Structuring Tax-Efficient Trust Decantings After ‘the Guidance’

The article discusses the impact of IRS Chief Counsel Advice Memorandum 202352018 (CCA) on the practice of trust decanting in estate planning. Trust decanting involves transferring assets from one trust to another, but the CCA has caused concern among practitioners due to potential tax consequences.

The CCA highlighted tax issues when modifying a trust, particularly if changes affect beneficial interests. While some feared the CCA signaled the end of irrevocable trust decanting, the article clarifies that the CCA primarily addressed trust modifications that result in "materially different" terms, which can trigger tax consequences, such as gift taxes.

The article outlines key considerations for avoiding tax issues in trust decanting, emphasizing that changes should not alter beneficial interests, as established by the Cottage Savings case. Practitioners must ensure that the appointed trust’s terms are not materially different from the invaded trust’s to avoid taxable events.

The IRS has been studying issues around decanting for over a decade and has not yet issued comprehensive rulings on certain matters. The article advises caution and careful drafting when modifying trusts to prevent unintended tax consequences, such as the loss of generation-skipping transfer (GST) tax exemption or triggering gift taxes. The author suggests timely filing of gift tax returns to limit the IRS's scrutiny window on these transactions.

For more information see Michael Borger "Structuring Tax-Efficient Trust Decantings After ‘the Guidance’" Bloomberg Law, September 3, 2024. 

Special thanks to Joel C. Dobris (Professor of Law, UC Davis School of Law) for bringing this article to my attention.