Income Tax Reporting For Decanting

Decanting refers to the distribution of trust property of one trust (the "first trust") to another trust (the "second trust").  Over the past several years, the number of states specifically authorizing decanting by statute has grown rapidly.  As of March 2014, at least twenty-two states have passed or proposed a state decanting statute.

Notwithstanding this proliferation of decanting statutes at the state level, the Internal Revenue Service (the "IRS") has not provided authoritative guidance regarding the proper tax treatment of decanted trusts.  In Notice 2011-101, the IRS invited comments from the public regarding the income, gift, estate and generation-skipping transfer tax issues arising from decanting.  In response, the IRS received comments from many well-respected national groups but still has not issued guidance.  In fact, to the contrary, the IRS continues to list certain decanting transactions on its "no ruling list" pursuant to Rev. Proc. 2014-3, and has