KTC: Alaska Trust Decanting
Irrevocable trusts are a very important tool for tax, estate, and financial planning. The problem with irrevocable trusts is that over time circumstances change, and the trustee and beneficiaries may wish that the terms of the trust can be changed. The trustee and the beneficiaries may petition the court to make changes or corrections. The court may or may not allow the changes. In any case, court proceedings can be time-consuming and expensive.
In the past, when an irrevocable trust was formed and funded, the terms were locked in place. Now there is a popular strategy for changing the terms of an established irrevocable trust called trust decanting. The process of trust decanting can modernize and dramatically improve the terms and flexibility of a trust.
Alaska’s trust decanting provisions (AS 13.36.157) are some of the most favorable decanting statutes in the USA.
Trust decanting is the process of moving assets from one trust to another. The term “decanting” derives from wine decanting, where wine is poured from one bottle into another bottle leaving the sediment behind. The aspects of the trust that are beneficial are still found in the new trust, while the undesirable provisions of the old trust are absent in the new trust.
Why decant a trust?
Trust decanting allows a trustee to revise and improve the terms of the original trust to reflect new circumstances. There are many scenarios for which a trustee would want to decant a trust. Those scenarios include:
Original trust no longer serves the needs of the beneficiary
The trust no longer meets the grantor’s intent
Trusts in some states may not offer adequate asset protection
Paying taxes in states where beneficiaries no longer live
Moving the governing law to a more trust-friendly state (such as Alaska)
Converting a trust with scheduled distributions into a dynasty trust to protect multiple generations
Transferring the trustee’s investment responsibility to a separate investment advisor
Revising who can serve as trustee
Converting a support trust into a full discretionary trust.
Correcting drafting errors or unclear terms of the original trust
Combining multiple trusts into one trust for a common beneficiary
Converting a trust which terminates at a set date into a longer termed trust or a lifetime trust or a dynastic trust
Making adjustment in terms of trust to protect a special needs beneficiary
Modifying powers of appointment
Converting a single trust into multiple trusts to serve different beneficiaries
Non-Alaska residents: and non-Alaska trusts:
Alaska’s decanting statute (AS 13.36.157) permits clients who do not live in Alaska to take advantage of Alaska’s decanting statutes by having their attorney add a trustee or co-trustee based in Alaska. Trusts created in other jurisdictions can take advantage of Alaska’s favorable decanting provisions by changing trust situs to Alaska. The following conditions must be met:
An Alaska-based trustee (such as Kodiak Trust Company) be appointed as trustee or co-trustee.
Alaska must be the principal place of trust administration for at least the duration of the decanting process.
The decanting process:
The first step is to change trust situs, moving the trust to a state with friendly decanting statutes, such as Nevada, South Dakota, Delaware, and Alaska.
Alaska is ideal for trust decanting because there is a wide range of permitted modifications under Alaska statutes, and the process is flexible.
Once the trust has been moved to Alaska or another state with friendly trust decanting statutes, the attorney will decant the assets from the existing trust into a trust with new terms. Note that a trust can be decanted into a new trust or an existing irrevocable trust.
To decant a trust under Alaska jurisdiction, at least one trustee must be one of the following:
A natural person residing in Alaska
An Alaska trust company, like Kodiak Trust Company
An Alaska bank possessing trust powers
Kodiak Trust Company will serve as either trustee or cotrustee and help you navigate the decanting process.
In recent years, the IRS has focused on trust decanting with increased scrutiny. Please read the article posted here entitled “IRS May End Irrevocable Trust Decanting.
