Trust Decanting in Connecticut

Trust decanting allows an authorized fiduciary to distribute assets from an existing irrevocable trust into a new trust with different terms. The metaphor comes from wine: pouring liquid from one vessel into another, leaving the sediment behind. In trust law, the “sediment” is the outdated or problematic provisions of the original trust.

Connecticut adopted the Uniform Trust Decanting Act as part of PA 19-137, codified at CGS 45a-545a through 45a-545cc, effective January 1, 2020. The Act provides a structured, statutory process for what had previously been an uncertain exercise of trustee discretion.

When Decanting Is Used

Decanting is a tool for fixing irrevocable trusts that no longer serve their intended purpose. Common reasons include:

• Correcting drafting errors or ambiguities
• Updating trust terms to reflect changes in tax law
• Adding spendthrift provisions or asset protection language
• Changing trustee succession provisions
• Converting a trust to a directed trust structure
• Consolidating multiple small trusts into a single trust
• Extending the trust’s duration within the limits of the rule against perpetuities
• Moving the trust’s situs to a more favorable jurisdiction
• Adding provisions for trust protectors or trust directors
• Modifying distribution standards to address changed beneficiary circumstances

Who Can Decant

Only an “authorized fiduciary” may exercise the decanting power. Under the Act, an authorized fiduciary is a trustee (or other fiduciary) who has discretion to make distributions of trust property. The scope of the decanting power depends on the scope of the trustee’s distribution discretion.

Broad discretion. If the authorized fiduciary has discretion to distribute trust property without being limited to an ascertainable standard (health, education, maintenance, or support), the fiduciary can decant into a second trust that may have substantially different terms. The second trust can exclude beneficiaries who had interests in the first trust, add new beneficiaries, and change distribution standards, subject to specific limitations.

Limited discretion. If the authorized fiduciary’s distribution discretion is limited by an ascertainable standard, the decanting power is narrower. The second trust must grant each beneficiary a beneficial interest that is substantially similar to the beneficial interest in the first trust. The fiduciary cannot use decanting to eliminate or reduce a beneficiary’s interest.

Requirements and Limitations

The Act imposes several mandatory constraints on decanting, regardless of the scope of the fiduciary’s discretion.

Material purpose. Decanting may not be used to defeat a material purpose of the first trust if the settlor’s intent is clearly expressed in the trust instrument.

Tax-qualified trusts. Decanting cannot change a trust in a way that would violate a mandatory rule of law applicable to a trust with tax-qualified provisions (such as a marital trust, charitable trust, or trust holding S corporation stock). The Act includes specific protections for these types of trusts.

Spendthrift provisions. If the first trust contains a spendthrift provision, the second trust must also contain a spendthrift provision.

Beneficiary additions. When the authorized fiduciary has limited discretion, the second trust generally cannot add beneficiaries who were not beneficiaries of the first trust.

Vested interests. Decanting cannot reduce a vested interest of a beneficiary who is currently entitled to mandatory distributions of income or principal.

Notice Requirements

The authorized fiduciary must provide notice of the proposed decanting to specified persons at least 60 days before the decanting takes effect. Required recipients of notice include:

• Each settlor of the first trust (if living and competent)
• Each qualified beneficiary of the first trust
• Each holder of a presently exercisable power of appointment over the first trust
• Each person who currently serves as trust director or trust protector
• The Attorney General, if the first trust is a charitable trust

The notice must include a description of the proposed decanting, the reasons for it, and a copy of the proposed second trust instrument (or, if the second trust instrument has not been finalized, a summary of the material differences between the two trusts).

Any person entitled to notice may petition the court to block or modify the proposed decanting. If the court determines that the decanting would not further the purposes of the trust, violates the Act, or is inconsistent with the fiduciary’s duties, the court may deny the petition or impose conditions.

The Second Trust

The second trust is a new, separate trust. It can be (and usually is) governed by the same jurisdiction’s law as the first trust, but it need not be. The second trust has its own terms, its own trustee provisions, and its own administrative framework.

The authorized fiduciary must ensure that the second trust’s terms comply with the Act’s requirements. In practice, the attorney drafting the second trust will prepare both the new trust instrument and the decanting instrument (the document by which the fiduciary exercises the decanting power).

Relationship to Other Modification Tools

Decanting is one of several modification tools available under Connecticut law. The CUTC also provides for judicial modification (CGS 45a-499mm), consent modification (CGS 45a-499ll), modification for tax purposes (CGS 45a-499nn), and nonjudicial settlement agreements (CGS 45a-499k).

Each tool has different requirements, different limitations, and different practical implications. Decanting is often the most efficient option when the changes needed are extensive and all parties are not available to consent, because it does not require court approval or unanimous beneficiary consent. But it is available only to trustees with distribution discretion, which limits its applicability for some trusts.

Tax Considerations

The tax consequences of decanting are among the most complex aspects of the process. The IRS has not issued comprehensive guidance, and the tax treatment depends on the specific changes made.

Gift tax. If a beneficiary’s interest is reduced or eliminated through decanting, the IRS could treat this as a taxable gift by the beneficiary. The risk is highest when the beneficiary has consented to or participated in the decanting.

Estate tax. Decanting that changes the beneficial interests in a trust can have estate tax consequences for beneficiaries who hold general powers of appointment or who are treated as having made transfers.

Income tax. Decanting that changes the trust’s grantor trust status (either creating or terminating grantor trust treatment) has immediate income tax consequences.

Generation-skipping transfer tax. Perhaps the most significant risk. If the first trust is exempt from GST tax (because it was grandfathered or because an allocation of GST exemption was made), decanting must preserve that exempt status. Changes to beneficial interests, particularly changes that extend the trust’s duration or shift interests among generations, can jeopardize GST-exempt status.

Practitioners should obtain tax counsel before any decanting that modifies beneficial interests, changes the trust’s duration, or alters the trust’s tax treatment. A decanting that solves one problem while creating a tax liability is worse than no decanting at all.

For more on the statutory framework governing trust modification, see our Connecticut Uniform Trust Code overview. For how the perpetuities period interacts with decanting, see Connecticut’s 800-year rule against perpetuities.

Decanting is often used to update trust provisions in light of changing estate tax law. For the current Connecticut estate tax exemption and rate structure, see the Connecticut estate tax guide. For how the federal and Connecticut estate taxes interact in trust planning, see federal-CT estate tax interaction.