As you know from my prior posts, I appreciate the interplay between divorce and estate planning. I enjoy working on cases where both worlds collide, and have been fortunate to be involved in some very interesting cases, which have involved irrevocable trusts.
A common misconception relating to irrevocable trusts is that they can’t be altered. This is not actually the case in many circumstances, and is important to remember, especially when family circumstances change, such as when a divorce arises.
A trust is irrevocable because either the donor (the person who established the trust) has died, or because the trust’s terms make it irrevocable. Changing an irrevocable trust can sometimes be done through a process known as decanting. When a trust is decanted, it is replaced by a new trust and the assets of the original trust are transferred to a new trust.
The Rhode Island decanting law lays out some specific requirements for an irrevocable trust to be decanted. Some of those requirements include the following. First, the terms of the original trust must allow for the trustee to make principal payments to one or more beneficiaries. Second, the trustee must exercise the power to decant via a written instrument. Third, the new trust cannot change the beneficial interests of the original trust, and notice of the decanting must be provided to certain trust beneficiaries.
It is not uncommon for a married couple to use irrevocable trusts in their estate plan as tax saving tools. What happens to these trusts when that same couple decides to divorce? The trusts may call for trustee arrangements that no longer work for the divorcing couple, or may vest one spouse with greater rights and powers than the other spouse. In these cases, decanting can be a powerful tool to level the playing field and swiftly and effectively resolve a pending divorce matter.
Decanting can be used in circumstances other than divorce, including when tax laws change, when a family member develops special needs, or when a family member gets into financial trouble. Ultimately, decanting is a powerful estate planning tool that should not be overlooked when dealing with irrevocable trusts.
There are some instances where an irrevocable trust cannot be decanted. If you are going through a divorce and your estate contains irrevocable trusts, you would be well advised to consult a knowledgeable estate planning and/or divorce attorney.
Until next time . . .