Can We Decant the Trust During Administration

Floyd called me last week, frantic. His mother had a trust drafted in 2010, a standard pour-over will, and now, after her passing, he discovered a glaring issue. The trust’s distribution provisions were based on outdated tax laws and didn’t account for his sister’s special needs. He’d found a handwritten codicil attempting to fix the problem, but it wasn’t properly witnessed – a fatal flaw. Now, he’s facing potentially significant estate taxes and a fractured family. He asked if there was anything we could do.

The short answer is, sometimes. “Decanting” a trust—transferring assets from an existing trust to a new trust—has become a powerful tool for trust administration, but it’s not a simple fix-all. It’s particularly relevant when initial trust terms no longer align with current circumstances, tax laws, or the beneficiaries’ needs, as in Floyd’s case. However, the ability to decant during administration is significantly more complex than decanting an ongoing, fully-funded trust.

The primary hurdle is the fundamental principle that a trustee’s power to modify a trust is limited by the trust document itself. Unless the trust expressly grants the trustee the power to decant during administration, we must look to statutory authority. California Probate Code § 16061.7 provides a pathway, but it’s not without limitations. The statute allows for decanting if it’s in the best interests of the beneficiaries and does not contravene a material purpose of the settlor. Crucially, within 60 days of the settlor’s death, the trustee must serve the ‘Notification by Trustee’ to all heirs and beneficiaries; this triggers the 120-day statute of limitations for contesting the trust, which is the trustee’s primary shield against future litigation. Decanting after this window significantly increases the risk of a challenge.

What are the Risks of Decanting During Trust Administration?

The biggest risk is a legal challenge. Beneficiaries who feel shortchanged by the decanting, or who believe it violates their mother’s original intent, can file a petition to set aside the transfer. Establishing the “best interests” standard and demonstrating that the decanting doesn’t undermine a material purpose of the trust requires meticulous documentation and a solid legal argument. This is where my experience as both an Estate Planning Attorney and a CPA proves invaluable. I’ve spent over 35 years navigating these complex issues, and I’m uniquely positioned to assess both the legal and tax implications of decanting.

How Does the CPA Advantage Apply to Decanting?

Decanting can have significant tax consequences, particularly concerning the step-up in basis. When assets pass through a trust, they typically receive a step-up in basis to fair market value at the date of the settlor’s death. However, decanting can complicate this process, potentially resulting in capital gains taxes when the new trust distributes those assets. We need to analyze whether the decanting triggers a taxable event, and if so, how to minimize the tax burden. Proper valuation of the assets being decanted is also critical.

What About Real Estate Held in the Trust?

If the trust holds real property, decanting can trigger Proposition 19 issues. Prop 19 stipulates that before distributing a parent’s home to a child, the trustee must verify if the child intends to make it their primary residence within one year; failure to file the proper exclusion claim forms will trigger a property tax reassessment to current market value, potentially forcing a sale. Decanting doesn’t change this requirement, and the trustee must be diligent in ensuring compliance.

What if Assets Were Accidentally Omitted from the Trust?

Sometimes, assets are unintentionally left out of the original trust. This isn’t uncommon, especially with retirement accounts or smaller bank accounts. For deaths on or after April 1, 2025, if a primary residence intended for the trust was legally left out (valued up to $750,000), the trustee can use a ‘Petition for Succession’ under AB 2016 (Probate Code § 13151) instead of a full probate. This is often a more streamlined and cost-effective solution. CRITICAL DISTINCTION: This is a “Petition” (Judge’s Order), NOT an “Affidavit.”

What are the Trustee’s Ongoing Responsibilities?

Even if a decanting is legally permissible, the trustee doesn’t escape ongoing responsibilities. Probate Code § 16062 mandates that trustees provide a formal accounting to beneficiaries at least annually and at the termination of the trust; waiving this requirement in the trust document does not always protect the trustee if a beneficiary demands a report. A transparent and accurate accounting is essential to maintaining trust and avoiding disputes.

What About the Federal Estate Tax Exemption?

For larger estates, the federal estate tax is a major consideration. The OBBBA (One Big Beautiful Bill Act) permanently set the Federal Estate Tax Exemption to $15 million per person, effective Jan 1, 2026. Trustees must determine if the estate exceeds this threshold (using portability election) before closing administration. Decanting can be a strategy to take advantage of this exemption, but it requires careful planning and expert tax advice.

Are There Issues with Business Interests Managed by the Trust?

If the trust owns an LLC, there are recent reporting requirements to consider. As of March 2025, domestic U.S. LLCs managed by the trust are exempt from mandatory BOI reporting; however, trustees managing foreign-registered entities must still file updates with FinCEN within 30 days of the settlor’s death. Decanting won’t change these requirements, and the trustee must ensure compliance with all applicable regulations.

What causes California trust administration to fail due to poor funding, vague terms, or trustee misconduct?

Success in trust administration depends on more than just the document; it requires active management of assets, precise accounting to beneficiaries, and careful navigation of tax rules. Whether dealing with a blended family or complex real estate, understanding the mechanics of trust law is the only way to ensure the grantor’s wishes survive scrutiny.

• Asset Protection: Explore permanent trust structures for asset shielding.
• Will Integration: Understand trusts created by will.
• Liquidity: Utilize an ILIT strategies for estate taxes.

A stable trust administration relies on the trustee’s ability to balance investment duties, beneficiary communication, and tax compliance. When these elements are managed proactively, families can avoid the emotional and financial drain of litigation.

Verified Authority on California Trust Administration

• Mandatory Notification (Probate Code § 16061.7): California Probate Code § 16061.7
  The first critical step in administration. This statute requires the trustee to notify all heirs and beneficiaries within 60 days of death. It starts the 120-day clock for any contests, limiting the trustee’s liability.
• Trustee’s Duty to Account (Probate Code § 16062): California Probate Code § 16062
  Defines the requirement for annual and final accountings. Trustees must report all receipts, disbursements, and changes in asset value to beneficiaries to ensure transparency and avoid surcharges.
• Primary Residence Succession (AB 2016): California Probate Code § 13151 (Petition for Succession)
  Effective April 1, 2025, this statute is a “rescue” tool for administration. If a home (up to $750,000) was left out of the trust, the trustee can petition for this order rather than opening a full probate.
• Property Tax Reassessment (Prop 19): California State Board of Equalization (Prop 19)
  Trustees must understand these rules before signing a deed to a beneficiary. Distributing real estate without filing the Parent-Child Exclusion claim can accidentally double or triple the property taxes for the heirs.
• Federal Estate Tax Exemption: IRS Estate Tax Guidelines
  Reflects the permanent increase to a $15 million per person exemption (effective Jan 1, 2026). Trustees must evaluate if an IRS Form 706 is necessary to preserve “portability” of the unused exemption for a surviving spouse.
• Digital Asset Access (RUFADAA): California Probate Code § 870 (RUFADAA)
  Without explicit authority under this statute, a trustee may be blocked from accessing the decedent’s online banking, email, or cryptocurrency accounts, stalling the administration process.