Decanting Trusts: A Strategy to Adapt Irrevocable Trusts for Small Business Owners
Decanting Trusts: A Strategy to Adapt Irrevocable Trusts for Small Business Owners
As a small business owner, your estate planning may include irrevocable trusts to protect assets and minimize estate taxes. However, what happens when the terms of an irrevocable trust no longer serve their intended purpose due to changes in laws or personal circumstances? The strategy of decanting a trust could be the solution you need.
What is Decanting?
Decanting a trust involves transferring assets from an existing irrevocable trust into a new trust with updated terms. This process allows for modifications to adapt to new legal requirements, correct mistakes, or better align with the grantor’s current intentions.
Key Benefits of Decanting a Trust
Flexibility: Decanting provides the opportunity to update trust terms, accommodating changes in tax laws or personal circumstances.
Improved Terms: By creating a new trust, you can remove outdated provisions and include more favorable terms.
Asset Protection: Converting support trusts to discretionary trusts can enhance protection against creditors.
Common Reasons to Decant a Trust
Updating Outdated Provisions: Laws and personal circumstances change, making it necessary to update trust terms.
Combining Multiple Trusts: Consolidating similar trusts can simplify administration and reduce costs.
Splitting a Trust: Separating assets into multiple trusts can accommodate different investment strategies or beneficiaries’ needs.
Changing Trust Type: Converting a support trust to a discretionary trust can provide better asset protection.
State Tax Benefits: Decanting can move a trust to a state with more favorable tax laws.
Special-Needs Trusts: Establishing a special-needs trust can provide for a beneficiary with disabilities.
Correcting Errors: Decanting allows you to fix drafting mistakes or clarify ambiguous language.
How to Decant a Trust
The decanting process involves several steps:
Review Existing Trust: Evaluate the current trust to determine if decanting is permitted under state law.
Draft the New Trust: Create a new trust document with updated terms.
Transfer Assets: Move assets from the old trust to the new one.
Administer the New Trust: Begin managing the new trust according to its terms.
Considerations and Potential Pitfalls
Legal Guidance: Due to the complexity of tax and legal issues, professional assistance is essential.
Tax Implications: Ensure that the decanting process does not trigger unwanted tax consequences.
State Laws: Decanting laws vary by state, so it’s important to understand the regulations in the state where the trust was created.
Conclusion
Decanting an irrevocable trust is a powerful tool for small business owners looking to adapt their estate plans to changing circumstances. By transferring assets to a new trust with updated terms, you can ensure your trust aligns with your current needs and legal requirements. However, due to the complexity of the process, it’s crucial to work with professionals who have experience in trust decanting.
Ready to explore decanting your irrevocable trust? Contact us at Diversified Asset Management to learn how we can help you optimize your wealth management strategy.
Robert J. Pyle, CFP®, CFA, AEP®, CEPA®
Diversified Asset Management, Inc.
📞 (303) 440-2906 x 101
📧 rpyle@diversifiedassetmanagement.com
🌐 Diversified Asset Management
For personalized guidance tailored to your unique situation, contact Diversified Asset Management, Inc. at info2@diversifiedassetmanagement.com or (303) 440-2906. Our experts can help you navigate the complexities of business succession and ensure a successful transition.
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Robert J. Pyle, CFP®, CFA, AEP® founded Diversified Asset Management, Inc., in 1996 to provide personalized, comprehensive wealth management services to successful individuals, families, single women, and business owners. His specialty is addressing the complex financial needs of self-employed professionals, corporate executives, and small-business owners. Our disclosure can be found here. The views, opinion, information, and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc. Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting, or tax advice.