Many of our clients come to us to because existing trust documents no longer meet their needs and changes are needed. In these cases South Dakota offers the greatest flexibility in offering the ability to decant, reform, modify and thus modernize existing irrevocable trusts. South Dakota's decanting, modification and reformation statutes are some of the best in the U.S.1
Reformation and Modification of an Existing Trust
Many grantors and beneficiaries come to us for reformation and modifications of trusts that are no longer "working" for some reason or that need greater flexibility. We find that when all beneficiaries and grantors are in agreement with the changes being proposed, the process works fast and efficiently. In addition, South Dakota has virtual representation statutes that represent the unborn beneficiaries, strengthening the process.
The process includes petitioning the court to modify or reform the administrative or dispositive terms of the trust. This process can be used when circumstances surrounding the trust have changed, to fix a drafting mistake, or to update the document due to changes in the law.
Unlike decanting, reformations and modification of existing grandfathered GST trusts is generally permitted.
Decanting is the act of distributing assets from one trust to a new trust, typically with new terms. A trust generally permits trustees to pay trust principal over to one or more beneficiaries, which is called the power to invade the trust. If the trustee has any discretion over income or principal, South Dakota's decanting statute permits a South Dakota trustee to pay property to another trust for a beneficiary/beneficiaries.
In a reformation or a modification the result is that the original trust stays in place with the new changes. In a decant, however, a new trust is created. The assets from the existing trust are "poured or decanted" into a newly created South Dakota trust.
Decanting, like reformation and modifications, occurs for many reasons.3 The top reasons that we see are as follows:
- Changing the governing law provisions of a trust;
- Modifying the administrative provisions;
- Modifying powers of appointment;
- Adding spendthrift protections;
- Adding or removing grantor trust provisions;
- Amending trustee succession provisions, removing or replacing a trustee;
- Separating higher risk assets;
- Combining trusts for greater efficiencies;
- Separating trusts to allow investment philosophies to be "fine-tuned" for beneficiaries;
- Avoiding state and local taxes;
- Reducing distribution rights for Medicaid eligibility planning purposes;
- Correcting drafting errors;
- Responding to changed circumstances;
- Extending the term of a trust;
- Assisting beneficiaries with disabilities;
- Correcting a scrivener's error or ambiguity;
- Decanting a beneficiary's share of a trust to a supplemental needs trust in order to preserve or obtain eligibility for public benefits.
See the rankings
1 "Decanting: A Statutory Cornucopia" by Rashad Wareh and Eric Dorsch, Trusts & Estates magazine, March 2012.; also "Trust Remodeling" by Rashad Wareh, Trusts & Estates magazine, August 2007.
2 SDCL 55-2-15
3 Thomas E. Simmons, Decanting and Its Alternatives: Remodeling and Revamping Irrevocable Trusts, 55 S.D. L. Rev. 253, 255 (2010).