Including a Tax Reimbursement Clause with Beneficiaries’ Consent


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 present.

Within the case at concern, the grantor established an irrevocable belief for the good thing about his little one and additional descendants. The belief was structured as a grantor belief so all belief earnings was taxable to the grantor. Neither state legislation nor the belief mandated or licensed the trustee to reimburse the grantor for such earnings 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 earnings and principal to reimburse the grantor for earnings tax legal responsibility attributable to the belief. The beneficiaries consented to the modification pursuant to state legislation, and the courtroom permitted it.

The IRS dominated that the modification gave the grantor a helpful curiosity within the belief. Beneath 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 present in these situations outlined in Rev. Rul. 2004-64 as a result of the reimbursements are being made pursuant to the unique phrases of the belief. Nonetheless, right here, the beneficiaries consented to a modification. The modification was a relinquishment of a portion of the beneficiaries’ curiosity within the belief and subsequently was a present to the grantor. The ruling famous the identical outcome would apply if the state legislation gave the beneficiaries a proper to object to the modification, and so they failed to take action.

This Chief Counsel Memo (CCM) leaves open a number of points. First, how is the present measured? How can one predict the quantity of future good points, losses and earnings that will likely be realized by a belief, not to mention how a lot of the tax will likely 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 vulnerable of measurement on the idea of typically accepted valuation rules, the present tax is relevant to the complete worth of the property topic to the present. Does this imply the present 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?

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