On Dec. 29, 2023, the IRS Chief Counsel’s Workplace launched Memorandum 202352018 stating its place that the modification of a belief so as to add a tax reimbursement clause might represent a taxable reward.
Within the case at subject, the grantor established an irrevocable belief for the good thing about his baby and additional descendants. The belief was structured as a grantor belief so all belief revenue was taxable to the grantor. Neither state regulation nor the belief mandated or licensed the trustee to reimburse the grantor for such revenue tax legal responsibility attributable to the belief. The trustee petitioned for a modification of the belief phrases to supply the trustee with discretionary energy to distribute revenue and principal to reimburse the grantor for revenue tax legal responsibility attributable to the belief. The beneficiaries consented to the modification pursuant to state regulation, and the courtroom accredited it.
The IRS dominated that the modification gave the grantor a useful curiosity within the belief. Underneath prior rulings (notably Income Ruling 2004-64), the belief instrument might mandate reimbursement of the grantor or give the trustee discretionary authority to reimburse the grantor with out creating a present by the beneficiaries. There’s no reward in these eventualities outlined in Rev. Rul. 2004-64 as a result of the reimbursements are being made pursuant to the unique phrases of the belief. Nevertheless, right here, the beneficiaries consented to a modification. The modification was a relinquishment of a portion of the beneficiaries’ curiosity within the belief and due to this fact was a present to the grantor. The ruling famous the identical end result would apply if the state regulation gave the beneficiaries a proper to object to the modification, they usually failed to take action.
This Chief Counsel Memo (CCM) leaves open a number of points. First, how is the reward measured? How can one predict the quantity of future good points, losses and revenue that shall be realized by a belief, not to mention how a lot of the tax shall be reimbursed to the grantor within the trustee’s discretion? Citing Treasury Rules Part 25.2511-1(e), the CCM states if the donor’s retained curiosity isn’t inclined of measurement on the premise of usually accepted valuation ideas, the reward tax is relevant to the complete worth of the property topic to the reward. Does this imply the reward is the total worth of the belief? Even when it isn’t, would Inner Income Code Part 2702 apply to deal with it as a present of the complete belief worth?
