In Notice 2011-101, the IRS announced that it is studying the tax implications of "decantings" when there is a change in the beneficial interests in a trust. "Decanting" is the term of art used by estate planners to refer to when a trustee uses his or her power to appoint assets from an irrevocable trust (the "invaded trust") into a new trust or trusts with different terms (the "recipient trust"). The power to appoint may arise under statutory law, such as New York's Estates, Powers and Trusts Law § 10-6.6 and Florida Statute § 736.04117, or under the terms of the invaded trust.
The IRS is inviting comments from the public regarding the income, gift, estate and generation-skipping transfer tax issues arising from these types of decantings. The comments are due by April 25, 2012, and the IRS will not issue private letter rulings on the tax consequences arising from a decanting during this time.
The Notice lists 13 items that the IRS has identified as potentially affecting the income, gift, estate or generation-skipping transfer tax treatment of a decanting that results in a change of a beneficial interest. These 13 items include, in part:
- When a decanting results in a beneficiary's right to or interest in trust principal or income being changed;
- When new beneficiaries are added to the recipient trust;
- When a beneficial interest, such as a power to appoint, is added, deleted or altered;
- When the beneficiaries are required to consent to the trustee's decanting and when the beneficiaries are not required to consent to the trustee's decanting;
- When assets are decanted from a grantor trust into a non-grantor trust, or vice versa; and
- When a decanting does not effect any of the changes listed in the Notice, but a future power to make a change is created.
Some of the changes listed in the Notice are changes that are explicitly permitted under various state decanting statutes. For example, a trustee with unlimited discretion can use § 10-6.6(b) of New York's Estates, Powers and Trusts Law to eliminate a beneficiary's interest, which clearly results in a beneficiary's right to or interest in trust principal or income being changed.
Decanting is an important tool for estate planners, and we eagerly await the IRS's response to the comments it receives.