Aug. 1, 2022

This paid piece is sponsored by Woods, Fuller, Shultz & Smith PC.

By Heath Oberloh, shareholder, Woods Fuller

If you are a wine connoisseur, you likely are familiar with the practice of decanting a bottle of wine. Decanting is the process of pouring wine from one container to another. Wine is often decanted to separate the liquid from sediment and to improve the wine’s flavor by exposing the wine to fresh air.

Like wine, trusts can be decanted. Similar to decanting a bottle of wine, when you decant a trust, you pour assets from one trust into another trust. A trust may be decanted to remove unwanted “sediment,” such as deadbeat beneficiaries or obsolete or ambiguous trust terms, or a trust may be decanted to improve the administrative or asset protection provisions of it.

There are many reasons why you might decide to decant a trust, including to:

• Extend the term of the trust.
• Change a support trust into a discretionary trust for maximum creditor and divorce protection.
• Change a grantor trust into a nongrantor trust to save state income tax and/or to sprinkle taxable income to beneficiaries in lower tax brackets.
• Change the governing law of the trust.
• Indirectly add a beneficiary by giving him or her a broad power of appointment.
• Obtain a step-up in income tax basis.
• Correct drafting errors or ambiguous terms.
• Remove a mandatory income distribution.
• Accelerate a future beneficiary’s interest.
• Change trustee or administrative provisions.
• Combine trusts for greater efficiencies.
• Separate trusts so each primary beneficiary has his or her own separate trust.
• Separate trusts to expand the number of $10 million qualified small business stock exemptions.

Essentially, trust decanting is used to improve an irrevocable trust by creating a new trust with more desirable terms.

Currently, over half of the states, including South Dakota, have trust decanting statutes. Different states have different statutes governing trust decanting, and some allow for more extensive trust remodeling than others. Like its other trust laws, South Dakota’s decanting laws are considered the best in the nation as they allow a trust to be decanted for almost any purpose.

Is your trust living up to its fullest potential? Do you need to remove some sediment from your trust? Would like you like to enhance your trust in some way? Talk to a Woods Fuller attorney to find out if decanting your trust may be an option for you.