Setting up and funding an irrevocable trust is one option that offers wealth preservation for your beneficiaries. Because you hand control of the assets in the trust over to the trustee, creditors can’t touch the contents to satisfy your debts.
The downside of an irrevocable trust is that you can’t change the terms or cancel the trust. This doesn’t mean that the trust can’t ever change. Virginia allows trustees to decant a trust, which means that the assets are transferred from an existing irrevocable trust into a new trust with updated terms. Very specific circumstances must be present in order for the trustee to be able to do this.
When can a trustee decant a trust?
Virginia Code § 64.2-779.1 through § 64.2-779.25 permits decanting a trust only if the trustee has principal decision-making powers set by the current trust. In order for decanting the trust to work, the trustee must act in good faith. The terms of the new trust must be based on the original trust, and the purpose must be upheld. This includes keeping the beneficiaries of the trust the same, which means none can be added or removed.
Decanting a trust might be beneficial to accomplish these goals:
- Improve administrative efficiency
- Add or update spendthrift provisions
- Adjust to updated tax laws
- Extend the trust’s duration
- Modify distribution ages
- Separate or combine trust shares
Once the trustee determines that decanting a trust is the best course of action, they must provide a notice of at least 60 days to the beneficiaries. The beneficiaries may have questions about why decanting is necessary. Being able to explain this is crucial, and decanting the trust in the proper manner is also critical. Because of this, working with someone familiar with these matters is beneficial.