Preserving Trust Assets with the California Trust Decanting Act

The California Uniform Trust Decanting Act (CUTDA) provides trustees with a powerful tool to modify an irrevocable trust under certain circumstances, allowing for greater flexibility in trust management. One of the most practical applications of CUTDA is when a trust’s corpus has diminished to a point where maintaining it independently is no longer financially responsible. In such cases, decanting the trust into a pooled special needs trust (PSNT) or another more cost-effective trust structure can preserve assets for the benefit of the trust’s beneficiaries.

What is Trust Decanting?

Trust decanting is the process of transferring assets from one trust (the “original trust”) to a new or existing trust (the “second trust”) with modified terms that better serve the interests of the beneficiaries. Under CUTDA, trustees can decant a trust without court approval or beneficiary consent, as long as the action aligns with their fiduciary duty and applicable state laws.

When is Decanting Appropriate?

One common scenario where decanting is beneficial is when a trust has become too costly to administer due to its diminishing corpus. Maintaining a stand-alone trust involves ongoing expenses such as:

Trustee fees
Accounting costs
Tax preparation fees
Investment management fees

When these costs significantly reduce the assets available for the beneficiary, the trustee may determine that consolidating the trust into a pooled trust is the best course of action.

Benefits of Decanting a Diminished Trust into a Pooled Trust

Lower Administrative Costs: Pooled trusts, managed by nonprofit organizations, typically have lower administrative fees compared to stand-alone trusts. This ensures that a greater portion of the trust’s assets remains available for the beneficiary’s needs.
Professional Trust Management: Pooled trusts provide professional management and oversight, ensuring compliance with applicable laws and regulations while relieving family members or individual trustees of administrative burdens.
Preservation of Public Benefits Eligibility: Many beneficiaries of smaller trusts rely on Supplemental Security Income (SSI), Medi-Cal, and other government benefits. Improperly structured trust distributions can jeopardize these benefits. A pooled special needs trust is designed to comply with federal and state regulations, ensuring continued eligibility.
Flexibility and Longevity: A pooled trust allows for ongoing support of the beneficiary without the risk of premature depletion due to high administrative costs. Funds are pooled for investment purposes but are maintained in separate sub-accounts for each beneficiary, allowing for individualized distributions.

Legal Requirements for Decanting Under CUTDA

To decant a trust under CUTDA, a trustee must ensure that:

The trust allows for decanting or does not explicitly prohibit it.
The trustee has discretion over principal distributions.
The proposed modification aligns with the settlor’s original intent and benefits the beneficiary.
Proper notice is given to interested parties, including beneficiaries, contingent beneficiaries, and co-trustees.

The Decanting Process

Trust Review & Analysis: The trustee evaluates whether the trust meets CUTDA’s requirements and determines if decanting is in the best interest of the beneficiaries.
Selection of a Pooled Trust: The trustee chooses a reputable pooled special needs trust that aligns with the beneficiary’s needs and financial situation.
Notice to Beneficiaries & Interested Parties: California law requires notice to be provided to all qualified beneficiaries and co-trustees before proceeding with decanting.
Execution of Decanting Documents: The trustee formally transfers assets from the original trust to the pooled trust, ensuring proper documentation and legal compliance.
Final Accounting & Termination of the Original Trust: Once the assets are successfully transferred, the original trust is formally closed, and any necessary tax filings are completed.

Conclusion

The California Uniform Trust Decanting Act offers trustees an effective solution when a trust’s corpus has diminished to an unsustainable level. By decanting assets into a pooled trust, trustees can reduce administrative costs, maintain professional management, and protect the beneficiary’s long-term interests while preserving public benefits eligibility. Trustees considering this option should work with experienced trust attorneys and financial advisors to ensure compliance with CUTDA and fiduciary responsibilities.

JLA Trust: A Trusted Partner for Decanted Trusts

JLA Trust accepts decanted trusts and continues to provide the same high-quality services previously offered by the original trustee—but at a more affordable price that reflects the remaining trust balance after decanting. By choosing JLA Trust, beneficiaries and their families can be assured of:

Expert Trust Administration: Our team has extensive experience managing special needs and pooled trusts, ensuring that all financial and legal requirements are met.
Cost-Effective Solutions: Our fee structure is designed to maximize the longevity of the trust while minimizing administrative costs.
Personalized Service: We work closely with beneficiaries and their families to understand their unique needs and provide tailored financial management solutions.
Commitment to Beneficiary Well-Being: We ensure that funds are managed responsibly while protecting the beneficiary’s eligibility for government benefits.