Probate & Trust Law Section Conference Manual ... - Minnesota CLE

tax consequences. See Tax Effects at 159, citing Chief Counsel Memo.
200923024; Rev. Rul. 2004-64, 2004-2 C.B. 7.
3. Negative Basis Assets. When the trust property has a liability against it
that exceeds the property’s income tax basis (a “negative basis” asset), it is
possible that decanting the negative basis assets will result in the
recognition of gain. See Tax Effects at 156; Crane v. Comm’r, 331 U.S. 1
(1947).
4. Beneficiary Recognition of Gain. It is possible that under the doctrine of
Cottage Savings Ass’n v. Comm’r, 499 U.S. 554 (1991), the IRS may take
the position that a beneficiary recognizes gain if the decanting changes the
quality of the beneficiary’s interest and the beneficiary’s consent (or
possibly the court’s approval) is required for the decanting. See Tax
Effects at 157-159. This may be of concern under the Illinois and
Kentucky statutes. These statutes do not require a beneficiary’s
affirmative consent, but prohibit decanting without court approval if the
beneficiary objects within the notice period. The IRS could construe the
ability of a beneficiary to block decanting by objecting within the notice
period as the equivalent of beneficiary consent.
5. Conversion of a Domestic Trust to a Foreign Trust. The conversion of
a domestic trust to a foreign trust may result in the recognition of gain
under Code section 684. See Tax Effects at 159.
6. The Accidental Grantor Trust. Several of the exceptions to grantor trust
treatment in Code section 674, such as the power to distribute corpus
subject to an ascertainable standard (Code section 674(b)(5)(A)), the
power to withhold income during the disability of a beneficiary (Code
section 674(b)(7)) and the power of an independent trustee to make
distributions (Code section 674(c)), do not apply if any person has a power
to add a beneficiary to the class designated to receive income or corpus.
The Illinois, Missouri and South Dakota statutes appear to permit
decanting to make a remainder beneficiary a current beneficiary. See
Section IV, F.
B. Estate and Gift Tax
1. Gift Tax. Under the Illinois decanting statute, a trustee who has absolute
discretion may decant to a second trust that eliminates, reduces or restricts
the interest of a beneficiary. If such beneficiary is legally competent, such
beneficiary will receive written notice of the trustee’s intent to decant and
can block the decanting by an objection in writing delivered to the trustee
within the 60-day notice period. If a beneficiary whose interest in the trust
will be reduced or eliminated by decanting fails to object, will such
beneficiary be treated as making a gift to the trust or the other
beneficiaries of the trust? See Tax Effects at 160-164. Under the Illinois
decanting statute, a beneficiary who is not legally competent is not
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