Just like you decant a fine wine from a wine bottle into a new one, you can decant the assets of a not-so-fine irrevocable trust into a new trust. A revocable trust is, by definition, subject to revocation or amendment, so no need there. Decanting means changing, updating and modernizing an irrevocable trust.
The trust agreement itself may allow this, but in Arizona, the law addressing decanting is found at Arizona Revised Statutes 14-10819, “Trustee’s special power to appoint to other trust.” Essentially, it states that unless the terms of the instrument expressly provide otherwise, a trustee who has the discretion to make distributions for the benefit of a beneficiary of the trust may exercise — without prior court approval — that discretion by appointing the estate trust in favor of a trustee of another trust if the exercise of this discretion:
- Does not reduce any fixed nondiscretionary income payment to a beneficiary.
- Does not alter any nondiscretionary annuity or unitrust payment to a beneficiary.
- Is in favor of the beneficiaries of the trust.
- Results in any standard applicable for distributions from the trust being the same or more restrictive standard applicable for distributions from the recipient trust when the trustee exercising the power is a possible beneficiary under the standard.
- Does not adversely affect the tax treatment of the trust, the trustee, the settlor (the original trustmaker) or the beneficiaries.
Typical reasons to decant include correcting ambiguities or drafting errors, changing the trust’s situs to a more favorable place, splitting up or combining trusts to achieve administrative cost savings, or broadening a trustee’s powers under the new trust. This would include the power to distribute income and principal to beneficiaries resulting in certain tax savings. A trust can also be decanted from a settlor trust to a non-settlor trust or vice versa, reversing the responsibility of who pays income taxes.