IRS Rules on Tax Impacts of Trust Modification

by Kelly Dickson Cooper

In my practice, I regularly answer questions regarding the permissibility and advisability of modifying irrevocable trusts.  With the enactment of a decanting statute in Colorado in 2016, these types of requests will only increase.  One of the major hurdles in modifying irrevocable trusts (and a trap for the unwary) is the potential tax consequences of a modification.  We often have to consider estate tax inclusion issues, the possibility of the imposition of gift taxes due to the modification, and the potential loss of generation-skipping transfer tax exemption for a trust.