Fixing What Looked Irrevocable: A Practitioner’s Guide to Trust Decanting in South Dakota

Irrevocable trusts were not always designed to last forever — they were designed for a moment in time: a client’s estate at a particular tax threshold, a family structure that has since changed, a trustee who is no longer available or appropriate, a distribution standard that made sense in 1998 but is now at odds with the beneficiary’s circumstances. The trust instrument said “irrevocable,” but the world kept moving.

Decanting provides the mechanism to reconcile that tension. South Dakota’s decanting statute, codified at SDCL § 55-2-15, is among the most flexible in the country — allowing a trustee with discretionary distribution authority to pour trust assets into a new trust with materially different terms, without court approval and, in many cases, without beneficiary consent. This article provides a working guide to the statute, its requirements, strategic applications, and the key distinctions from other modification vehicles practitioners should weigh.

What Decanting Is — and What It Is Not

Decanting is the exercise of a trustee’s existing distribution power to distribute trust assets to a new trust rather than outright to a beneficiary. The conceptual predicate is straightforward: if a trustee has discretionary power to distribute principal to or for the benefit of a beneficiary, that same power authorizes distribution into a new trust for that beneficiary’s benefit — provided the new trust does not expand the beneficial interests of the current beneficiaries or otherwise violate the statutory constraints.

Decanting is not a judicial modification and should not be conflated with it. It does not require a finding of changed circumstances under the UTC’s modification standards. It is not a non-judicial settlement agreement under SDCL § 55-3-24, though NJSAs can accomplish some overlapping goals and are sometimes used in conjunction with a decant. The distinctions matter because each mechanism carries different procedural requirements, different limits on what can be changed, and different tax risk profiles.

South Dakota’s Statutory Framework: SDCL § 55-2-15

South Dakota’s decanting statute authorizes a trustee holding discretionary distribution authority over principal to exercise that power by distributing assets to one or more new trusts. The key operative provisions:

Trustee authority required. The decanting power derives from the existing trust’s distribution standard. A trustee with an ascertainable standard (health, education, maintenance, support) over principal has the authority to decant, as does a trustee with purely discretionary principal distribution power. Mandatory income interests require more careful analysis — the decant cannot eliminate a mandatory current income interest without the affected beneficiary’s consent.

Beneficiaries of the second trust. The current beneficiaries of the second trust must be among the current or remainder beneficiaries of the first trust. You cannot expand the class of beneficiaries through a decant. The statute does permit excluding a current beneficiary from the second trust’s distribution provisions under certain circumstances, which is one of the more powerful applications of the statute when a beneficiary’s circumstances have materially changed (disability, addiction, creditor exposure, relationship deterioration).

Spendthrift and other protective provisions. The second trust may include or strengthen spendthrift provisions even if the first trust lacked them — a significant advantage when the original instrument was drafted without adequate creditor protection language.

No court approval required. Unlike many states’ decanting regimes, South Dakota does not require court approval as a precondition to a decant. This dramatically reduces the cost and delay of the process for straightforward decanting exercises. Courts retain jurisdiction to review a completed decant upon challenge, but the trustee has broad authority to act without prior judicial blessing.

Notice. Under SDCL § 55-2-15, the trustee should provide reasonable notice to the qualified beneficiaries prior to completing the decant, though the statute does not make beneficiary consent a prerequisite. The specific notice requirements and timing should be confirmed against current statutory language and the terms of the trust instrument.

Strategic Applications: When to Reach for Decanting

1. Correcting Drafting Errors and Updating Administrative Provisions

Trust documents drafted decades ago often contain mechanical provisions that are obsolete, unworkable, or counterproductive. Investment standards keyed to the “prudent investor rule” before statutory codification, outdated trustee succession provisions naming banks that no longer exist, distribution committees requiring unanimous agreement among trustees who are now deceased — these are not hypotheticals. They are the contents of active trusts in every estate planning practice.

Decanting allows a trustee to move assets into a new instrument with modernized administrative provisions without the friction and expense of court intervention. The substantive beneficial interests need not change at all; the vehicle is simply upgraded.

2. Changing the Governing Law and Situs

A trust established under New York law with a New York trustee can, through a combination of trustee substitution and decanting, become a South Dakota trust administered under South Dakota law. The second trust designates South Dakota law as governing, appoints a South Dakota corporate trustee, and the assets pour over. The tax and structural advantages of South Dakota law — including the directed trust framework, abolished rule against perpetuities, asset protection provisions, and zero state income tax — become available prospectively.

This application is particularly powerful for long-standing trusts that predate the widespread adoption of South Dakota’s directed trust and dynasty trust statutes. Beneficiaries in those trusts did not have access to the advantages their counterparts in newly-drafted trusts enjoy. Decanting closes that gap.

3. Strengthening Asset Protection

An irrevocable trust that lacks robust spendthrift provisions, or whose distribution standard creates too much predictability for creditor attachment under applicable state law, can be decanted into a second trust with stronger protections. South Dakota’s spendthrift statute at SDCL § 55-1-20 and the broader asset protection framework under Title 55 provide the receiving trust with some of the strongest creditor protection available in any domestic jurisdiction.

The key principle: A South Dakota trustee’s discretionary distribution power is not subject to attachment or anticipation by the beneficiary’s creditors before a distribution is made. Combined with a strong spendthrift clause, this creates a multi-layered protection structure.

4. Extending the Trust Term

A trust approaching its perpetuities date — whether under the old common law rule or a statutory period in its original jurisdiction — can be decanted into a South Dakota trust with no perpetuities limitation. South Dakota abolished the rule against perpetuities in 1983 (SDCL § 43-5-8), allowing trusts to continue indefinitely for successive generations. A decant into a South Dakota trust resets the perpetuities analysis under the new governing law, enabling a dynasty trust structure going forward.

5. Adjusting Distribution Standards

Changed circumstances — a beneficiary’s disability, addiction, pending divorce, or significant change in financial circumstances — may render the original distribution standard either too restrictive or too permissive. A decant to a second trust with a revised distribution standard, consistent with the original grantor’s intent as reasonably construed, allows the trustee to adapt the instrument to current reality without a court proceeding.

This application requires the most careful analysis. If a mandatory current income interest exists, the decant cannot eliminate it without that beneficiary’s consent. The interests of remainder beneficiaries must be appropriately considered. And where the change in distribution standards arguably benefits the trustee personally or involves a conflict, independent review is advisable.

6. Separating a Single Trust into Multiple Trusts

A trust holding assets for multiple beneficiaries — particularly where the beneficiaries are in different tax brackets, have different creditor exposure profiles, or have different planning needs — can be decanted into separate trusts tailored to each beneficiary’s circumstances. This enables income splitting, tailored distribution standards, and appropriate governance for each branch without the cost of a judicial proceeding.

Tax Considerations

Decanting is generally treated as a modification of the trust for income, gift, and estate tax purposes rather than a transfer to a new trust — but that general statement requires careful analysis in every specific case.

Income tax. If the original trust is a grantor trust, the decanting should not alter grantor trust status unless terms of the second trust change the grantor trust trigger provisions. If the original trust is a non-grantor trust, the second trust’s grantor trust characterization should be independently evaluated. The IRS has not issued comprehensive guidance on decanting, and Revenue Ruling 2011-2 (addressing incomplete-gift non-grantor trusts in the context of trust modification) provides some analogical support but is not squarely on point.

Gift tax. A decant that does not expand the beneficial interests of current beneficiaries and does not shift value from one class of beneficiaries to another should not constitute a taxable gift. However, if the decant effectively accelerates or defers beneficial interests, or if the distribution standard change has economic consequences for remainder beneficiaries, a gift tax analysis is required.

Estate tax inclusion. If the original trust was structured to exclude assets from the grantor’s gross estate, the decanting should not trigger estate tax inclusion unless the second trust grants the grantor powers that would invoke IRC §§ 2036, 2037, or 2038. Confirm that no retained powers inadvertently re-enter through the second trust’s instrument.

Generation-skipping transfer tax. Decanting from an exempt trust to a second trust generally preserves GST exemption allocation provided the second trust does not have a new non-skip person as a current beneficiary in a manner that extends or resets the GST status. Revenue Procedure 2001-38 and the final regulations under IRC § 2642 address allocation of GST exemption in modification contexts; the decanting-specific analysis requires a fact-driven review.

Decanting vs. Other Modification Vehicles

Practitioners should consider the full menu before recommending decanting:

Decanting is most appropriate when the trustee has clear discretionary authority, the changes sought are consistent with that authority, and avoiding court involvement is a priority. Non-judicial settlement agreements are preferable where beneficiary consent is achievable and the changes sought technically exceed what the distribution power supports. Judicial modification remains necessary where the instrument is genuinely broken in a way that no existing power can cure.

Conclusion

South Dakota’s decanting statute provides estate planning counsel and their clients with a practical, cost-effective mechanism to modernize irrevocable trust instruments that have outlived their original design. Whether the goal is changing governing law to capture South Dakota’s advantages, strengthening asset protection, extending the trust term, or simply updating administrative provisions, SDCL § 55-2-15 supports a broad range of outcomes without requiring court approval or beneficiary consent.

The statutory framework is permissive, but the analysis requires care — particularly on the tax side, where guidance remains incomplete. Practitioners who approach decanting with a clear view of the modification goals, the relevant distribution standard, the tax profile of the original trust, and the beneficiary circumstances will find it one of the most versatile tools in the irrevocable trust modification toolkit.

Learn More

Sterling Trustees is a South Dakota non-depository trust company and serves as directed or administrative trustee for irrevocable trusts nationwide. We regularly work alongside estate planning counsel in structuring decanting transactions, including serving as the receiving trustee for trusts migrating to South Dakota. Contact Antony Joffe or schedule a call. 

Download this article