Recent Developments

The fact that a trust cannot be changed (irrevocable) doesn't mean that changes cannot be effected if the trust agreement or state law permit it. But even if change is possible, care must be taken to consider the tax consequences of these changes. A recent private letter ruling addressed trust division issues. In PLR 200651028 a trust that was exempt from the generation skipping transfer (GST) tax was to be divided (partitioned).  A trust was formed for beneficiary 1 and GST exemption allocated to it to assure a zero inclusion ratio (i.e., no GST tax). The trust agreement permitted the trustee to partition the trust into separate trusts when more beneficiary 2 was born. The trust was divided on a fractional basis. The terms of the new trust were identical but for beneficiaries. The new trust also provided for the same succession of interests as the old trust. The IRS held that the partition was a "qualified severance" under IRC Sec. 2642(a)(3) so both the old and new trusts will be treated as separate trusts, and both remain GST exempt. The IRS further held that no beneficiary would be considered to have made a gift to the other as a result of the partition. This was because the trust agreement required the creation of the second trust, and after the partition of the trust each beneficiary had substantially the same beneficial interests both before and after the partition. Therefore, no transfer of property was deemed to occur and no gift tax triggered. The ruling also confirmed that the partition of the trust did not cause the trust assets to be included in the estates of any of the beneficiaries under Code Sections 2036, 2037 or 2038. Again, the rationale was that the beneficiaries had the same interests before and after the partition. See also: PLR 200651005 and PLR 200651005 both dated September 20, 2006.