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Tax Reporting Mechanics of Trust Decanting Nov. 21, 2016 Bryan D. Kirk, Managing Director and Trust Counsel Fiduciary Trust International of California, San Mateo, Calif. bryan.kirk@ftci.com Robert K. Kirkland, President Kirkland Woods & Martinsen, Liberty, Mo bkirkland@kwm-law.com
Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.
November 21, 2016 Tax Reporting Mechanics of Trust Decanting Tackling Compliance Issues in the Absence of IRS Guidance Bryan D. Kirk Robert K. Kirkland Managing Director President Trust Counsel Kirkland Woods & Martinsen, PC (650) 312-3981 (816) 792-8300 bryan.kirk@ftci.com bkirkland@kwm-law.com This presentation includes views expressed by representatives of Fiduciary Trust Company International and Kirkland Woods & Martinsen PC, as of the date indicated, and is intended to provide general information only on the topics it addresses. It is not intended to provide specific financial, legal or tax advice. You should consult your personal financial, legal and tax advisor(s) regarding your specific circumstances in determining whether the contents of, or opinions expressed in, this presentation are appropriate for you or relevant to any investment, tax or estate planning decisions that you make.
Table of Contents Background on Decanting and IRS Tax Guidance Pages 7-12 Notice Requirements Pages 14-17 Continuation of Existing Trust v. Creation of New Trust Pages 18-22 Gain Recognition Scenarios Pages 23-24 Changing of Situs Pages 26-28 Filing Requirements Pages 29-33
Background on Decanting and IRS Tax Guidance What is “decanting”? • The term “decanting” refers to the pouring of a liquid, such as wine, from one container to another. • “Trust decanting” generally refers to the distribution of property of one trust to another trust pursuant to a trustee’s discretionary power to distribute property to or for the benefit of the trust’s beneficiaries – The rationale is that, if a trustee has the discretionary power to distribute property to or for the benefit of one or more beneficiaries, the trustee has, in effect, a special power of appointment that should enable the trustee to distribute property to a second trust for the benefit of one of more of such beneficiaries. 7
Background on Decanting and IRS Tax Guidance Common Law Authority • In Phipps v. Palm Beach Trust Co., 196 So. 299 (Fla. 1940), the Florida Supreme Court held that the trustee of a trust may exercise its discretionary distribution power by making a distribution to another trust for the benefit of the beneficiary rather than directly to the beneficiary. The Restatement (Second) of Property • The Restatement (Second) of Property: Donative Transfers § 11.1 9 (Comment d) provides that a trustee’s ability to transfer trust property is similar to a special power of appointment, under which a trustee can transfer an interest in property equal to or less than the title authorized under the trust instrument. 8
Background on Decanting and IRS Tax Guidance Statutory Authority • New York enacted the first decanting statute in 1992 (NY EPTL § 10-6.6(b)). • Additional states have also enacted decanting statutes, including Alaska (Alaska Stat. § 13.36.157 (2008)); Arizona (Arizona Rev. Stat. Ann. § 14-10819 (2012)); Delaware (Del. Code Ann. Tit. 12, § 3528 (2012)); Florida (Fla. Stat. Ann. § 736.04117 (West. Supp. 2008); Illinois (760 Ill. Comp. Stat. § 5/16.4); Indiana (Ind. Code § 30-4-3-36 (2010); Kentucky (Ky. Rev. Stat. Ann. § 386.175); Michigan (Mich. Comp. Laws §§ 556.115a, 700.78201); Minnesota (Minn Stat. § 502.851); Missouri (Mo. Rev. Stat. § 456.4-419 (2012); Nevada (Nev. Rev. Stat. 163.556 (2012); New Hampshire (N.H. Rev. Stat. Ann. § 564-B:4-418 (Lexis Nexis Supp. 2009); North Carolina (N.C. Gen. Stat. § 36C-8-816.1 (2011)); Ohio (Ohio Rev. Code § 5808.18 (2012)); Rhode Island (R.I. Gen. Laws § 18-4-31); South Dakota (S.D. Codified Laws § 55-2-15 (2012)); Tennessee (Tenn. Code Ann. § 35-15-816(b)(27) (2007)); Texas (Tex. Prop. Code Ann. §§ 112.071-112.087); Virginia (VA. Code Ann. § 64.2- 778.1 (2012)); Wisconsin (Wis. Stat. Ann. § 701.0418); and Wyoming (Wyo. Stat. Ann. 4- 10-816(a)(xxviii), (b)). • Uniform Trust Decanting Act was also recently adopted by New Mexico and Colorado, both effective in early 2017. • Illinois and California also introduced decanting statutes this year. 9
Background on Decanting and IRS Tax Guidance Non-Tax Reasons to Decant • Modify administrative provisions • Deal with changed family circumstances • Create a special needs trust • Provide greater asset protection for beneficiaries • Change the governing law of the trust • Limit beneficiary rights to information • Change trustees or successor trustees • Include trust protectors or other advisors • Divide or consolidate trusts • Correct drafting errors or address ambiguities without court involvement • Alter investment restrictions (e.g., permit lack of diversification) • Postpone the termination of a trust 10
Background on Decanting and IRS Tax Guidance Tax Reasons to Decant • Convert a grantor trust to a non-grantor trust, or vice versa • Grant a beneficiary a power of appointment or change a testamentary power of appointment from general to limited, or vice versa • Take advantage of state income tax laws that apply to a trust • Stretch individual retirement account distributions • Qualify a trust to own stock in an “S” corporation 11
Background on Decanting and IRS Tax Guidance IRS Tax Guidance • In 2011, the IRS put decanting transactions on its no private letter ruling list (Rev. Proc. 2011-3) and requested comments on the tax implications of decanting while stating it was studying such implications. • In 2012, The American College of Trust and Estate Counsel (“ACTEC”) submitted comments to the IRS providing a great detail of analysis on the income, gift and GST tax issues relating to decanting. • As of 2016, decanting transactions remain on the no private letter ruling list (Rev. Proc. 2016-3), meaning the IRS will not issue rulings on whether decanting in which there is a change in beneficial interests: – Is distribution for which a deduction is allowable under IRC § 661 or which requires an amount to be included in the gross income of any person under IRC § 662. – Is a gift under IRC § 2501. – Causes a loss of GST exempt status or is a taxable termination or taxable distribution under IRC § 2612. 12
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