Trust Decanting

Purpose:
To move assets from one trust to another.

Limitations:

  • Beneficiaries must have commonality of at least one current or future beneficiary that distributions can be the object of to exercise of this power.
  • Trustees can only exercise this power if they are not themselves a beneficiary and if the beneficiaries have no right to change trustees on the original trust unless the power is only be exercised in reference to health, education, maintenance or support distributions. This eliminates the potential for the trustee to increase payments to self or to a beneficiary who can change the trustee on the original trust. Same trustee not required on both trusts.

Specific to SD Statute:

  • SD does not require absolute discretion as trustees to enact this statute.
    The trustee is limited by the power they have-can only move or reallocate based on the power they have to distribute.
  • SD statute also differs because of the ability to reduce an income interest unless it falls into one of the following categories-CRT/GRAT/Exception for Marital Deduction. This brings to question whether or not certain trust types are viable if the income interest is reduced or eliminated-tax implications of changes need to be recognized when considering.
  • This statute also provides for corpus or income invasion for a future beneficiary who may have had only access to income distributions. Therefore, beneficiaries that normally would have only received discretionary distributions from one specific category may have access to both categories under this statute.
  • No notice to or consent of beneficiaries or court required.
  • Written document exercised by trustee must be filed with trust document.
  • Power can not be applied to assets that the beneficiary has a current right to withdraw. Vesting period on assets cannot be extended by this power either.

Specific Situations where this would be of beneficial:

  • Change of beneficiary circumstances (eg. Power to distribute to “second trust” instead of directly to a beneficiary should circumstances warrant.)
  • Change in administrative provisions and/or lowering costs
  • Change of trustee
  • Extending termination date of trusts (with SD law this is mostly non issue)
  • Correct trust drafting errors
  • Converting from grantor to non-grantor trusts or vice versa
  • Change of governing law-situs (opportunity to avoid state or local tax)
  • Dividing property held in trust

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