Decanting to Amend an Irrevocable Trust Under the Illinois Trust Code


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Decanting to Amend an Irrevocable Trust Under the Illinois Trust Code

Since 2015, Illinois law has allowed the trustee of an irrevocable trust to engage in a process called "decanting." In a decanting, a trustee exercises his or her discretionary power to distribute trust assets to a new trust for the benefit of the beneficiaries instead of distributing assets to the beneficiaries directly. The term "decanting" comes from the world of wine – in a trust decanting, the trustee transfers (pours) the assets (the wine) of the original trust (the bottle) into a new trust (the decanter). Decanting is subject to a highly complex set of rules, and the scope of what trust provisions can or cannot be changed in a decanting depends on the breadth of the discretion granted to the trustee of the first trust.

The prior Illinois decanting statute, which was in effect from 2015 through 2019, referred to a "first trust" and a "second trust," which led many to believe that decanting required the creation of an entirely new trust. This made decanting administratively difficult, as it required all assets owned by the "first trust" to be transferred to the "second trust." For example, for irrevocable trusts owning life insurance, this required the trustee to update ownership registration and beneficiary designations for the life insurance policies. It also appeared to require the trustee to obtain a new taxpayer identification number for the trust and update income tax filings accordingly. Decanting therefore imposed a significant administrative burden on trustees – in addition to the legal complexities already inherent in the process.

On January 1, 2020, Illinois enacted an entirely new "Illinois Trust Code," which supersedes the prior decanting statute. The fundamental rules governing decanting under the new statute are generally the same as before. However, the new statute contains an extremely helpful clarification. As defined under the new statute, "decanting power" means:

"the power of an authorized fiduciary under this Article to distribute property of a first trust to one or more second trusts or to modify the terms of the first trust." (760 ILCS 3/1202(4).)

In other words, it is now possible to simply amend the terms of the original trust in a decanting rather than create an entirely new trust. This makes the wine analogy more strained – how does one "amend" the "bottle"? – but makes decanting much more straightforward. A trustee can now amend (or even restate) an existing trust agreement and retain the same name of the trust, without transferring legal title to the trust assets, updating beneficiary designations, or obtaining a new taxpayer identification number. One should note that this statute does not permit the settlor (the creator) of an irrevocable trust to change the terms of the trust, as doing so would have negative estate tax consequences. However, the new statute gives a trustee considerable flexibility in updating and modernizing the terms of an older irrevocable trust.

The rules governing the requirements for giving notice to beneficiaries of a decanting and what terms may or may not be changed in a decanting remain quite complex. However, the new Illinois Trust Code significantly reduces the administrative burdens associated with decanting, making it an even more useful tool for modifying irrevocable trusts under the right circumstances.