“Decanting” is the term generally used to describe the “distribution of [irrevocable] trust property to another trust pursuant to the trustee’s discretionary authority to make distributions to, or for the benefit of, one or more of the beneficiaries [of the original trust].” See 18.05 Decanting, 2014 WL 691647, 1, quoting Morse v. Kraft, 992 N.E.2d 1021, 1024 (Mass. 2013). While decanting an irrevocable trust can be a procedurally intricate process unto itself, the practitioner should also be weary of the multivarious tax recognition events, which can include income tax, estate and gift tax, and generation skipping transfer tax issues. This article’s purpose is to provide insight into commonly asked tax questions regarding the decanting of revocable trusts and what the practitioner should be weary of when using this estate planning technique.
Before delving into the assorted tax issues regarding irrevocable trusts, it should be noted that while practitioners can usually apply to the Internal Revenue Service for a Private Letter Ruling in relation to most tax questions, the IRS has put decanting of irrevocable trusts and most of their associated tax queries on the “No Ruling List.” See Rev. Proc. 2022-3, 2022-1 I.R.B. 144 (IRS RPR 2022). This means that should one wish to obtain clarification as to whether any alteration to the dispositive provisions of the trust document might generate a recognition event, the IRS will provide no clarification. See id. It should also be noted that Private Letter Rulings regarding issues of decanting irrevocable trusts do exist, but usually are before the year 2011.
Income Tax Recognition Events
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