutes. Many lower-ranked state statutes have flexibilities that higher-ranked state statutes lack and therefore are often better in certain situations. So the reader should not necessarily conclude that a higher-ranked state is always better."
Frequent LISI contributor Steve Oshins, Esq., AEP (Distinguished) authors three different annual state rankings charts and one state income tax chart:
- The Annual Domestic Asset Protection Trust State Rankings Chart
- The Annual Dynasty Trust State Rankings Chart
- The Annual Trust Decanting State Rankings Chart
- The Annual Non-Grantor Trust State Income Tax Chart
Steven J. Oshins, Esq., AEP (Distinguished) is a member of the Law Offices of Oshins & Associates, LLC in Las Vegas, Nevada. He was inducted into the NAEPC Estate Planning Hall of Fame® in 2011. He was named one of the 24 "Elite Estate Planning Attorneys" and the "Top Estate Planning Attorney of 2018" by The Wealth Advisor. Steve was also named one of the Top 100 Attorneys in Worth and is listed in The Best Lawyers in America® which also named him Las Vegas Trusts and Estates Lawyer of the Year in 2012, 2015 and 2018 and Tax Law Lawyer of the Year in 2016. He can be reached at 702-341-6000, ext. 2 or firstname.lastname@example.org. His law firm’s website is www.oshins.com.
Steve recently updated his Decanting State Rankings Chart to include its newest members – Alabama, California and Georgia. With the addition of these three states, there are now 29 states that have decanting statutes.
Steve will be presenting a 90-minute webinar hosted by LISI from 3:00 to 4:30 pm EST on Friday, February 8th titled, "2019 Trust Decanting Update". Please register at this link.
Now, here is Steve Oshins’ commentary:
Trust decanting is the act of distributing assets from one trust to a new trust with different terms for one or more beneficiaries of the first trust. Just as you can decant wine by pouring it from its original bottle into a new bottle, leaving the unwanted sediment in the original bottle, the distribution trustee can pour the assets from one trust into a new trust, leaving the unwanted terms in the original trust.
For many years, practitioners have struggled to find ways to change the terms of an irrevocable trust. However, through common law and through the decanting statutes that have been enacted in many jurisdictions, it is now possible to "modify" an irrevocable trust by having the trustee distribute the trust assets into a new or different irrevocable trust for one or more of the same beneficiaries of the first trust.
Decanting is essentially a "do-over."
Just like last year’s Chart, the 6th Annual Trust Decanting State Rankings Chart includes links to each state’s decanting statute.
The states are ranked based on the ease of use and amount of flexibility provided by their statutes. Many lower-ranked state statutes have flexibilities that higher-ranked state statutes lack and therefore are often better in certain situations. So the reader should not necessarily conclude that a higher-ranked state is always better.
The Chart provides a simple guide for an estate planner who can use it to quickly analyze which states might be used to accomplish the decanting goals for a particular client situation. Regardless, as decanting has become so important in the estate planner’s playbook, it is important to understand the differences among the states.
Alabama, California and Georgia
Alabama and California both adopted the Uniform Trust Decanting Act. The question that one must always ask is whether uniformity is good or bad. The answer depends upon who is being asked.
In this author’s opinion, uniformity tends to lead to averageness. Not always, but sometimes. The reason for this is that a committee made up of both practitioners and professors often ends in compromise which isn’t necessarily bad, but also which generally doesn’t lead to a high ranking on the State Rankings Chart which rewards flexibility over appeasing both sides on policy issues.
Each state that has adopted the Uniform Trust Decanting Act has received a Total Score of 65 on the Chart which was good enough for a tie at #16. This is certainly a good score and allows many potential decantings to be done using these states’ laws. But it won’t put those states in the running for the out-of-state client’s trusts given the middle ground taken on many issues.
Thirteen Decanting Opportunities
Following are thirteen reasons to consider decanting an irrevocable trust:
1. Extending the term of the trust: Many trusts are drafted to make mandatory distributions to the beneficiaries at staggered ages. This can open the trust assets up to unnecessary estate taxes, creditors and divorcing spouses. The trustee should consider decanting the trust into a long-term Dynasty Trust that lasts for multiple generations.
2. Changing a support trust into a discretionary trust: Many trusts are drafted to give the trustee the power to make distributions to the beneficiaries for their health, education, maintenance and support. These trusts are often called support trusts. Depending upon state statutes and case law, support trusts are often available to certain classes of creditors, including divorcing spouses. A discretionary trust, on the other hand, gives the trustee absolute discretion over distributions and thus generally protects the assets from all classes of creditors. Thus, decanting a support trust into a discretionary trust can be a valuable strategy.
3. Decanting to modify trust provisions to avoid state income taxes by avoiding the various state income tax long-arm statutes and/or to sprinkle income to lower tax state/federal tax bracket taxpayers: This will often involve removing and replacing trustees who live in states that tax trusts based on residency of a trustee or place of administration or other factors depending upon applicable state laws. It can also involve decanting to remove mandatory income distributions in order to retain income in the trust to save state income taxes and/or sprinkle the income to lower federal/state bracket taxpayers.
4. Decanting to modify a non-grantor trust to force the income tax liability to low bracket taxpayers: This involves giving low bracket taxpayers the power to withdraw the income from the trust in order to tax them on the income under IRC §678(a). Rather than giving a power of withdrawal over the entire corpus, the power is only over the income. Contrast this with the traditional Beneficiary Defective Trust which gives the beneficiary the power of withdrawal over the entire corpus.
5. Decanting a grantor trust into a non-grantor trust: Many irrevocable gift trusts have been established as grantor trusts in order to leverage the trusts with income tax-free installment sales and to "burn" the taxable estate by having the settlor continue to pay the income tax each year. Many, if not most, of these installment sales should be unwound and these trusts should be decanted into a non-grantor trust in order to avoid state income taxes and/or sprinkle income to lower bracket beneficiaries or to take advantage of the IRC §678(a) rules to shift the income tax liability. And even if existing installment sales are continued for appropriate clients, certainly estate planners should consider partially decanting those trusts in order to move excess equity out of those trusts and into non-grantor trusts.
6. Correcting drafting errors or ambiguous terms: Many trusts have drafting errors or ambiguous terms that need to be fixed. Some trusts give a trust protector or independent trustee the power to fix these types of errors, while others do not. Decanting the trust into a new trust can cure these problems.
7. Changing the governing law of the trust: Many trusts were established in a jurisdiction with a state income tax that can be avoided or bad creditor protection statutes or case law that can also be avoided. While many of these trusts have a provision allowing the trustee to move the trust to a different situs, many of them do not. This is easily solved by decanting the trust into a trust domiciled in a superior trust jurisdiction. This also includes the ability to decant a Dynasty Trust or Domestic Asset Protection Trust from one state to a state with superior laws.
8. Modifying powers of appointment: Many trusts do not contain powers of appointment which would enable a person to change the succeeding interests of the beneficiaries and how they receive the assets. In today’s planning world where the estate tax exemption is much higher than it had been in the past and in which income tax reduction has been so much more important, it is often also useful to be able to give a beneficiary a general power of appointment over certain trust assets in order to achieve a new income tax basis at that person’s death. This can be accomplished through decanting.
9. Changing trustee provisions: Many trustee provisions do not allow for a succession of trustees or for a list of people who can name successors, while other trusts have a succession of trustees who the settlor may have wanted at the time the trust was established, but who would now not be selected by the settlor if the settlor could redo the trust today. This can be changed through decanting.
10. Combining trusts for greater efficiencies: Many of our clients set up trusts at different times, and sometimes with different law firms over the years. Ultimately, the family has more trusts than are needed. If the trusts aren’t sufficiently similar enough to merge them, then they can be combined through decanting one trust into another or by decanting multiple trusts into a newly formed trust.
11. Separating trusts: Many trusts have been drafted so the entire family benefits from one large pot trust. Although this sometimes makes sense in certain situations, more often than not it creates problems because different beneficiaries have different needs and different investment philosophies. A large pot trust can be decanted into separate trusts for each beneficiary so the beneficiaries have their own autonomy.
12. Creating a special needs trust: It may not have been contemplated when the initial trust was drafted that there would be a beneficiary that has special needs and will require a trust that preserves eligibility for public benefits. A trust can be decanted to add this language.
13. Qualifying a trust to own S corporation stock: Many trusts have been drafted without the trust scrivener contemplating the possibility that the trust would need to be able to own S corporation stock at some point. This includes other forms of business entities that elect to be taxed as an S corporation. If the trust agreement doesn’t give a trust protector or independent trustee the power to add such provisions, the trust can be decanted to add the provisions.
This list is not exhaustive. There are numerous other reasons to decant a trust.
The 6th Annual Trust Decanting State Rankings Chart adds Alabama, California and Georgia to the mix. This chart provides links to each of the 29 decanting jurisdictions’ state statutes, thereby providing a valuable resource to estate planners all over the country.
Decanting can be used to save taxes, to protect assets from creditors and divorcing spouses, to fix drafting errors and to make many other modifications that historically were unavailable to estate planners.
HOPE THIS HELPS YOU HELP OTHERS MAKE A POSITIVE DIFFERENCE!
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