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PERSONAL FINANCE

Estate Planning: IRS Eases Trust Rules

A lawyer explains how recent IRS policy changes makes it easier for business owners to transfer assets to heirs.
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Good news for business owners worried about future estate-tax liabilities: thanks to a change in IRS policy, it's gotten easier to transfer company stock and other assets to heirs through the use of irrevocable trusts.

"Before this change, announced in Revenue Ruling 9558, the IRS adhered to a widely unpopular position it had adopted in 1979," explains Allan Landau, a senior partner at Boston law firm Sherburne, Powers & Needham. "That position held that if you, as the person who established the trust, retained the right to remove and replace its trustee, you were in effect retaining control over the trust. So assets were still really part of your estate and thus were liable for estate taxes."

Not surprisingly, the tax man's position dampened entrepreneurs' -- and others' -- interest in using such trusts. "If you didn't retain the right to change the trustee, there was no recourse, other than a lawsuit, if you were unhappy with his or her actions," says Landau.

But, he says, "the IRS's new position is that retaining the right to remove and replace a trustee is not the same as retaining control, because trustees are bound first and foremost by their fiduciary responsibilities to the trust. That change provides a wonderful comfort factor."

The new rules may encourage business owners to lengthen the lifetimes of these trusts, especially when they contain company stock. "Stock held by a trust has valuable protections against all kinds of creditors, including, in many cases, your children's spouses in a divorce suit. So the longer stock can stay in a trust, the safer it is."

If you decide to set up a trust, be sure to consider specifically including the right of trustee removal in plan documents. (There's no need to spell out the circumstances that might trigger removal.) But remember: the main person you can't replace your trustee with is yourself.

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Last updated: May 1, 1996




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