Texas Decanting Statute: Discretion, Notice, and Tax Treatment

The Texas decanting statute, found in Chapter 112, Subchapter D of the Texas Property Code, lets a trustee distribute assets from an existing irrevocable trust into a newly created one without court approval or beneficiary consent, provided proper notice is given. How much the new trust can differ from the old one depends almost entirely on whether the trustee holds full or limited discretion over principal distributions under the original trust.

Full Discretion Versus Limited Discretion

Section 112.071 defines the two categories that control everything else. A trustee with full discretion can distribute principal to or for the benefit of a beneficiary without being restricted by any standard. A trustee with limited discretion either follows mandatory distribution provisions with no discretion at all, or can distribute principal only under an ascertainable standard tied to things like a beneficiary’s maintenance or support.¹

A full-discretion trustee acts under Section 112.072 and has substantial room to reshape the terms of the second trust, including the timing, manner, or conditions of distributions. A limited-discretion trustee acts under Section 112.073 and faces tight constraints on what the new trust can look like.

What a Limited-Discretion Trustee Must Keep the Same

When the trustee’s power is bounded by an ascertainable standard, the second trust must stay closely aligned with the first. The current beneficiaries must be identical. The successor and presumptive remainder beneficiaries must also carry over unchanged. The distribution language authorizing payment of income or principal in the new trust must match what appeared in the original.²

If the original trust describes beneficiaries as a class, such as “my descendants,” the second trust must include anyone who later joins that class. If the original gave a beneficiary a power of appointment, the new trust must grant the same power with the same class of permissible appointees. The trustee must exercise the decanting power in good faith, consistent with the trust’s terms and purposes, and in the interests of the beneficiaries.²

In practical terms, a limited-discretion trustee can update administrative provisions and modernize the trust’s framework but cannot fundamentally change who gets what, or on what terms.

Limits That Apply No Matter the Discretion Level

Even a full-discretion trustee works within hard limits built into Subchapter D.

Prohibitions in the Original Trust

If the trust instrument specifically prohibits decanting, the trustee cannot override it. A general provision barring amendment or revocation, or a standard spendthrift clause, does not by itself block decanting.³ A line that says “this trust may not be amended or revoked” is not, on its own, a bar.

Trustee Compensation

A trustee cannot decant solely to change how their own compensation is calculated. If the decanting serves another valid and reasonable purpose, the trustee may bring their compensation in line with what state law considers reasonable. A trustee also cannot collect a commission or separate fee just for moving assets from the first trust to the second.⁴

Protecting Federal Tax Benefits

Section 112.086 prevents decanting in any way that would jeopardize a federal tax benefit the original trust was designed to receive. The protected benefits include the gift tax annual exclusion under IRC Section 2503(b), the marital deduction for estate, gift, or GST tax purposes, the charitable deduction for income, estate, or gift tax purposes, direct skip treatment under IRC Section 2642(c), and any other federal tax benefit claimed for a contribution to the original trust.⁵

If the first trust holds S corporation stock, the second trust must qualify as a permitted S corporation shareholder. If the first trust holds an interest in property subject to minimum distribution rules, such as an inherited IRA, the decanting cannot shorten the minimum distribution period. The statute does, however, permit decanting even if it changes the grantor trust status of either trust.⁵

Notice the Trustee Must Give

Court approval is not required, and neither the settlor nor the beneficiaries need to consent, so long as the trustee gives proper written notice beforehand. Notice goes to all current beneficiaries and all presumptive remainder beneficiaries, determined as of the date the notice is sent.⁶

The notice must contain a statement that the trustee intends to exercise the decanting power, a statement of the beneficiary’s right to object, a statement that the beneficiary may petition a court to approve, modify, or deny the decanting, and a description of how the distribution will be carried out.⁶

If a beneficiary is a minor without a guardian, notice goes to a parent. If a beneficiary has a court-appointed guardian or conservator, notice goes to that person instead. The trustee can skip notice for beneficiaries who cannot be found after reasonable effort, who are unknown to the trustee, or who waive the requirement.⁶

When a charity is involved, whether as a named beneficiary, a dissolved charitable beneficiary, or an unnamed charity the trustee has authority to benefit, the trustee must also notify the Texas Attorney General, unless the AG waives that requirement in writing.⁶

How the Distribution Is Executed

The transfer takes effect through a written instrument signed and acknowledged by the trustee. That document must be filed with the records of both the first trust and the second trust.⁷ From there, the trustee handles the practical mechanics of retitling assets, such as transferring deeds for real property, updating brokerage account registrations, and reassigning ownership of business interests.

The trustee does not need to show a current need to distribute principal under the first trust’s terms before exercising the decanting power. The authority to decant is independent of whether a distribution would otherwise be warranted at that moment.⁸

Federal Tax Treatment Is Still Unsettled

The IRS has been studying decanting since at least 2011 and has not issued definitive guidance. IRS Notice 2011-101 identified decanting as under review and flagged factors that could trigger income, gift, estate, or generation-skipping transfer tax consequences, including changes to a beneficiary’s interest in principal or income, adding or removing beneficiaries, shifts in grantor trust status, differences in governing law that extend a termination date, and changes in GST status.⁹

The IRS will issue private letter rulings for decantings that do not change any beneficial interest and do not extend the applicable rule against perpetuities period. For transfers that do change beneficial interests, the IRS has refused to issue rulings, which leaves trustees and their advisors without official cover.⁹

Generation-Skipping Transfer Tax Deserves Extra Caution

A trust that was irrevocable on or before September 25, 1985 holds grandfathered GST-exempt status, and Treasury Regulations provide two safe-harbor tests for preserving that status after a decanting. Both generally require that the second trust not shift beneficial interests to a lower generation and not extend the vesting period beyond the original perpetuities period. Trusts that became GST-exempt through allocation of the settlor’s GST exemption, meaning zero inclusion ratio trusts, have no formal safe harbor, though private letter rulings suggest similar principles apply. Even seemingly minor administrative changes can jeopardize GST-exempt status if they indirectly shift interests to a lower-generation beneficiary.

The Second Trust May Need a New EIN

When a decanting terminates the first trust by distributing all of its property to the second trust, the IRS requires a new Employer Identification Number for the receiving trust. The IRS lists distributing property to a residual trust among the events triggering a new EIN. If the first trust keeps some assets after a partial decanting, it retains its existing EIN, but the newly created second trust still needs its own number for tax reporting. A change in trustee alone does not require a new EIN.¹⁰

1
State of Texas. Texas Property Code 112.071 – Definitions
2
State of Texas. Texas Property Code 112.073 – Distribution to Second Trust: Trustee With Limited Discretion
3
State of Texas. Texas Property Code 112.084 – Certain Distributions Prohibited
4
State of Texas. Texas Property Code 112.087 – Compensation of Trustee
5
State of Texas. Texas Property Code 112.086 – Tax-Related Limitations
6
State of Texas. Texas Property Code 112.074 – Notice Required
7
State of Texas. Texas Property Code 112.075 – Written Instrument Required
8
State of Texas. Texas Property Code 112.082 – Need for Distribution Not Required
9
Internal Revenue Service. Transfers by a Trustee from an Irrevocable Trust to another Irrevocable Trust
10
Internal Revenue Service. When to Get a New EIN