Evaluating Whether to Convert Common Trust Funds into Mutual Funds
The Small Business Job Protection Act of 1996 (the "Job Protection Act") changed federal tax law to permit tax-free conversions of one form of pooled investment vehicle, common trust funds ("CTFs"), into another form, registered mutual funds. Similarly, since 1998 no state with banks holding significant CTF assets has imposed capital gains tax on investors whose CTFs are converted to mutual funds. According to an Investment Company Institute report, banks across the country have taken advantage of these federal and state tax law changes and converted a total of at least $27.2 billion of CTF assets into proprietary mutual fund assets in 1997 and 1998 alone. However, unless properly undertaken banks performing the conversions may be subject to litigation and other risks.
