Tax considerations often motivate individuals to create irrevocable trusts when it comes to estate planning purposes. We therefore wish to take every precaution when creating or modifying such a trust to make certain unintended tax consequences cannot be triggered.
One individual created three irrevocable trusts for the benefit of a grandchild. Modification or termination of the trust was allowed under state law where the trust was created should the beneficiaries and the settlor agree to such changes. At some point it was agreed that the trusts should be modified concerning successor trustees in two of the trusts. The third trust was also modified to provide the trustee greater power in making distributions to the grandchild.
There was question whether the proposed modifications would require under the Internal Revenue Code the trust estate to then be included in the settlor’s estate upon his death. However, since the settlor did not retain possession or enjoyment of property that was transferred to the applicable trusts and since the right of the settlor to modify the trust arose under state statute, the IRS ruled that the trust modification did not cause the trust estate to be included for estate tax treatment in the settlor’s estate.
There were other questions raised concerning the modifications as well, but none prevented the trusts from losing their GST or generation-skipping transfer tax exemption. What this case does demonstrate, however, is that tax considerations involving irrevocable trusts can be complex. That this matter had to be resolved through an IRS private ruling demonstrates the need for having an attorney look over the documents prior to any actions being taken.
Source: WealthManagement.com, “Proposed Modification of Trusts Won’t Change Tax Status,” Debra Doyle, May 9, 2014
