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By Deborah M. Beers, Esq.
Buchanan Ingersoll & Rooney, PC, Washington, DC
The IRS, in Notice 2011-101,1 is requesting comments on whether and under what circumstances a transfer of assets from one trust to a second trust (sometimes referred to as "decanting") that results in a change in beneficial interests in the trust should be subject to income, gift, estate or generation-skipping transfer taxes. This project, which was listed on the Treasury's Priority Guidance (Business) Plan for FY 2011-2012, may result in a published revenue ruling (or perhaps proposed regulations) addressing the issues that have plagued practitioners in this area over the years. Whether such guidance will be welcomed, however, will depend on what it says.
"Decanting" - a term more commonly associated with wine than with tax planning - refers to the act of pouring the assets of one trust into another trust (often referred to as a "receiving trust") with slightly different terms.
Decanting may be accomplished either pursuant to the terms of the trust indenture or under state law.
Trusts that contain decanting authority often are totally discretionary trusts that allow the trustee to distribute the income and principal of the trust "to, or for the benefit of" the beneficiary(ies), "outright or in trust." Such trusts alternatively may give the trustee or other special power holder the power to appoint assets of one trust to another trust for the benefit of specified beneficiaries.
Decanting also may be accomplished pursuant to state law. At least 10 states have enacted decanting statutes permitting the distribution of the assets of one trust to another (receiving) trust under carefully prescribed procedural and substantive rules. (We note that a trust that is governed by the laws of a state with no decanting statute may sometimes be moved, via a situs change, to a state in which decanting is permitted.) A number of the statutes that authorize decanting require that the trustee have an unlimited power to invade principal on behalf of the beneficiary without regard to an ascertainable standard. A number of such statutes do not permit the assets to be distributed to trusts for the benefit of persons who were not beneficiaries of the original trust, although some authorize the trustee of the original trust to grant a special power of appointment to a named beneficiary that might result in the addition of new beneficiaries (or the alternation of shares of existing beneficiaries). Most decanting statutes do not require beneficiary consent or court approval.
Notice 2011-101 states that the Treasury Department and the IRS are studying the tax implications of such transfers and are considering approaches to addressing some or all of the relevant tax issues in published guidance. While these issues are under study, the IRS will not issue private letter rulings with respect to such transfers that result in a change in beneficial interests.2 The IRS generally will continue to issue PLRs with respect to such transfers that do not result in a change to any beneficial interests and do not result in a change in the applicable rule against perpetuities period.
Comments from the public are invited regarding the income, gift, estate and GST tax issues and consequences arising from transfers by a trustee of all or a portion of the principal of a Distributing Trust to a Receiving Trust that change beneficial interests. The facts and circumstances that the Treasury Department and the IRS have identified as potentially affecting one or more tax consequences include the following:
The public is invited to suggest a definition for the type of decanting the guidance is intended to address. Additionally, the public is encouraged to comment on the tax consequences of such transfers in the context of domestic trusts, the domestication of foreign trusts, transfers to foreign trusts, and on any other relevant facts or combination of facts not included in the above list.
Written comments are encouraged to be submitted by April 25, 2012.
This commentary also will appear in the March 2012 issue of the Tax Management Estates, Gifts and Trusts Journal. For more information, in the Tax Management Portfolios, see Streng, 800 T.M., Estate Planning, and in Tax Practice Series, see ¶6350, Estate Planning.
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