Recently, a Private Letter Ruling has allowed taxpayers toconvert two trusts into a unitrust. A man died leaving his three sons as thesole beneficiaries of Trust 1 and Trust 2 governed by state law. Both of thetrusts were irrevocable. State law permits the trustee to transfer the trusts intoa unitrust to delineate the trust income if five requirements are met. TheTrusts trustee and beneficiaries deem that the Trusts meet the criteria forconversion under State law and agree to change the Trusts to a unitrusts.Following an agreement, trustee and beneficiaries ask for a ruling that willnot disturb their GST tax status. Additionally, they request that theconversion will not cause a beneficiary to have made a bequest that classifiesas a gift for tax purposes and will not subject the Trusts or the beneficiariesto capital gains.
PLR 201320009 held that so long as the trusts meet thefive requirements for the unitrust and the beneficiaries agree the conversionwill not change any interest in either trust. As a result, neither trust loseit’s GST status. Additionally, because there is not a shift in any beneficialinterest none of the beneficiaries can be treated like they have made a gift forgift tax purposes. Finally, no gain or loss will be recognized for either trustbecause of the conversion.
See Lorraine E. Gardner, Private Letter Ruling IRS Rules On Proposed Conversion Of Trusts, Legacy UCLA , May 24, 2013.
Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.
