Thanks to generosity of Leimberg Information Services, we are pleased to provide to you a recently published article on LISI, where nationally renowned estate and asset protection attorney, Steve Oshins, discusses the creation and release of his 1st Annual Trust Decanting State Rankings Chart.

“The 1st Annual Trust Decanting State Rankings Chart was created to serve as a single page guide to various states’ differences among their decanting statutes. The states are ranked based on the ease of use and amount of flexibility provided by their statutes, not based on the public policy issues that may exist based on one’s opinion that the statutes give the trustee too much flexibility.

Many lower-ranked state statutes have flexibilities that higher-ranked state statutes lack and therefore are often better in certain situations. So the reader should not necessarily conclude that a higher-ranked state is always better. The chart provides a simple guide for an estate planner who can use it to quickly analyze which states might be used to accomplish the decanting goals for a particular client situation. Regardless, as decanting has become so important in the estate planner’s playbook, it is important to understand the differences among the states.”

Now, Steve has expanded his rankings charts to include the 1st Annual Trust Decanting State Rankings Chart. The chart has a burgundy and champagne color scheme.

Steven J. Oshins, Esq., AEP (Distinguished) is an attorney at the Law Offices of Oshins & Associates, LLC in Las Vegas, Nevada. Steve is a nationally known attorney who is listed in The Best Lawyers in America® and has been named one of the Top 100 Attorneys in Worth magazine. He was inducted into the NAEPC Estate Planning Hall of Fame® in 2011. He has written some of Nevada’s most important estate planning and creditor protection laws, including the law making the charging order the exclusive remedy of a judgment creditor of a Nevada LLC and LP (in 2001, 2003 and 2011), the law changing the Nevada rule against perpetuities to 365 years (in 2005) and the law making Nevada the first and only state to allow a Restricted LLC and a Restricted LP, creating larger valuation discounts than any other state allows (in 2009). His law firm’s web site is http://www.oshins.com.

Before we get to Steve’s commentary, members should take note that Bob Keebler and Steve Oshins are co-presenting a teleseminar for the The Ultimate Estate Planner on January 29th titled “Decanting an Irrevocable Trust: The Ultimate Do-Over.” To learn more or to register, enter this link in your web browser: https://ultimateestateplanner.com/lawyer/Teleconference-Registration_cp10308.htm.

Now, here is Steve Oshins’ commentary:

EXECUTIVE SUMMARY:

Trust decanting is the act of distributing assets from one trust to a new trust with different terms. Just as one can decant wine by pouring it from its original bottle into a new bottle, leaving the unwanted sediment in the original bottle, one can pour the assets from one trust into a new trust, leaving the unwanted terms in the original trust.

For many years, practitioners have struggled to find ways to change the terms of an irrevocable trust. However, through common law and through the decanting statutes that have been enacted in many jurisdictions, it is now possible to modify an irrevocable trust. The rationale for allowing such a modification is that a trustee who has the power to distribute the trust property to or for the benefit of one or more beneficiaries should be able to make the distribution to them in trust and dictate the terms of that trust. Decanting is essentially a “do-over”.

COMMENT:

The Chart

The 1st Annual Trust Decanting State Rankings Chart (click here to download chart) was created to serve as a single page guide to various states’ differences among their decanting statutes. The states are ranked based on the ease of use and amount of flexibility provided by their statutes, not based on the public policy issues that may exist based on one’s opinion that the statutes give the trustee too much flexibility.

Many lower-ranked state statutes have flexibilities that higher-ranked state statutes lack and therefore are often better in certain situations. So the reader should not necessarily conclude that a higher-ranked state is always better. The chart provides a simple guide for an estate planner who can use it to quickly analyze which states might be used to accomplish the decanting goals for a particular client situation. Regardless, as decanting has become so important in the estate planner’s playbook, it is important to understand the differences among the states.

The Variables and Weights Applied

No single-page chart can include every possible variable. However, the goal of the Chart is to include the most material variables that one would consider in selecting an appropriate jurisdiction. The Chart uses the following seven variables to create the rankings:

1. Does the state have a decanting statute? [55% weight]
   In order to be listed on the Chart, the state must have a statute authorizing decanting. This starts each state with 55 points and thus sets the baseline for the scoring on the Chart. Although it is possible to decant under the common law authority, no state without a decanting statute is eligible for the Chart.
2. Does the state statute allow a trust with an ascertainable standard to be decanted? [10% weight]
   Many trusts are drafted with an ascertainable standard for distributions. The most common ascertainable standard is for health, education, maintenance and support. Since there are so many existing irrevocable trusts with an ascertainable standard, in order to decant these trusts, the estate planner must first move the trust to a jurisdiction that allows this prior to decanting it. Otherwise no modifications can be made.
3. Does the state statute require the trustee to send notice to the beneficiaries of the trust? [10% weight]
   Although public policy might dictate that in many situations the beneficiaries should be given notice, the requirement that notice be given, including copies of the existing trust and future trust, is generally not desired by our clients who want privacy of their affairs. Many states that allow decanting require that such notice and disclosure be given and thus are docked points because of this.
4. Does the state statute allow a trust with an ascertainable standard to be decanted into a discretionary trust? Does the state statute allow the trustee to remove a mandatory income interest? [7.5% weight]
   A discretionary trust generally provides greater creditor protection than does a trust with an ascertainable standard such as for health, education, maintenance and support. Thus, many estate planners would like to enhance the creditor protection by decanting the ascertainable standard trust into a discretionary trust.

   The same philosophy applies with respect to a trust that contains a mandatory distribution. Unless the tax laws require a mandatory distribution, such as to qualify for the marital deduction, many people would like to decant a trust with a mandatory distribution of income to remove that mandatory distribution so as not to subject that distribution to the creditors of the beneficiary who is receiving the distribution.

   The ability to enhance the creditor protection through decanting likely deserves more than a 7.5% weight. However, since a 10% weight was already applied to the ability, in general, to decant a trust with an ascertainable standard, in order to avoid over-weighting ascertainable standard trusts in the Chart, a 7.5% weight was applied to this element.

5. Does the state statute allow the trustee to decant into a trust that gives a beneficiary the power to appoint assets to someone who isn’t a beneficiary of the first trust? [7.5% weight]
   No state’s decanting laws allow the new trust to include beneficiaries who weren’t beneficiaries of the first trust. However, as circumstances change, people often change their mind and want to add a beneficiary. Although this can’t directly be done with decanting, many decanting jurisdictions specifically allow a beneficiary to be given a broad power of appointment that allows appointments to people who were not beneficiaries of the initial trust. Thus, through multiple steps, a person who wasn’t a beneficiary of the first trust can benefit.
6. Is the state a favorable Dynasty Trust jurisdiction? [7.5% weight]
   Many people have irrevocable trusts that were established in strong Dynasty Trust jurisdictions (whether or not the trusts were drafted to take advantage of the Dynasty Trust laws), so they will often want to take advantage of a new Dynasty trust jurisdiction that has more flexible decanting statutes. The Chart applies a 7.5% weight to help separate the better Dynasty Trust jurisdictions from other jurisdictions. This weight also (indirectly) helps enhance the score of the states with no state income tax or fiduciary income tax since those states have high Dynasty Trust rankings.
7. Is the state a favorable Domestic Asset Protection Trust jurisdiction? [2.5% weight]
   Since many of the irrevocable trusts that might be decanted include the settlor as a discretionary beneficiary, the Chart gives the Domestic Asset Protection Trust states a 2.5% weight towards their score. This is the lowest-weighted variable simply because the primary focus of the Chart is the decanting and only a small percentage of irrevocable trusts are self-settled.

Summary

Decanting has become very popular as a means of modifying an irrevocable trust. There are so many irrevocable trusts where the settlor and/or the beneficiaries would like a “do-over”. Decanting allows this to be done. The new Chart provides a guide for the estate planner who is considering using the current trust jurisdiction or considering moving the trust to a jurisdiction with more flexible decanting statutes.

CITE AS: LISI Estate Planning Newsletter #2179 (January 7, 2014) at http://www.leimbergservices.com Copyright 2014 Leimberg Information Services, Inc. (LISI). Reproduction in Any Form or Forwarding to Any Person Prohibited – Without Express Permission.

CITES: The author recommends Susan Bart’s state decanting summaries at http://www.sidley.com/state-decanting-statutes/ and M. Patricia Culler’s list of “State Decanting Statutes Passed or Proposed at http://www.actec.org/public/Documents/Studies/Culler_Decanting_Statutes_11_15_2013.pdf