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Decanting & Appointment


 Decanting can be a powerful modern estate planning tool and may be used to provide great flexibility in a trust arrangement.  In short, the power to decant stems from the power of appointment and refers to the distribution of trust property to another trust pursuant to the trustee=s discretionary authority to make distributions to, or for the benefit of, one or more beneficiaries. 

 The first discussion and application by an American court of decanting was Phipps v. Palm Beach Trust Co., 142 Fla. 782, 196 So. 299  (1940).  The Supreme Court of Florida held that a trustee could invade trust property and pay it over to another trust for the same beneficiary.  No court has since held to the contrary, that no fiduciary power exists under common law.  New York was the first state to enact rather comprehensive decanting legislation.  Alaska, Arizona, Delaware, Florida, Indiana, Missouri, Nevada, New Hampshire, North Carolina, South Dakota and Tennessee have followed suit and also passed decanting statutes.  In non-statutory jurisdictions, the practitioner must rely on Phipps or change the situs of the trust to a state which allows favorable decanting.  Georgia has no statute or precedent.  Therefore, our practice relies on Phipps when decanting our life insurance and family trusts. 

 As for the tax consequences of decanting, Private Letter Ruling 200736002 suggests that if the entire trust property is decanted into another trust, the new trust will be treated the same for income tax purposes as the old one from which the property originated.  This would be true for purposes of distributable net income (DNI), GST tax exemption allocation, and rule against perpetuities calculations, etc.  In addition, when the originating trust has negative basis assets, it may be advisable to leave such assets in the old trust in order to avoid the Crane gain.  Crane v. United States, 331 U.S. 1, 35 Aftr. 776 (1947).  There are other income tax consequences to consider as well:  the potential beneficiary gain attributable to DNI, Cottage Savings gain, and exceptions for the conversion of income interest into unitrust interests (See, Regulation 1.643(B-1), Private Letter Ruling 200810019) and qualified severances (Regulation Section 26.2642-6, 26.2654-1(b) and 1.1001-1(h)).  Finally, where a beneficiary of a trust has special powers of appointment, generally any gift is thus incomplete for gift tax purposes.  See Rev. Ruling 84-125.   Therefore, any perceived gift by a beneficiary of a decanted trust would also be incomplete and not subject to gift tax.

 In trust law, practitioners often refer to the King Lear effect; that is, the next best thing to owning wealth is controlling it.  A power of appointment provides that control to the donee, so such a power should be carefully considered in estate planning documents.   If properly drafted, these powers of appointment may allow wealth to pass to multiple generations and avoid transfer taxes. 

 If your trust documents do not provide for these powerful tools, or if you are just not sure, give us a call for more information. 


*IRS regulations require that we inform you as follows:  Any U.S. federal tax advice contained in this communication is not intended to be used and cannot be used for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or tax-related matters.


  • Mike Hoffman

    Mike is the founding and managing partner of Hoffman & Associates and oversees the general operations and personnel of the firm. He works primarily in the estate planning practice helping clients minimize the effect of the estate tax, ensure orderly transition of generations in family businesses, and maximize asset protections. Mike also devotes a considerable amount of his efforts to the business law and tax planning needs of the firm’s clients. He is licensed to practice in the States of Georgia, Ohio, and Tennessee, and is a Certified Public Accountant.

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