Reformation, Modification & Decanting

It may be helpful to reform, modify and thus modernize many older irrevocable trusts. Alternatively, it may be beneficial to decant from one older trust to a newly drafted trust, provided the trustee has the power to distribute assets. Modifications, reformations and decanting of a trust all have gained popularity as a result of new trust laws, the new Uniform Principal and Income Act, the Uniform Prudent Investor Act, "directed trust laws," changes in family circumstances and/or a desire to change trust administration. South Dakota’s decanting, modification and reformation statutes are some of the best in the U.S., and the South Dakota process is both cost and time effective. Please see: “Trust Remodeling” (pdf) by Rashad Wareh, Trusts & Estates Magazine, August 2007.

South Dakota law also provides that a court may reform the terms of a trust instrument upon receipt of a petition by a trustee or beneficiary. The reformation can be accomplished in order to conform the terms of the trust to the trustor's intention provided that the failure to conform was due to a mistake of fact or law and the trustor's intent can be established. In order to achieve the trustor's tax objectives the terms of a trust instrument may be construed or modified in a manner which will not violate the trustor's probable intention.

Trustees or beneficiaries might wish to modify an irrevocable trust to:

Improve the trust's governance structure;
Change the law applicable to the trust when the terms of the trust do not facilitate a change to its governing law;
Change dispositive provisions;
Change the administrative terms of the trust to ensure the trust provides the proper tools to its fiduciaries for the best management of the trust; or
Modernize an outdated trust agreement.

Decanting of a Trust

Reformation and modification both result in keeping the original trust, but by a South Dakota trustee once they have been appointed amending it, whereas decanting results in the pour over from an existing trust to a totally new trust. Decanting statutes vary depending upon the nature of the trustee's discretionary authority and whether the beneficiaries of the new trust will include the contingent beneficiaries of the original trust. Choosing the most appropriate decanting statute depends on the nature of the trustee's discretionary authority and whether the beneficiaries of the new trust will include contingent beneficiaries of the original trust. South Dakota's top rated decanting statute (effective July 1, 2007) provides a lot of flexibility for trust remodeling:

SDCL 55-2-15: South Dakota's new decanting statute allows for broad authority for modification of a trust. South Dakota requires only that a trustee have "discretionary authority" (without requiring that authority to be "unfettered" or "absolute.") Also, South Dakota's list of acceptable beneficiaries of the new trust is worded in the disjunctive. The beneficiaries of the new trust have to be either: (1) "power objects" of the exercise of the distributive power or (2) "one or more of those other beneficiaries of the first trust to or for whom a distribution of income or principal may have been made in the future from the first trust at a time or upon a happening of an event specified under the first trust."

Additionally, the language of the South Dakota statute permits the new trusts into which old trusts are decanted to have different beneficial interests and would even allow formerly contingent beneficiaries to become current beneficiaries and share equally (or pursuant to a different allocation) with those beneficiaries who previously were the only current beneficiaries.

The South Dakota statute does restrict a trustee's exercise of the decanting authority in that the trustee must take into account the purposes of the trust from which property is to be decanted, the terms of the new trust and the consequences of the decanting.