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Decanting a trust in Texas

Many residents of Houston understand the meaning of “decanting” when the subject is fine wine. Decanting involves pouring a wine that has sufficiently aged into a bottle that allows the wine’s sediment to separate from the wine. Decanting also adds oxygen to the aged wine to improve its flavor. The same word — decanting — is now being used to describe a technique for managing the assets in irrevocable trusts.

The purpose of decanting a trust is not unlike the purpose behind decanting wine: all or some of the assets in the trust are transferred to another trust to take advantage of a change in the law or in the avoid loss if the trust’s investments may lose their value. The Texas legislature enacted a statutory provision allowing the decanting of irrevocable trusts in 2013.

Many people believe that the creator of an irrevocable, called the “settlor” in our state, cannot modify the terms of the trust in any material way. This belief is erroneous. The settlor can modify the trust by obtaining the permission of the court. With the passage of the decanting statute, trustees can now transfer assets by moving assets from the original trust to a second trust created for a specific purpose.

Decanting obviates the need for a court proceeding and generally, saves the trust the expenses of such a proceeding. The three most common reasons for decanting a trust are updating or amending provisions of the original trust that have become outdated, addressing changed circumstances of one or more beneficiaries and reducing or eliminating federal and state estate taxes.

Many older trusts now lack flexibility, and administering such a trust can be difficult. A trustee can solve this problem by creating a trust that grants the trustee greater flexibility in its administration. The trust can be funded by decanting assets from the older trust into the newer trust. Any such transfer of assets must reflect the settlor’s original intent, such as providing benefits for one or more designated beneficiaries. However, a beneficiary may have experienced a change in circumstances, such as a serious illness or injury, which necessitates setting money aside to pay medical or living expenses for the beneficiary.