You accumulated sizable estate assets and your lawyer created an irrevocable dynasty trust for your infant son to protect his legacy and provide him a long-term financial safety net. You were a thoughtful and loving parent.
A lot has happened over the past 20 years. The business world has changed and the path to independent adulthood lies obscured in your son’s generation’s new definition of success: do what makes you happy, when it makes you happy. Within this paradigm, your son turned into a somewhat lazy young adult with a recent college degree in History of the Ottoman Empire. Yes, it’s a just BA, and no, there is no PhD in his future. With a resume full of throwaway summer jobs your son moved back home with no career prospects.
Then, the icing on the cake: your estate planning attorney reminded you she will be making the first sizable distribution from your son’s trust this month. Hearing you groan, she gently reminds you that he can use the money in any manner he sees fit. You rightfully worry that he will quit looking for a job the minute he gets the money and become a “trust fund baby.”
You ask your estate planner to stop the distribution and beg her to save your son from himself. If he gets this money now, he’ll never get a job and move out. Unfortunately, the trust you asked her to prepare is irrevocable and cannot be amended.
Sound familiar? You and thousands of Americans are in the same boat, looking to protect your adult children from themselves.
Thirty years ago conventional wisdom was to draft irrevocable trusts. No one could foresee that changed economic and societal circumstances could backfire on the client.
Until recently, changing an irrevocable trust was impossible. Fortunately, there is now a fix.
The process of fixing broken trusts has become known as “decanting” where you can pour the assets out of an old inadequate irrevocable trust into a new irrevocable trust with more suitable provisions for the changed circumstances. This “Do-Over Trust” can rectify unwanted provisions of an old trust with new terms in a new trust.
All decanting statutes are not created equally. California’s newly passed law this past January is quite restrictive, has onerous notice requirements and is possibly inadequate for many situations. Therefore, if the broken trust contains a “change of situs” (location) provision, as most well drafted trusts do, consider moving the trust to another state like, NV, DE or SD; states with much more flexibility and then decant under that state’s laws.
Decanting is a relatively new concept, and the legal community is just discovering what planning opportunities exist to fix poorly drafted or antiquated irrevocable trusts previously thought to be non-correctable. This is a positive option many are now considering.