The practice of “trust decanting” is a method that allows trustees to transfer assets from an established trust into another trust (decanting), most likely one with terms that reflect the current situation. Today, this strategy offers many opportunities for asset planners to update older trusts by enhancing asset protection and responding to changes in the family or legal situation.
Trusts created offshore are typically designed to remain in place for extended periods — sometimes for several decades — and may be structured to continue through multiple generations. As time passes, the laws governing them can change, families will expand, and the importance placed on different aspects of their finances can also shift. Using a trust decant is a way for trustees to maintain the effectiveness and relevance of long-term trusts by updating the trust’s structure without having to dissolve prior planning.
Key Takeaways
- Trustees may transfer property from one trust to another under certain conditions, allowing them to create a new trust with different stipulations than those of the old.
- Trustee use of this procedure could be advantageous if they wish to modify provisions that have become outdated since the creation of the trust, alter the manner in which beneficiaries are treated, or enhance their ability to protect assets.
- It appears decanting will be particularly valuable in offshore trusts, offshore estate plans, and international asset protection trusts. These types of trusts typically involve cross-border issues and extended periods of time for operation.
- A trustee must act pursuant to the terms of his/her authority as set forth in the original trust document and the trustee’s fiduciary responsibilities.
- If properly employed, decanting will allow a trust structure to mature over time without diminishing the grantor’s (settlor’s) long-term objectives.
What Is Trust Decanting?
Trust decanting is a legal process (for trustees) that allows them to transfer assets from an existing trust to a new one with different or updated terms. Although the underlying assets remain protected within a trust structure (e.g., tax protection), the governing provisions of the assets may be changed.
Trust decanting is similar to pouring wine from one bottle into another while leaving the sediment behind. When we apply this concept to trust law, the “sediment” could include outdated administrative clauses/rules/provisions for investments that are no longer applicable, as well as rigid/distribution rules that no longer support the trust’s purpose.
In practice, trust decanting can assist in resolving issues such as the following:
- Outdated investment provisions
- Rules and provisions related to distributions that were once practical but are now not suitable due to changes over time
- Adminstrative clauses/rules/provisions that do not reflect modern regulations/regulatory environments
- Structural limitations in older trust deeds
By moving assets into a newly drafted trust, trustees have the ability to update the framework of their original wealth planning goals.
Why Trust Decanting Matters in Offshore Wealth Planning
Trusts located outside the individual’s home country have been established for many years as a means of preserving a family’s wealth for extended periods — and, in some cases, passing that wealth from one generation to another. The types of property an offshore trust may contain include stocks, bonds, mutual funds, commercial properties, and private companies.
However, like all other forms of entities and investments, the laws governing the creation and administration of trusts will continue to evolve. Likewise, when a trust has beneficiaries residing in multiple countries or owns assets in various foreign jurisdictions, complying with changing regulations and laws can prove to be very difficult. Therefore, a trustee’s ability to “decant” (i.e., transfer) the assets held in the original trust into a new trust that reflects current legal and regulatory requirements is a highly valuable option.
The Role of Trust Decanting in Offshore Asset Protection Trusts
Offshore Asset Protection Trusts (OAPT) have been used as vehicles to protect wealth from potential claims by creditors, governmental intervention, etc. As time goes on, circumstances will change; what was once an adequate means of protecting your wealth through an OAPT may need to be modified or replaced.
This is when decanting becomes relevant. A trustee can transfer assets from one trust to a new trust with stronger provisions than the previous one. Some examples include:
- Protecting held assets more effectively.
- More straightforward and flexible provisions for the administration of the trust by the trustee.
- Better confidentiality provisions.
- Provisions related to distribution that allow you to distribute your wealth in accordance with how your family’s situation currently exists.
Decanting allows the OAPT to continue to perform its function of protecting your wealth. Also, it enables your family to adjust to changing family dynamics, legal changes, and/or regulatory requirements.
Legal and Regulatory Framework for Trust Decanting
Decanting is an activity that may occur when there are express provisions in the trust instrument or when permitted by statute. As a result, most trustees’ actions will need to be done in accordance with their fiduciary duties. All trustee actions regarding decanting must comply with all applicable trust and tax laws and reporting requirements.
Regulatory environments for internationally administered trusts are shaped by numerous national and international regulations and compliance schemes. These include:
- Automatic exchange of financial account information through the OECD’s CRS
- Reporting of U.S. taxpayer-held accounts to the IRS through FATCA
- Implementation of Anti-Money Laundering (AML) measures consistent with FATF recommendations
- The national laws governing the administration of trusts. For example, the trust law in the United Kingdom and other national trust statutes were enacted into law in offshore jurisdictions.
These regulations are critical because they determine whether the decanting process can occur with court approval, is restricted, or is prohibited.
Common Reasons Trustees Use Trust Decanting in Offshore Trust Administration
There are many ways a trust may benefit from being updated through trust decanting. There are a number of common motivations for establishing trusts today, and each will depend on the individual family’s circumstances.
Updating Outdated Trust Provisions
Over time, the law and other factors influencing wealth management evolve. As a result, an older trust may contain provisions that no longer make sense. For example:
- Obsolete investment restrictions
- Unnecessary administrative requirements
- Unclear or unwieldy decision-making processes
Trust decanting enables trustees to update all of these types of provisions without changing the basic nature of their role.
Strengthening Asset Protection
The primary reason for establishing an offshore trust is typically to protect assets. However, just like everything else, the laws surrounding asset protection do not stand still. New risks arise, and old risk mitigation strategies become less effective.
At this point, a new trust can provide additional protections or clarity regarding who makes decisions about the trust. This is especially important for wealthy individuals living abroad because it enables them to respond quickly to changes in local laws and customs. Thus, they can continue to focus on their primary goal of protecting their assets from unwanted claims.
Adjusting Distribution Provisions
A family’s circumstances never stop changing. Children are often added to the family through birth, relocation, or death, and financial needs change over time.
Therefore, it is likely that a family’s original trust arrangement does not accurately reflect their current situation. Trust decanting gives trustees the opportunity to design a new trust arrangement that reflects their present circumstances and addresses their future goals.
Responding to Tax or Regulatory Changes
Taxes and regulations related to international wealth management change constantly. Transparency standards, reporting requirements, and related factors can greatly affect how an offshore trust operates. Government agencies (e.g., the IRS in the US or HMRC in the UK) issue guidelines on taxes and reporting for trusts. Such regulatory developments may necessitate restructuring a trust to maintain compliance with existing tax laws.
Trustees are not allowed to decant all trusts. Generally, the trustee’s ability to transfer or decant the trust’s assets into a new trust will depend upon either
- Specific grant of power in the original trust document
- Trust legislation in the jurisdiction where the trust was originally created
There are now several offshore jurisdiction trust laws that allow for greater flexibility in creating new trusts as needed by the trustee.
However, trustees still need to be careful when making this type of decision, as there may be legal limitations and/or fiduciary duties and obligations to consider, as well as the best interests of the beneficiaries.
How Trust Decanting Works in Practice
While the exact process can differ depending on the trust’s structure and the jurisdiction it falls under, trust decanting usually follows a fairly clear sequence of steps. The goal is to move assets from the old trust into a new trust while updating provisions to better reflect current needs, all without compromising legal compliance or fiduciary responsibilities.
Typical Steps in the Decanting Process
In this way, a trustee will typically use a general framework to guide their decision on whether to utilize decanting as an option.
- Step one involves reading the terms and conditions in the trust deed to determine if the trustee has the authority to create a new trust (the decanted trust) using the same type of transfer of assets found in the old trust; alternatively, they can review the broadness of their discretionary powers in order to be able to do so.
- Step two involves having their experienced trust advisor perform a legal analysis regarding which jurisdiction’s laws govern the creation of trusts in order to ensure that they have the right to create such a decanted trust.
- Step three involves drafting a new trust and including in its terms and conditions all the most recent provisions required by law to satisfy the family’s current needs and wishes.
- Once the new trust has been drafted, the assets from the original trust will be transferred into the newly created trust.
- Finally, Step five involves making sure all administrative items related to the transfer of the assets are completed, such as updating records of ownership and compliance with ongoing reporting obligations, as well as making adjustments to governance processes as deemed appropriate.
As you might expect, while the above steps appear relatively simple and straightforward to complete, in fact, each step is critical and requires careful thought and planning. The trustee must consider what is best for the beneficiary(s), taking into account their needs, desires, and expectations along with legal considerations, in order to effectively and successfully accomplish a successful decanting transaction.
Offshore Jurisdictions That Recognize Trust Decanting
Several well-known offshore jurisdictions have developed legal frameworks that allow trust decanting under certain conditions.
| Feature | Trust Decanting | Trust Modification |
| Method | Assets transferred to a new trust | Existing trust terms amended |
| Flexibility | High | Varies by jurisdiction |
| Complexity | Moderate | Sometimes requires court approval |
| Typical Use | Structural updates | Minor administrative changes |
Decanting can sometimes provide greater flexibility because it allows the creation of a new trust framework rather than modifying the existing one.
Example Scenario: Decanting an Offshore Family Trust
Imagine, a few years ago, a family created a new trust to manage their offshore investments. The trust was created in 2002, and at that time it suited the families’ situation. Today, there are more people in the family, more complexity with their investments, and some of the terms in the old trust no longer suit the families’ requirements. Instead of destroying the trust, the trustees decided to use “trust decanting.” The trustees transferred the assets from the old offshore trust to a new offshore trust, which provided the same protection as before but allowed them to invest their money as they pleased, allowed them to be able to distribute the funds as they saw fit, and provided more flexibility with regard to how decisions would be made.
Potential Risks and Limitations
The benefits of trust decanting notwithstanding, there are certainly some risks associated with such a transaction. The most significant of these include the following:
- Limitations on legal authority
- Fiduciary duties
- Beneficiary concerns
- Jurisdictional differences
Trustees will need to seek professional guidance on the extent of their authority to decant, since each state has different requirements regarding the authority of trusts and other types of fiduciaries.
Furthermore, trustees have a duty to act in the best interests of the beneficiary. In addition, if the trustee decides to decant, the beneficiary may feel that his/her rights have been diminished. Finally, because trust laws differ widely from one jurisdiction to another (especially with offshore trusts), the trustee should be aware of the various requirements applicable to them.
Best Practices When Considering Trust Decanting
While trust decanting can provide numerous benefits to both the settlor and the beneficiaries, it should not be entered into lightly by either party. As a result of the fact that a trust decant is merely a rearrangement of an already established trust and does not create a brand new trust, it is critical for the trustee(s) to carefully consider the implications of such an action prior to proceeding.
A number of practical actions taken during the decant process can help make the process less complicated and reduce the risk of costly disputes down the road. These actions include:
- Review in detail both the original trust deed and governing trust law.
- Obtain counsel from knowledgeable trust attorneys and/or trust administrators who are familiar with the jurisdiction where the trust is located.
- Consider how changes made through decanting may impact the various beneficiaries both currently and in the future.
- Record in detail why you decided to perform a decanting of the trust.
- Determine what new features of your revised trust structure will continue to reflect the long-range objectives originally intended for the creation of the trust.
When Trust Decanting Is Most Useful
Types of wealth structures that are typically most affected by trust decanting include the following:
- Multi-generational family trusts
- Asset protection offshore trusts
- Trusts holding operating businesses
- Older trusts created under outdated laws
These trusts will benefit from decanting if they need to be adapted to keep up with changing circumstances (i.e., changes in the environment or legal framework).
Summary
Decanting is becoming increasingly common in modern trust law and international wealth planning. The primary function of decanting is to transfer assets from an old trust into a newer trust with modified terms (to reflect current trends) to update the trust’s structure and maintain its purpose.
For offshore trusts, which can span multiple jurisdictions and generations, decanting offers considerable flexibility. Over time, legal systems, family dynamics, and economic conditions all change. If properly done and consistent with applicable trust law and the trustee’s fiduciary duty, decanting will allow offshore trusts to continue adapting and growing. As such, it will allow long-term wealth planning to remain viable while preserving the settlor’s original intent.
FAQ
What is trust decanting?
A trust decant is the process of transferring all assets from one trust to another with new or revised terms. Trustees may choose to transfer the assets because the terms of the original trust have become either outdated or overly restrictive. If a trustee wants to close the trust but does not wish to give up the benefits it provides, a trust decant would provide a mechanism by which the trustee could close the old trust and establish a new trust with updated provisions. This can be particularly useful for offshore trusts, where long-term wealth-planning strategies will be put in place for years, if not decades.
Is trust decanting allowed in offshore trust jurisdictions?
Generally, most offshore jurisdictions permit a trustee to utilize a trust decant so long as there has been compliance with specific procedural requirements. Most notably, jurisdictions such as Nevis, the Cayman Islands, and the British Virgin Islands permit a trustee to modify an offshore trust by utilizing a trust decant, provided the grantor of the trust has given permission in the original trust instrument, or provided by statute, for the trustee to create a new trust. However, in each case, the trustee must continue to act in accordance with his fiduciary obligations to protect the beneficiaries’ best interests.
Why might trustees decide to use trust decanting?
There are numerous scenarios in which a trustee determines that a decanting of a trust is warranted. These include when the conditions set forth in the original trust instrument no longer apply to the family’s situation; when the administration of the original trust requires more flexibility; when the trustee wishes to enhance the protection afforded to the assets contained in the original trust through enhanced asset protection or due to legislative changes; or when an offshore trust has been established with a view toward its lasting for multiple decades (if not generations) and the trustee desires to maintain the relevance of the structure as family circumstances and/or governmental regulations evolve.
Do beneficiaries need to approve a trust decanting?
No, generally speaking, whether a beneficiary must approve a trust decant depends on the governing law applicable to the original trust, as well as any restrictions on the trustee’s ability to act under the original trust document. Many times, trustees are permitted to execute a trust decant without express approval from any beneficiary. However, regardless of the type of action a trustee chooses to pursue regarding the creation of a new trust with revised provisions, he/she will need to carefully evaluate any potential risks and/or consequences before making any decisions.
How is trust decanting different from modifying a trust?
While both involve changing some aspect of a previously executed trust document, creating a trust decant entails transferring all assets in an existing trust into a new trust with modified or updated terms. On the other hand, amending a trust involves revising the prior language in an existing trust document and thereby retaining those same documents. As such, creating a trust decant may present additional opportunities for a trustee compared to merely amending a trust document.
