Can We Decant the Trust During Administration

It happens more often than you’d think. Phillip came to me in a panic last month. His mother had passed away, and he’d been named as successor trustee of her irrevocable trust. She’d created the trust in 1998, and it was… outdated, to put it mildly. Changes in tax law, family dynamics, and frankly, just the passage of time had rendered it almost unusable for its intended purpose. Phillip had a draft codicil ready to go, attempting to address these issues. But he’d lost track of the original trust document while moving, and the codicil was therefore essentially worthless. He faced the prospect of a costly court modification proceeding – potentially tens of thousands of dollars in legal fees – and a prolonged period of uncertainty.

What Phillip needed, and what many trustees find themselves needing, is a process called trust decanting. Essentially, decanting allows you to transfer the assets of an existing irrevocable trust to a new trust with updated terms, effectively rewriting the rules without the need for court intervention, provided certain conditions are met. It’s not a simple fix, and it’s absolutely crucial to understand the implications before proceeding. I’ve been practicing estate planning and as a CPA for over 35 years, and I’ve seen both incredible successes and devastating mistakes when it comes to trust administration. My background as a CPA gives me a unique insight into the tax ramifications of these decisions, particularly concerning the crucial step-up in basis and the potential impact of capital gains.

What’s Allowed, and What’s Not?

The ability to decant a trust isn’t universal. California law, under the Trust Decanting Act (Probate Code § 13115 et seq.), offers a pathway, but it’s not a free-for-all. The original trust must be irrevocable, and the decanting must be consistent with the original trust’s terms. This means you can’t use decanting to fundamentally alter the beneficiaries or strip them of their rights. Changes are typically limited to administrative or tax-driven updates. For example, decanting might be appropriate to streamline investment strategies, address changes in state law, or to take advantage of new tax planning opportunities. Trying to radically alter the trust’s core purpose is a red flag.

The Importance of the Beneficiary Notice

A critical component of the decanting process is providing proper notice to all beneficiaries. While the statute doesn’t require their consent, it does mandate a specific notification that details the decanting and their right to object. Probate Code § 16061.7 outlines this requirement: “…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.” Ignoring this notice requirement can open you up to significant legal challenges down the road.

Tax Considerations – The CPA Advantage

This is where my CPA background becomes invaluable. Decanting can have substantial tax consequences, particularly relating to capital gains. Generally, decanting is considered a non-taxable event if it’s done correctly. However, if assets have appreciated in value, the transfer to the new trust could trigger a deemed sale, resulting in capital gains taxes. A careful analysis of the assets and the trust terms is essential to minimize these liabilities. We need to determine if a step-up in basis is possible, and if not, how to structure the decanting to mitigate the impact. Properly valuing the assets at the time of decanting is paramount; this valuation will be used for determining any potential tax liabilities.

Real Estate and Prop 19 Complications

If the trust holds real estate, the decanting process adds another layer of complexity due to Prop 19. 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 real estate necessitates a thorough understanding of these rules.

What If Assets Were Accidentally Left Out?

Sometimes, despite the best intentions, assets are unintentionally omitted from the original trust. Emily came to me with this exact problem – a valuable piece of land had been mistakenly excluded from her mother’s trust. In situations like this, the trustee might be tempted to simply add the asset to the trust during administration. However, this can create significant tax issues and potentially invalidate the entire trust. 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. Remember, this is a “Petition” (Judge’s Order), NOT an “Affidavit.”

Duty to Account and Ongoing Obligations

Decanting doesn’t absolve the trustee of their ongoing duties. Probate Code § 16062 states that “…trustees are legally mandated to 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.” You must continue to diligently manage the trust assets, provide regular accountings, and act in the best interests of the beneficiaries.

What failures trigger court intervention and contests in California trust administration?

The advantage of a California trust is control and continuity, but this relies entirely on accurate funding and disciplined administration. Without clear asset titles and strict adherence to fiduciary standards, a private trust can quickly become a subject of public litigation over mismanagement, capacity, or undue influence.

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.
• Estate Tax Exemption (OBBBA): IRS Estate Tax Guidelines
  Reflects the OBBBA 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.