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.