Legal Memorandum: Tax Consequences of the Exercise of Trust Protector Powers

Issue: Under federal tax law, what are the consequences of the exercise of Trust Protector powers allowing reformation of the Trust?

The IRS has examined the tax consequences of the exercise of Trust Protector powers.  For example, in I.R.S. Priv. Ltr. Rul. 200537044 the Service held that a Trust Protector’s conversion of a trust to an accumulation trust did not have negative implications for purposes of complying with Section 401(a)(9).  The Service stated:

Trust Protector actions were in conformity with relevant provisions of Trust T which was drafted for Decedent and executed by Decedent.  Additionally, we note that, pursuant to the terms of Trust T, said actions are effective “ab initio” or, in other words, relate back to the date that Decedent executed Trust T.  Thus, said Date 4, 2004, writing may be treated as a part of Trust T.

Thus, said Trust Protector action may be treated as effectuating Decedent’s written intent as to which beneficiaries were to receive from his IRA W, and will not be treated as a post-death action taken by an individual or entity which negates, modifies, or changes Decedent’s Date 1, 2003 beneficiary designation.

Examples of topics covered in other Trust Protector rulings include the GST (Generation-Skipping Tax) consequence of changing Trust protector provisions and estate tax inclusion issues associated with powers held by a Trust Protector.  See, e.g., I.R.S. Priv. Ltr. Rul. 200120021.  The Service has issued numerous ruling on the reformation of charitable trust through judicial reformation.  The rulings are very informative as to the circumstances under which a trust may be modified to comply […]