How Trust Decanting Works
Sometimes a trust needs to be updated, but the terms do not allow simple amendments. This statute gives a trustee a practical alternative. If the trustee has discretion over distributions, they can appoint part or all of the trust property into a new trust. The move must meet several conditions designed to protect everyone involved.
A trustee who has the discretion under the terms of a testamentary instrument or irrevocable inter vivos agreement to make distributions, regardless of whether a standard is provided in the trust instrument to or for the benefit of a beneficiary of the trust, may exercise without prior court approval the trustee's discretion by appointing part or all of the trust property in favor of a trustee of another trust.
A.R.S. § 14-10819(A)The statute applies to both testamentary trusts (created through a will) and irrevocable trusts created during the settlor's lifetime. It does not require the trustee to go to court first, though the trustee may request court approval before or after the transfer.
Conditions That Protect Beneficiaries
This power is not unlimited. The transfer cannot reduce any fixed income payment to a beneficiary or alter any annuity or unitrust payment. The receiving trust must benefit the same beneficiaries.
If the trustee is also a beneficiary, any distribution standard in the new trust must be at least as restrictive as the original. The transfer also cannot create adverse tax consequences or violate rules on trust duration.
The exercise of the trustee's power to appoint trust property under subsection A of this section is considered to be the exercise of a special power of appointment.
A.R.S. § 14-10819(C)By treating the transfer as a special power of appointment rather than a general one, the statute helps preserve favorable tax treatment for the trust and its beneficiaries.
Practical Reasons for Transferring Assets
Families use trust decanting for several practical reasons. A trust drafted decades ago may not account for changes in tax law, family circumstances, or the types of assets the trust now holds. Transferring assets into a new trust can update the terms without going through a lengthy court process.
For example, a trust holding real estate or life insurance may benefit from being moved into a new trust with updated management provisions. The trustee can also use decanting to consolidate multiple smaller trusts into one, reducing administrative costs.
Decanting is a powerful tool, but it requires careful planning. The trustee should review the original trust terms, consult with qualified advisors, and document the reasons for the transfer. Taking these steps helps ensure the move serves the beneficiaries' interests and holds up if ever questioned.