Decanting a Trust: Do This When Your Irrevocable Trust No Longer Works (The Top 5 Jurisdictions)
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In the latest videos, I’ve been discussing the best U.S. trust jurisdictions, focusing on the top five and a few others that could rank six or seven. We’ve explored various aspects that make a trust jurisdiction advantageous for clients, including Dynasty Trusts and Domestic Asset Protection Trusts. Today, we’re diving into the concept of decanting.
Decanting is a modern concept in trust law that has gained traction over the last few decades. Essentially, it allows you to transfer assets from one trust (Trust A) to another (Trust B). This flexibility addresses the rigid nature of irrevocable trusts, which traditionally made it difficult to adapt to changes in personal circumstances or laws. While decanting offers significant advantages, there are limitations depending on the jurisdiction.
To understand the best jurisdictions for decanting, let’s look at a comparison chart from Bridge for Trust, which highlights key states like South Dakota, Nevada, Wyoming, Alaska, and Delaware. South Dakota leads in decanting statutes, followed closely by Nevada. Alaska and Delaware have fallen behind, with Wyoming ranking lower than many expect.
The chart indicates that South Dakota and Nevada both allow decanting, with South Dakota scoring 99.5 out of 100, compared to Nevada’s 99. Other states, like Delaware and Alaska, have lower scores due to more restrictive laws.
One interesting aspect of decanting is whether you can change from a trust with an ascertainable standard (like health, education, maintenance, and support) to a discretionary trust. Most jurisdictions, including South Dakota and Nevada, allow this change, while Delaware does not.
Another key factor is whether states require notice to beneficiaries before decanting. Most states, including South Dakota and Nevada, do not require this, which helps avoid potential conflicts among beneficiaries. In contrast, some states like Alaska do require notice.
Furthermore, whether you can remove mandatory income interests and accelerate remainder beneficiaries’ interests varies by jurisdiction. South Dakota offers flexibility in these areas, while other states provide less clarity or outright restrictions.
In terms of Dynasty Trusts, which can exist perpetually without triggering certain taxes, South Dakota again ranks highest, followed by Nevada. Domestic asset protection trusts also show South Dakota and Nevada as top contenders.
In conclusion, if you’re considering the best trust jurisdiction, prioritizing flexibility, privacy, and favorable laws is crucial. South Dakota stands out for its robust decanting and trust protector statutes, making it a leader in the field. Even if you initially set up an irrevocable trust in a less favorable state, you may have the option to move it to South Dakota for better flexibility and management options. As trust jurisdictions continue to compete and evolve, choosing the right one can provide significant long-term benefits and peace of mind.
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