Taxation & Estate Planning

“Decanting” Trusts in Ohio

By Michael D. Bonasera, Esq.

A recent and interesting development in trust administration has made its way to Ohio, that of allowing a trustee to distribute the assets of one trust into another trust with substantially similar administrative provisions and beneficiaries, called “Decanting.” New York looks to have been the first to allow it (as far back as 1992) and now Ohio is thinking about it. If the OSBA follows the direction of the New York statute, some of the parameters we may see could look like this:

1. The trustee must have absolute discretion to invade the principal of the trust;

2. the exercise of the power cannot reduce the fixed income right of any beneficiary;

3. the exercise of the power must be in favor of one or more of the proper objects of the exercise of the power;

4. and the new trust cannot contain certain provisions deemed to violate public policy

Why do it?
It looks like New York was hoping to extend the benefits of “exempt trusts.” “Exempt Trusts” in this context means trusts which were executed prior to October 22, 1986 when Congress passed the Tax Reform Act of 1986 which contains the current form of the Generation Skipping Transfer (GST) Tax that we all know and love. Decanting a trust may allow one to extend the benefits of such exempt trusts. According to Alan Helperin and Michelle Wandler of Paul, Weiss, Rifkind, Wharton & Garrison LLP in this article (PDF):

[T]he GST regulations have provided that an exercise of a special power of appointment over an exempt trust
in favor of another trust generally does not cause the second trust to be subject to [the GST]. For years, in private letter
rulings, the IRS had asserted that modifications of an exempt trust do not cause the trust to lose its exempt status, but
only if the modifications do not result in any change in the quality, value or timing of any beneficial interest under the
trust.

Great stuff! I’ll be keeping an eye on this as the OSBA works on their recommendations.

Full post as published by The Ohio Trust & Estate Blog on January 04, 2008 (boomark / email).