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Trust Law/Level VIII · Trusts of the world/8.3 Running a trust/Lesson 5

Decanting and modifying an irrevocable trust

The main US routes for changing an irrevocable trust: decanting, modification by consent or by the court, nonjudicial settlement agreements and trust protectors, and the federal tax questions decanting raises.

Education, not legal advice. Trust law changes from country to country and state to state, and the right structure depends on your situation. Anything you sign should be drafted or reviewed by a qualified lawyer where you live.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. Cheapest change: a nonjudicial settlement agreement among all interested persons (UTC §111) can settle interpretation, trustee appointment, pay or place of administration without court. Catch: it cannot violate a material purpose and must contain terms a court could properly approve.
  2. Decant under statute without consent or court: Maine’s version lets an authorized fiduciary act after at least 60 days’ notice to the settlor, qualified beneficiaries and others (18-B §1207). Catch: a trustee with limited discretion must give each beneficiary substantially similar interests (§1211).
  3. Draft a trust protector power into new trusts to amend administrative terms or change governing law without court. Catch: under the Uniform Directed Trust Act a trust director generally owes fiduciary duties, and powers used outside their terms or in bad faith can be challenged.
  4. Keep a grandfathered trust’s generation-skipping exemption by decanting only where the instrument, or state law when it became irrevocable, allowed it without beneficiary or court consent (Treas. Reg. §26.2601-1(b)(4)(i)(A)). Catch: the new trust must not postpone vesting beyond the original perpetuities period.
  5. When private routes fail, a court can modify for unanticipated circumstances (UTC §412) or to meet the settlor’s tax objectives, even retroactively (§416). Catch: decanting that changes beneficial interests has uncertain federal tax effects; the IRS paused rulings on it (Notice 2011-101).

MaterialsUniform Trust Code §§111 and 410 to 417 as enacted in a state, such as Maine Revised Statutes title 18-B, free on the legislature’s websiteA state decanting statute, such as Maine’s Uniform Trust Decanting Act (title 18-B, chapter 12), free on the legislature’s websiteIRS Notice 2011-101, on transfers from one irrevocable trust to another, free on irs.gov

Wonder

  1. Where does a trustee’s power to decant come from if the trust document does not mention it?
  2. When can beneficiaries change an irrevocable trust without the settlor, and when do they need a court?
  3. Why has the IRS not settled the tax treatment of every decanting?

Explore

  1. ‘Irrevocable’ means the settlor alone generally cannot change or end the trust, not that its terms can never change. In the US, several routes exist, and which are available depends on the state and the trust instrument. Decanting is a trustee’s exercise of a distribution power to transfer property from an existing trust (the first trust) to a new or different trust (the second trust) with different terms, much as wine is poured into a new vessel. The power may come from the trust terms, from a state decanting statute or, in some states, from case law. This lesson describes these routes and does not recommend any of them.
  2. The Uniform Law Commission approved the Uniform Trust Decanting Act (UTDA) in 2015; it has been enacted in a number of states, which vary, and other states have their own decanting statutes. Maine’s version (title 18-B, chapter 12, enacted 2021) is an example. Under it, an authorized fiduciary may decant without anyone’s consent or court approval but must give at least 60 days’ notice to persons including the settlor, the qualified beneficiaries and other fiduciaries (§1207). A trustee with only limited discretion, such as distributions under an ascertainable standard, must give each beneficiary substantially similar interests in the second trust (§1211). A court may be asked for instructions or approval (§1208).
  3. The Uniform Trust Code (UTC) provides court-based routes. Under §411, if the settlor and all beneficiaries consent, a noncharitable irrevocable trust may be modified or terminated even if this is inconsistent with a material purpose; the model text makes this nonjudicial, but some states, such as Maine, require a court order. Without the settlor, all beneficiaries may terminate the trust only if the court concludes continuance is not necessary to achieve any material purpose, or modify it if this is not inconsistent with a material purpose. Under §412, a court may modify administrative or dispositive terms, or terminate the trust, if unanticipated circumstances mean doing so will further the trust’s purposes. Under §416, a court may modify terms to achieve the settlor’s tax objectives, even retroactively.
  4. Under UTC §111, ‘interested persons’, meaning those whose consent would be needed for a binding court-approved settlement, may enter into a binding nonjudicial settlement agreement on any matter involving a trust. Matters listed include interpreting the terms, approving a trustee’s report or accounting, appointing a trustee or setting pay, moving the place of administration and a trustee’s liability. Such an agreement is valid only to the extent it does not violate a material purpose of the trust and includes terms a court could properly approve. Any interested person may ask the court to approve it. Because it binds only those who sign it or are properly represented, identifying every interested person matters.
  5. Some trust instruments appoint a trust protector, a person other than the trustee given powers such as amending administrative terms, changing the governing law or removing and replacing trustees. A protector acting within an express power does not need a court. Its powers, and whether it owes fiduciary duties, depend on the trust terms and state law. The 2000 UTC (§808) treated a person holding a power to direct the trustee as presumptively a fiduciary, and the Uniform Directed Trust Act (2017), enacted in some states, generally gives a ‘trust director’ fiduciary duties like a trustee’s. A protector’s power may still be challenged if it is used outside its terms or in bad faith.
  6. Decanting can have federal tax consequences. In Notice 2011-101, the Treasury Department and the IRS requested comments on when a decanting that changes beneficial interests is not subject to income, gift, estate or generation-skipping transfer tax. Factors they listed include adding beneficiaries, changing a beneficiary’s interests, moving from a grantor trust to a non-grantor trust or vice versa, and extending the trust’s termination date. While the issues were under study, the IRS said it would not issue private letter rulings on decantings that change beneficial interests. Comments were due by 25 April 2012. Professionals generally review the tax position of each proposed change, and state tax may differ.

Key facts

  • The Uniform Law Commission approved the Uniform Trust Decanting Act in 2015; states that enact it, such as Maine in 2021, often vary its text.
  • Under Maine’s version of the decanting act, an authorized fiduciary may decant without consent or court approval but must give at least 60 days’ notice (18-B §1207).
  • Under UTC §411, all beneficiaries can terminate a noncharitable irrevocable trust without the settlor only if a court concludes continuance is not necessary to achieve any material purpose.
  • UTC §412 lets a court modify administrative or dispositive terms, or terminate a trust, because of circumstances the settlor did not anticipate; §416 allows modification to achieve the settlor’s tax objectives.
  • Under UTC §111, a nonjudicial settlement agreement is valid only to the extent it does not violate a material purpose and includes terms a court could properly approve.
  • In Notice 2011-101, the IRS requested comments on the income, gift, estate and GST tax effects of decanting and said it would not issue private letter rulings on decantings that change beneficial interests while it studied them.

Exercise nine, six, three, one

9CollectList up to 9 ways an irrevocable trust can be changed, from this lesson or from a trust instrument or state statute you are reading (some sources give fewer), noting who acts and whether a court is involved.
6ClusterSort them into 6 categories: decanting, modification by consent, court modification for unanticipated circumstances, court modification for tax objectives, nonjudicial settlement agreements, and trust protector powers.
3DistillReduce the 6 categories to 3 groups: changes a fiduciary or protector can make alone, changes that need the agreement of beneficiaries, and changes that need a court.
1CrystallizeWrite 1 sentence explaining, in your own words, why an ‘irrevocable’ trust can still sometimes be changed.

Fact check

Dates, figures and claims checked against the published sources listed below.

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