Tax Concerns When Modifying Trusts
In May 2013, the Internal Revenue Service issued a Private Letter Ruling addressing tax concerns resulting from a trust modification agreement. PLRs are issued when a taxpayer directly requests guidance from the IRS on a specific matter. A PLR may be relied upon by the taxpayer who requested it; however, PLRs offer an excellent opportunity for individuals to help determine how the IRS might treat a similar situation.
- Income tax. A trust modification that increases beneficiaries’ rights to income from properties will typically require them to pay more income tax on their distributions.
- Gift tax. In some cases the modification effectively causes a transfer of interest among beneficiaries, which may cause the IRS to recognize this as a gift and impose a gift tax.
- Generation-skipping transfer tax. The GST tax is not only imposed on gifts, but also on certain trust transfers and distributions. The GST tax may be imposed even when a trust transfer is subject to gift tax. It applies only to trust transfers to or for the benefit of persons who are 37 ½ years younger than and unrelated to the grantor, or to related individuals more than one generation younger than the grantor. This is a greater concern in states that allow Dynasty Trusts (including North Carolina). Learn about proposed limitations on Dynasty Trusts.