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Decanting: When Trust B needs to be fixed

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Here’s the scenario: A married couple had a joint trust. One spouse has died. The survivor now wants to ensure that the trust money is protected for the benefit of the couple’s child or children (and grandchildren). A well-written Trust B (the decedent’s trust or bypass trust) would provide asset protection benefits, and would also prevent the next generations from squandering the money. But not every trust is well-written. Sometimes Trust B needs to be fixed by a process called decanting.

Our law firm fixes problems with trusts, so we are all to familiar with the problems that can arise when one spouse has died. Many of these problems are caused by poorly written documents. And a lot of these poorly written documents were prepared by non-attorneys (such as document preparation companies). Such companies are more interested in selling canned documents than actually providing a quality service. In our experience, documents prepared by non-lawyers (even non-lawyers who market themselves as estate planning experts) are usually full of mistakes.

As written in a recent Forbes article: “The trouble with do-it-yourself planning, however, is that even if your situation seems simple, there are many oddball things a layman wouldn’t think of that can go wrong, especially with a will. These mistakes can end up costing your heirs a lot more than you saved in legal fees.” I would lump document preparation companies in the same category as “do-it-yourself planning” because these people have no idea how the documents actually hold up after a person has died.

A couple of common problems in trusts that arise after one spouse has died include:

a. The surviving spouse has complete control. This sounds great at first. But as the surviving spouse gets older, he or she can be pressured by family and friends to change the beneficiaries of the trust. And suddenly the original beneficiaries have been written out of the will (or trust). It is best to provide a check and balance. Having co-trustees is one approach. Another method is to use a trust company (assuming the amount of assets allows for this).
b. The irrevocable trust lacks flexibility. For example, Trust B may provide for an outright distribution to the children, regardless of the children’s ability to successfully manage the money. Or perhaps a trustee is irresponsible but there is no way to remove the trustee without going to court. (This is one reason for using a trust protector.)

Luckily, the Arizona statute provides a way of fixing an irrevocable trust such as Trust B. Section 14-10819 of the Arizona Statutes allows for one irrevocable trust to be transferred to a newly written trust (assuming that certain conditions are met). The process of called “decanting” and is best done by an experienced estate planning attorney.

Has anyone had an issue with needing to fix a trust after one spouse has died? Please let us know below.

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