The IRS recently released Notice 2008-63 in advance of a formal Revenue Ruling. This Notice provides guidance on the federal tax implications of private trust companies and similar trust arrangements.
Notice 2008-63 confirms that private trust companies generally do not result in any estate, gift, or generation skipping tax benefits that could not be realized using other traditional estate planning tools.
As described in the Notice, a private trust company may be established pursuant to state law or pursuant to terms included in a trust instrument. These laws or trust terms provide that the private trust company is to serve as the trustee of the trusts. The family members can own the trust company. The tax benefits stem from control over discretionary distributions being vested in a discretionary distribution committee. The committee can be composed of family members or non-family members, but the grantor and beneficiary cannot serve on the committee for trusts that they created and for which they are beneficiaries.
The Notice confirms that if the formalities are followed, the trust assets will not be included in the grantor’s taxable estate or the taxable estate of the family members who serve on the committee. The grantor will have made a taxable gift upon establishing the trusts, rather than the committee members making taxable gifts in making distributions. Replacing a corporate trustee with a private trust company trustee will not void a generation skipping transfer exemption.
To attain these tax benefits, the parties – especially the committee members – must keep detailed records. These records include who participated in specific meetings and possibly affirmations that there were no formal or informal agreements with regard to distributions. Given the potential tax exposure, diligent tax attorneys and financial advisers may be well advised to maintain these records on behalf of their clients who establish private trust companies.