Decanting an Irrevocable Trust in South Carolina: When and How Is It Possible?

The term “irrevocable” suggests permanence, a legal structure set in stone, unable to be altered or revoked. For many individuals in South Carolina who have established or benefit from an irrevocable trust, this belief can lead to a sense of helplessness when circumstances change. Life is unpredictable, and a trust created years or even decades ago may no longer serve the family’s best interests due to shifts in tax law, beneficiary needs, or unforeseen family dynamics. Fortunately, “irrevocable” does not always mean “un-changeable.” A powerful and sophisticated legal tool known as decanting can often provide the flexibility needed to adapt an old trust to modern realities.

What Does “Irrevocable” Really Mean for a Trust?

An irrevocable trust is a legal arrangement where the creator, known as the settlor or grantor, permanently transfers assets into a trust managed by a trustee for the benefit of named beneficiaries. Once created and funded, the settlor typically cannot amend or dissolve the trust. This permanence is often intentional, designed to achieve specific goals like:

• Estate Tax Reduction: By removing assets from the settlor’s personal estate, an irrevocable trust can reduce or eliminate future estate tax liability.
• Asset Protection: Assets held within the trust are generally shielded from the creditors of both the settlor and the beneficiaries.
• Medicaid and Government Benefits Planning: It can help individuals qualify for long-term care benefits by reducing their countable assets.

While these are powerful advantages, the trade-off is a lack of flexibility. The rules governing the trust are fixed. A revocable living trust, by contrast, can be changed or canceled by the settlor at any time. The challenge arises when an irrevocable trust’s unchangeable nature conflicts with a necessary change.

What is Trust Decanting?

The term “decanting” is borrowed from the world of wine. When a winemaker decants an old bottle of wine, they carefully pour the liquid into a new vessel, leaving the unwanted sediment behind. Trust decanting operates on a similar principle. It is the legal process of a trustee using their discretionary power to “pour” the assets from an existing irrevocable trust into a new irrevocable trust that has updated and more favorable terms.

The old, problematic provisions are left behind in the original trust, while the assets move into a new trust instrument better suited for the current situation. This is not a way to undo the trust but rather a method to restate its terms within a new framework, all while respecting the settlor’s original intent.

Why Might a Trustee Consider Decanting a Trust in South Carolina?

Trustees and beneficiaries may seek to decant a trust for a multitude of reasons. The need for modification is rarely due to a single issue but often a combination of factors that have emerged over time. Some of the most common motivations include:

• Correcting Drafting Errors or Ambiguities: Older trust documents may contain ambiguous language or simple scrivener’s errors that create administrative confusion or lead to disputes. Decanting can clarify these terms without the need for costly court proceedings.
• Updating Administrative Provisions: A trust may have outdated administrative rules. For example, it might name a successor trustee who has since passed away or become incapacitated, or it may lack provisions for appointing or removing trustees. Decanting allows for the modernization of these essential mechanics.
• Adapting to Changes in the Law: Federal and state laws related to taxes, estates, and trusts are constantly evolving. A trust drafted under an old tax code may be inefficient or even detrimental under current law. Decanting can update the trust to take advantage of new tax-saving strategies.
• Addressing a Beneficiary’s Changed Circumstances: A beneficiary’s life can change in unexpected ways. They might develop a disability, requiring the creation of a special needs trust to protect their eligibility for government benefits. Alternatively, a beneficiary may be struggling with creditors, divorce, or substance abuse issues, making it prudent to place assets in a new trust with stronger protections.
• Improving Tax Efficiency: The new trust can be structured to minimize various taxes, including state income tax (by moving the trust’s location or “situs” to a no-income-tax state), federal estate tax, and the Generation-Skipping Transfer (GST) tax.
• Combining or Separating Trusts: It can be inefficient to manage multiple small trusts for the same family. Decanting can consolidate them into a single, more cost-effective trust. Conversely, a single large trust for multiple family branches might be split into separate trusts to avoid conflicts and tailor distributions to each branch’s unique needs.

What is the Legal Authority for Decanting in South Carolina?

Unlike many states that have enacted specific statutes explicitly authorizing trust decanting, South Carolina does not have a dedicated decanting law. However, this does not mean decanting is impossible. The authority for a trustee to decant a trust in South Carolina can be found in several places:

• The Trust Document Itself: A well-drafted trust may contain a provision that explicitly gives the trustee the power to decant. This is the most straightforward source of authority.
• The South Carolina Uniform Trust Code (UTC): While the UTC in South Carolina does not have a specific decanting section, other provisions can be interpreted to permit it. A trustee’s broad discretionary power to distribute trust principal to or for the benefit of a beneficiary can often be interpreted as the power to distribute those assets to a new trust for that same beneficiary.
• Common Law: Decades of case law have established broad powers for trustees acting in the best interests of the beneficiaries. A trustee’s fiduciary duty may not only permit but sometimes compel them to take action, like decanting, to better protect and manage the trust assets.

Because the authority is not derived from a single, clear statute, navigating this process requires a careful legal analysis of the original trust document and the relevant provisions of the South Carolina Trust Code.

Who Has the Power to Decant a Trust?

The primary actor in a decanting is the trustee. However, not every trustee has this power. The key requirement is that the trustee must have discretionary authority to make distributions of the trust’s principal (the assets) to the beneficiaries.

The scope of the trustee’s decanting power often depends on the breadth of their discretion. For example:

• Absolute Discretion: If a trustee has “absolute,” “sole,” or “unfettered” discretion to distribute principal, they generally have the broadest power to decant assets into a new trust with significantly modified terms.
• Limited Discretion: If the trustee’s discretion is limited by a standard—for example, they can only make distributions for a beneficiary’s “health, education, maintenance, and support” (HEMS)—their power to decant is more restricted. The new trust must generally retain the same limitations.

A trustee cannot decant a trust if their role is limited to making only mandatory income distributions. The power is tied directly to the ability to distribute the underlying principal of the trust.

What is the Process for Decanting a Trust?

Executing a decanting is a formal legal process that must be handled with precision to ensure its validity. While the specifics can vary, the general steps include:

• Review the Original Trust Document: The first step is a thorough analysis of the existing trust to identify the trustee’s distribution powers, any restrictions on that power, and the rights of the beneficiaries.
• Analyze Trustee’s Authority: A legal determination must be made that the trustee has the authority to decant under the terms of the trust and South Carolina law. This involves confirming that the action is consistent with the trustee’s fiduciary duties.
• Draft the New Trust: An entirely new irrevocable trust is drafted. This document will contain the updated provisions and will be structured to receive the assets from the original trust.
• Provide Notice to Beneficiaries: In South Carolina, a trustee is typically required to provide notice of the proposed decanting to all qualified beneficiaries. This notice period gives beneficiaries an opportunity to review the changes and raise any objections.
• Execute the Decanting: Once the notice period has passed without objection, the trustee executes a legal instrument that exercises their power of appointment. This document formally transfers the assets from the old trust to the new trust.

What Are the Limitations on a Trustee’s Decanting Power?

Decanting is a powerful tool for modifying irrevocable trusts, but it is not without significant limitations. A trustee cannot exercise this power to make changes that fundamentally violate their fiduciary duties or the core purpose for which the trust was established. Understanding these key limitations is crucial for any trustee considering decanting.

• Fiduciary Duties: Paramount among these limitations are the trustee’s fiduciary duties. Any decanting action must be undertaken in good faith and, most importantly, in the best interests of all beneficiaries. A trustee is strictly prohibited from decanting a trust to benefit themselves, such as by increasing their own compensation, or to favor one beneficiary over others without a valid and compelling reason that aligns with the settlor’s original intent. The trustee’s loyalty must remain with the beneficiaries as a whole.
• Beneficiary Rights: The rights of the beneficiaries are also a critical constraint. The new trust created through decanting cannot eliminate or diminish a beneficiary’s vested right. For instance, if the original trust explicitly grants a beneficiary a current, mandatory right to receive all trust income, the decanted trust cannot alter this provision to make income distributions discretionary. Such a change would fundamentally impair a vested interest.
• Adding New Beneficiaries: A trustee does not have the authority to introduce entirely new beneficiaries who were not initially included in the original trust instrument. The pool of beneficiaries for the new, decanted trust must either be identical to the original beneficiaries or constitute a subset of those original beneficiaries. This limitation ensures that the trust’s scope remains consistent with the settlor’s initial charitable or familial intentions.
• Respecting the Settlor’s Intent: One of the most significant overarching limitations is the requirement to respect the original settlor’s probable intent. Decanting should be employed to further or clarify the settlor’s original goals, not to completely rewrite the purpose of the trust in a way that contradicts those goals. While decanting can address unforeseen circumstances or adapt to changing laws, it cannot be used as a means to fundamentally alter the settlor’s foundational wishes regarding the trust’s objectives and beneficiaries.
• Rule Against Perpetuities: Finally, the new trust established through decanting cannot extend the duration of the trust beyond the period allowed by law. This is typically governed by the rule against perpetuities, which prevents trusts from existing indefinitely and tying up assets for an unreasonable length of time. Adherence to this rule ensures that trust assets will eventually vest in identifiable beneficiaries within a legally defined period.

How Does Decanting Compare to Other Methods of Trust Modification?

Decanting is one of several ways to alter an irrevocable trust, and it is often the most effective when unanimity is not possible. Other common methods include:

• Judicial Modification: This involves petitioning a court to approve changes to the trust. It can be effective but is also public, time-consuming, and expensive.
• Non-Judicial Settlement Agreements (NJSAs): Under the South Carolina Trust Code, trustees and beneficiaries can enter into a binding agreement to modify a trust. However, this requires the consent of all parties, which can be difficult or impossible to obtain if there are minor beneficiaries, uncooperative family members, or unborn future beneficiaries.
• Trust Protector Actions: Some modern trusts name a “trust protector,” a third party with the specific power to amend the trust. If the trust has a protector with this authority, their action may be a simpler path than decanting.

Decanting is particularly valuable when a trustee needs to act, but obtaining the consent of every beneficiary for an NJSA is not feasible.

Navigating Complex Trust Matters with Confidence

The ability to decant an irrevocable trust provides a vital solution for families whose financial and personal situations have outgrown the confines of an older estate plan. It allows for the thoughtful and strategic adaptation of a trust to protect beneficiaries, improve tax outcomes, and ensure the trust functions as intended for generations to come. However, given the lack of a specific decanting statute in South Carolina, the process demands careful legal guidance from attorneys familiar with state trust law.

The DeBruin Law Firm is committed to providing knowledgeable counsel to trustees and beneficiaries across Greenville and the surrounding communities. We can help you evaluate whether decanting is a viable option for your trust and guide you through every step of the process, ensuring compliance with all legal and fiduciary requirements.

If you are managing or benefiting from a trust that no longer meets your family’s needs, please contact us at (864) 982-5930 or send a message online to schedule a consultation.