Trust Decanting and High-Asset Divorce Matters
In high-asset divorce cases, the division and characterization of trust assets can become a central and highly complex issue. When one or both spouses have interests in trusts, traditional property division principles may intersect with advanced estate-planning concepts. One such concept that can play a significant role in these cases is trust decanting.
Trust decanting is a mechanism that allows a trustee, under certain circumstances, to distribute or “pour” assets from an existing trust into a new trust with different terms. In divorce cases involving substantial assets, decanting can materially affect how trust property is administered, valued, protected, or classified for purposes of equitable distribution.
The purposes of trust decanting are wide-ranging and may include addressing changed circumstances, preserving or improving tax treatment, modifying administrative provisions, or correcting deficiencies in an original trust instrument without the need for court intervention. In some cases, decanting may be used to adjust investment powers, appoint or remove trustees or fiduciaries, extend or alter a trust’s termination date, or change the governing law of the trust.
Decanting may also be used to divide trust assets into separate trusts or shares, reduce administrative costs, limit potential liability, or convert a trust from grantor to non-grantor status—or vice versa. In more specialized situations, decanting can be used to create or modify spendthrift protections, establish a supplemental needs trust, grant a beneficiary a special power of appointment, or correct drafting errors that might otherwise require costly litigation.
How Trust Decanting Works
Trust decanting generally occurs when a trustee is granted authority—either expressly in the trust instrument or by statute—to distribute trust assets to a second trust for the benefit of one or more beneficiaries of the original trust. This authority may arise under a testamentary trust or an inter vivos (living) trust.
Under the decanting process, the trustee may transfer all or part of the assets from the original trust into a new trust, either under the existing trust instrument or pursuant to a newly created instrument. The beneficiaries of the second trust must typically be among the permissible beneficiaries of the original trust, or individuals who could have received distributions of income or principal under the first trust in the future. In some cases, the second trust may be structured to take effect upon the occurrence of a specific event contemplated by the original trust.
While trust decanting can offer flexibility and strategic advantages, it can also raise significant legal questions in the context of divorce. These may include whether a spouse’s trust interest constitutes marital or separate property, whether decanting was used to shield assets improperly, and whether trust modifications impact support, maintenance, or property division determinations.
The Importance of Skilled Legal Guidance
In a high-asset or complex divorce involving trust interests, trust decanting can dramatically affect the outcome of the case. Because decanting implicates trust law, tax considerations, fiduciary duties, and family law principles, it is critical to work with legal counsel who understands how these areas intersect.
At Stange Law Firm, PC, we assist clients in complex divorce matters where trust assets are involved. We understand the sophisticated legal issues that can arise when trusts and marital dissolution overlap, including the potential use—or misuse—of trust decanting. Having knowledgeable counsel can help ensure that trust-related issues are properly identified, analyzed, and addressed as part of an overall divorce strategy.
If you are facing a high-asset divorce in which trust assets may be implicated, consulting with an attorney familiar with trust structures and advanced asset-protection concepts is an important step in protecting your financial interests.
