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Nevada Trust Decanting
A Solution for Modifying Irrevocable Trusts
by Jay R. Larsen, Esq.
Irrevocable trusts are a common tool in estate planning. They play an important role in protecting assets, reducing
taxes, and preserving legacies from one generation to the next. Irrevocable trusts come into existence in a number
of ways.
A grantor who created a typical revocable living trust may die, at which point the trust becomes irrevocable. Or
perhaps the grantor created an irrevocable trust to protect assets or remove a large life insurance policy from
the grantor/insured’s estate for estate tax purposes. The grantors may have grandchildren for whom they wish to
establish an irrevocable minor’s trust for future education.
There are many reasons for using irrevocable trusts, but a common characteristic is that they are typically not
amendable. A carefully drafted irrevocable trust may provide some flexibility, for example through a limited power
of appointment. But generally speaking, an irrevocable trust that has “gone wrong” in some way can be difficult
to change.
Why Might You Want to Change the Trust?
Rather than things going wrong with the trust, it is more likely that goals or circumstances change such that it is
difficult to accomplish the original intent of the trust. Sometimes issues arise with trust assets or beneficiaries, and
the trust language is too ambiguous to provide clear direction about what should be done.
Maybe circumstances arise which cause the parties involved to recognize the benefits of extending the trust beyond
a fixed term or mandatory payout at a certain age. Changing a trust from one that provides for the health,
education, support and maintenance needs of a beneficiary to a discretionary trust can provide superior asset
“
There are many reasons for using irrevocable trusts, but a common
characteristic is that they are typically not amendable.”
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protection. Perhaps it makes sense to combine trusts that otherwise cannot be merged by their terms. Or due to
the differing needs of a pool of beneficiaries of a single large pot trust, it might make sense to divide the trust into
separate trusts. Perhaps tax laws change.
In addition to the reasons above, there are many others for wanting to modify an otherwise seemingly unchangeable
irrevocable trust. So how does one go about accomplishing that objective?
How to “Fix” the Irrevocable Trust.
• Court Order: One possible method of dealing with desired changes is to petition the court. This works well
to fix clerical errors, confirm new trustees, or clarify ambiguities. However, certain modifications, such as
changing distribution provisions, may be more difficult, especially without the consent of all the beneficiaries
affected by the change.
• Non-Judicial Settlement Agreement: If beneficiary consent is going to be needed anyway, a non-judicial
settlement agreement (“NJSA”) should be considered if your state allows it. Nevada statute permits a wide
range of changes to an irrevocable trust, including its termination. NRS 164.940.
• Decanting: A third option for fixing potential problems with irrevocable trusts is for the trustee to transfer assets
from the irrevocable trust causing the concern to a new irrevocable trust that does not have the problems. This
transferring process is known as “decanting.” Not all trusts are eligible for decanting and not all states allow
decanting. Fortunately, Nevada statute allows for decanting as long as the statutory requirements are met. NRS
163.556.
The Decanting Process
First, the irrevocable trust should be domiciled in Nevada and subject to Nevada law. If necessary, jurisdiction of
the trust should be transferred to Nevada so that the Nevada decanting statutes apply.
Next, the trustee must satisfactorily answer several questions. Do the terms of the trust prevent decanting? If so, the
trust may not be decanted. Does the trustee have discretion or authority to distribute income or principal of the trust
either to or for the benefit of a beneficiary? If so, then the property which is subject to the discretion or authority
may be transferred to a second irrevocable trust.
It is important to note that new beneficiaries may not be added to the second trust. Also, there are several
circumstances under which decanting is not allowed. Such circumstances include the second trust reducing an
income interest if the first trust is a marital trust, a charitable trust, or grantor retained annuity trust. Or if property
specifically allocated to a particular beneficiary is not allocated to that same beneficiary in the second trust, unless
the beneficiary consents. There are also a couple of other prohibited situations.
“
As you can imagine, in order to prevent a trustee from abusing the
decanting power, there are additional restrictions to decanting if the trustee
is also a beneficiary of the first irrevocable trust.”
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As you can imagine, in order to prevent a trustee from abusing the decanting power, there are additional restrictions
to decanting if the trustee is also a beneficiary of the first irrevocable trust.
Once it is determined that the trustee may decant assets from the first irrevocable trust to the second, the next step
is to create the second irrevocable trust, if it is not already established.
Before appointing assets to the second trust, the trustee may give notice to the beneficiaries or may seek court
approval. The statute is not clear whether or not the trustee may decant without either notice or court approval, but
arguably should be okay. Nevertheless, the recommended course of action is to either obtain beneficiary consent,
provide the appropriate notice, or obtain court approval. If court approval is sought, notice of the petition is given
to the beneficiaries.
After court approval is obtained, the notice period expires, or beneficiary consent is obtained, the trustee may
assign the desired assets from the first trust to the second trust.
Decanting has become an additional tool to remedy “broken” trusts, whether from drafting problems or from
changed life circumstances. However, proper decanting is not a do-it-yourself project. Working with an experienced
trust company serving as trustee and receiving the advice of experienced legal counsel is important for successful
trust decanting.
Jay R. Larsen, Esq. is a partner with the law firm of Gerrard Cox Larsen with offices in Las Vegas and Henderson,
Nevada. He has 25 years of experience and is AV rated with Martindale-Hubbell. Mr. Larsen focuses his practice in
the areas of estate planning, asset protection, probate, estate administration, estate & gift taxation, guardianship,
and business entity formation. Mr. Larsen obtained his law degree from Brigham Young University, J. Reuben Clark
Law School, graduating magna cum laude, followed by a masters of law (L.L.M.) in taxation from the Washington
School of Law, Washington Institute for Graduate Studies. Mr. Larsen volunteers his time in various community
activities, including as a member of the Rotary Club of Green Valley and of the Nevada State College Planned
Giving Committee.
About the Author
JAY R. LARSEN, ESQ.
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Copyright 2024 © Jay R. Larsen. All Rights Reserved. Reproduction in any form or forwarding to any person prohibited – without express
permission. This article is designed to provide accurate and authoritative information regarding the subject matter covered. It is provided
with the understanding that Peak Trust Company cannot provide legal advice and this material should not be construed as such.
Jurisdiction-specific law should be discussed with appropriately skilled legal counsel. The techniques discussed here are general statements
and do not cover the many complexities of the subject. Each state frequently proposes and pass updates and clarifications to their respective
statutes and regulations. Please consult legal counsel and official state sources for the most up-to-date information on jurisdiction-
specific law. Peak Trust Company makes no guarantees as to the completeness or relevance of these statements. Statements of fact or
opinion are the responsibility of the authors and do not represent an opinion on the part of the officers or staff of Peak Trust Company.
Peak Trust Company serves as trustee of trusts nationwide, specializing in administration for trusts pursuant to Alaska and Nevada law. “Peak Trust Company” is the brand for a
group of affiliated state chartered professional trust companies headquartered in Anchorage, Alaska. Separate state charters are maintained for operations in Alaska and Nevada
as Peak Trust Company-AK and Peak Trust Company-NV. More information about Peak Trust Company, including our services, investment strategies, fees and objectives, are
available upon request by calling (888) 544-6775, or visiting www.PeakTrust.com.
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