New York CPAs Back Safe Harbor Rules for Trust Decantings

The New York State Society of CPAs said the Internal Revenue Service should provide safe harbor guidelines for transferring property from one irrevocable trust to another, a process known as a trust decanting.

The IRS asked for comments when it issued Notice 2011-101, indicating it was studying the implications of decanting in circumstances where there is a change in the beneficial interests in a trust, and solicited comments regarding the income, gift, estate and generation-skipping transfer tax issues that may arise from a trust decanting.

In its comment letter, the NYSSCPA recommended that the IRS issue safe harbor guidelines relating to trust decantings so that trustees, and the professionals who advise them, will have certainty as to the tax consequences of a decanting that is within the scope of the safe harbors.  The NYSSCPA also proposed what these safe harbor guidelines should be for income, gift, estate and GST tax purposes.

“If the IRS were to issue safe harbor guidelines, it would significantly narrow the extent of taxpayer uncertainty and thereby substantially reduce the need for private letter rulings,” said the comment letter’s principal drafter, NYSSCPA Trust and Estate Administration Committee member, Kevin Matz. He noted that even if a trust transfer falls outside the safe harbor guidelines, it still wouldn’t necessarily be subject to income, gift, estate or GST tax consequences.

The NYSSCPA believes these safe harbor principles can be addressed in the form of a revenue ruling, and has offered to assist the IRS in drafting it.

One of the key elements of the comment letter was the NYSSCPA’s proposed safe harbors relating to GST tax issues, which calls into question the tax policies supporting very narrow safe harbor guidance that the IRS previously provided in the context of trusts that are “grandfathered” from the GST tax.

“We are taking a cutting-edge approach in our proposed GST tax safe harbor guidelines,” Matz said. “We are trying to bring attention to the overbroad approach that the IRS has previously taken with respect to GST grandfathered trusts, as this issue dovetails specifically with our proposed safe harbor guidelines for trust decantings.”

The comment period for this notice closed on April 25. The IRS will not be issuing private letter rulings related to this issue while it is being studied.