Can You Transfer Assets From One Trust to Another?

It is possible to move assets from an existing trust into a new one, a process legally known as “decanting.” This action is often used to update or improve the terms of an irrevocable trust, which is otherwise unchangeable. Decanting involves creating a new trust with more favorable provisions and then transferring the assets from the original trust into it. This allows for modifications that can adapt to new laws or shifting beneficiary needs.

Common Reasons for Transferring Trust Assets

A primary motivation for transferring assets is to alter the administrative or dispositive terms of an irrevocable trust when original provisions become outdated. For instance, a distribution schedule might not align with a beneficiary’s current financial maturity or life circumstances, necessitating a change to the timing or conditions of their inheritance. A new trust can be drafted with updated terms that better reflect the present situation.

Another reason is to respond to changes in the legal and tax landscape. Since tax laws are frequently revised, a trust that was once tax-efficient may no longer be optimal. Transferring assets to a new trust designed under current laws can lead to better tax outcomes. Similarly, changes in state trust law might offer opportunities for improved asset protection or more flexible administration.

Correcting errors or ambiguities in the original trust document is also a common driver for decanting. A drafting mistake can lead to administrative complications or outcomes inconsistent with the grantor’s original intent. This process can also be used to consolidate multiple trusts for more streamlined management or to modernize an older trust.

Determining the Authority to Transfer

The authority to transfer assets from one trust to another is not automatic and must be legally established. The first step is to review the original trust instrument for a clause that explicitly grants the trustee the power to decant. The language of such a clause will define the scope and limitations of the trustee’s ability to make changes.

If the trust document has no explicit provision, the power to transfer assets may be granted by state law through statutory decanting. Many states have enacted laws allowing trustees to decant a trust if certain conditions are met. A common requirement is that the trustee must have discretionary power to distribute the trust’s principal to the beneficiaries.

The legal framework for decanting varies significantly from one state to another, with some providing broad authority and others imposing more stringent limitations. For example, a common restriction is that the new trust cannot add beneficiaries who were not included in the original trust. The trustee’s power is ultimately dictated by the interplay between the trust’s specific language and the governing state law.

Required Documentation and Information

Before any assets can be moved, a set of documents must be prepared to ensure the transfer is legally sound and properly executed. This documentation includes:

• A new trust document that is drafted to include all necessary provisions, such as the appointment of trustees, the identification of beneficiaries, and the specific terms governing asset management and distribution.
• A detailed inventory and valuation of all assets held by the original trust. This involves creating a complete list of every asset and assigning a current fair market value as of the date of the intended transfer.
• A formal trustee resolution that documents the decision to decant the trust, the legal authority for doing so, and the rationale behind the action.
• A notice to beneficiaries, if required by state law or the original trust. This notice should provide details about the decanting, including the reasons for the transfer and a description of how the new trust’s terms will differ.
• A formal legal opinion that confirms the trustee’s authority to decant, which can provide an additional layer of legal protection for the trustee.

The Asset Transfer Process

Once the new trust is created and documentation is in place, the process of moving assets involves re-titling each asset from the original trust to the new trust. The specific actions required will vary depending on the type of asset being transferred.

For real estate holdings, the transfer is accomplished by executing and recording a new deed. This deed legally conveys the property from the trustee of the old trust to the trustee of the new trust and must be filed with the appropriate county recorder’s office.

Transferring liquid assets like bank and brokerage accounts requires direct engagement with the financial institutions. The trustee will need to provide the institution with a copy of the new trust document and other required paperwork. The institution will then close the old accounts and open new ones titled in the name of the new trust.

Interests in a privately held business, such as a limited liability company (LLC) or partnership, involve amending the company’s official records. This may require drafting an amendment to the operating or partnership agreement and issuing new membership or partnership certificates in the name of the new trust.

Key Tax Considerations

While decanting is often structured to be a non-taxable event, there are tax implications that must be carefully considered. A primary concern is the income tax treatment of the transferred assets. The assets will move to the new trust with the same cost basis they had in the original trust. This means the transfer itself does not trigger capital gains tax, but the inherent gain is carried over and will be realized when the new trust eventually sells the asset.

The potential for an unintended taxable gift is another area of focus. If decanting reduces or eliminates a beneficiary’s interest for the benefit of others, the beneficiary whose interest was diminished may be considered to have made a taxable gift. This risk is heightened if a beneficiary was notified of the decanting and had the right to object but did not.

A risk also involves the Generation-Skipping Transfer (GST) tax, especially for older trusts that are “grandfathered” or otherwise exempt. If a decanting modifies the trust in a way that violates the exemption rules, for instance, by extending the trust’s duration beyond what was originally permitted, the trust could lose its protected status. This would subject future distributions to the GST tax.