IRS Rules Favorably on Division and Modification of Inter Vivos Trust

The IRS on October 24, 2014 issued a private letter ruling with respect to the application generation-skipping transfer (GST) tax on a proposed division and modification of a multi-generational Trust.

The inter vivos Trust was established for the benefits of Donor’s issues. It provides that during Donor’s lifetime each beneficiary may demand a pro rata amount to be distributed out of the initial contribution and any subsequent distributions, and the trustees have absolute discretion to make or apply the income of the Trust. The Trust also provides that upon Donor’s death and after all surviving issues have reached certain age, the Trust will be divided into equal shares to each living child and each deceased child’s descendants, per stirpes. The share of each surviving child is to be held in further trust, while the share of a deceased child is to be distributed outright.

The trustees and beneficiaries proposed to divide the Trust into three separate trusts (Divided Trusts) while the Donor is still alive, and to modify the term with regard to trustee succession. The proposed modification provides to have each child as a co-trustee of his or her own trust, together with an independent trustee.

The IRS confirmed that such division and modification of the Trust “will not result in a shift of any beneficial interest in the trusts to any beneficiary who occupies a generation lower than the persons holding the beneficial interests” and thus continues to be exempt from GST tax. The IRS also ruled that the division and modification of a trust wouldn’t result in a transfer subject to federal gift tax, cause trust property to be includable in beneficiaries’ estates, cause the recognition of gain or loss, or affect the basis or holding period for trust assets.

See IRS PLR 201443004 (October 24, 2014).

Posted by Jiaqi Wang, Associate Editor, Wealth Strategies Journal

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s