Irrevocable trusts are a common and sophisticated estate planning tool, but the process of modifying or amending the trust is quite difficult. This can present a problem for our international clients, as the needs of Mexican and Latin American investors often change as their assets grow and the tax laws evolve. When this happens, the experienced estate planning attorneys at MEG International Counsel will investigate every possible option to find the most favorable solution.
Recently, we had a client in Mexico with a foreign trust that needed to be adapted to comply with the tax law changes that went into effect in January 2020. We needed to be proactive to avoid the harsh consequences the reform could pose to the beneficiaries after the law became fully implemented in January 2021. We worked with the client to redomicile the trust and change the governing law to a U.S. jurisdiction that allows the modification of an irrevocable trust.
After we created the possibility for the trust to be governed by the specific U.S. jurisdiction, we used the law of that jurisdiction—even though it wasn’t in the original trust itself—to “decant” the trust. We changed how the beneficiaries would receive their distributions from the trust moving forward. This approach helped the client remain in compliance with his tax obligations in Mexico by avoiding the need to be subjected to the law altogether. Additionally, the “decanting” helped protect the client’s privacy, safety, and security by avoiding the problematic reporting provisions of the Foreign Account Tax Compliance Act (FATCA) and its global counterpart, the Common Standard for Automatic Exchange of Financial Account Information in Tax Matters known as CRS.
Other Uses for Decanting a Trust
Modifying an irrevocable trust is known as decanting a trust. This process involves pouring or combining the assets of the original irrevocable trust into a second newly created irrevocable trust with more desirable terms. You can think of the process as similar to decanting a bottle of vintage wine. In both cases, you will leave something undesirable behind in the old container while working to preserve what is desirable in the new one.
There are many restrictions on the decanting process, but our skilled attorneys may be able to use this approach to:
- Change the jurisdiction of the trust for tax or asset protection purposes
- Correct an error in the terms of the original trust
- Increase the asset protection capabilities of the trustee
- Address asset-related scenarios that were unforeseeable when the original trust was created
- Change or add to the order of successor trustees
- Modify the ages of distribution for the remainder beneficiaries
Learn More About Your Estate Planning Options
MEG International Counsel provides clients with estate planning services customized to fit their unique needs as Mexican or Latin American investors. Request our complimentary guide, The Definitive Blue Book of Estate Planning for Foreign Millionaires, to familiarize yourself with key estate planning concepts, then contact us to schedule a consultation to discuss how to utilize irrevocable trusts to achieve your estate planning goals.