From a tax perspective, 2024 has started off with an important pronouncement from an estate planning perspective – CCA 202352018. Many of you Forum attendees may recall that we have discussed at prior Forum programs the concept of gifting and/or selling property to a grantor trust. As part of that planning, it is common for there to be a discretionary tax distribution provision that can provide the grantor with the funds necessary to cover the grantor’s income tax obligation related to the trust’s income. Long ago, the IRS ruled in Rev. Rul. 2004-64 that if the decision to make such a tax distribution is discretionary and is made by a non-subservient trustee, the grantor’s right to the tax distribution does not cause includability of the trust’s assets in the grantor’s estate.

In the event a grantor trust does not provide for a discretionary tax distribution, and the grantor had “donor’s remorse,” the IRS had privately ruled in PLR 201647001 that the modification of a trust to add a discretionary trustee power to make a tax distribution was an “administrative” change that had no gift tax consequences. Unfortunately, the IRS had changed its mind, and, in the CCA, which appeared in advance sheets this morning and had a release date of December 29, 2023, the IRS indicates that adding such a provision at a later date constitutes a gift by the beneficiaries back to the grantor. How this gift would be valued is anyone’s guess, and the IRS almost admits as much in footnote 2 in which it states that “[a]lthough the determination of the values of the gifts requires complex calculations, Child and Child’s issue cannot escape gift tax on the basis that the value of the gift is difficult to calculate.”