IRS Requests Comments on Trust Decanting


The IRS is requesting comments on the tax implications of trust “decanting,” which refers to transfers by a trustee of all or a portion of the principal of an irrevocable trust to another irrevocable trust. Specifically, would like to hear from practitioners regarding when and under what circumstances such transfers that result in a change in the beneficial interests in the trust are not subject to income, gift, estate, and/or generation-skipping transfer (GST) taxes. See Notice 2011-101 for details.

North Carolina and many other states have statutes that expressly allow for trust decanting. In addition, in order to add flexibility and protection for beneficiaries, irrevocable trusts such as life insurance trusts often contain provisions allowing the trustees to transfer some or all of the principal to another trust. Court approval is not required, but certain limitations are imposed to so that the rights of the beneficiaries are not substantially modified.
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