SUBSTANTIALLY SIMILAR TRUSTS CAN MERGE

The Internal Revenue Code has extensive provisions regarding the merger of corporations. These provisions allow for corporate combinations without recognition of gain or loss to the participants, and for the carryover of tax attributes of a corporation into the survivor in the merger (if the particular Code requirements are met).

There are no similar Code provisions regarding a merger of trusts. Therefore, there is a risk that upon such a merger, the trusts may be deemed to have disposed of their assets for fair market value triggering gain recognition, and the trust beneficiaries may likewise be viewed as having exchanged their trust interests in a taxable transaction.

In a recent Private Letter Ruling, the IRS provided that where several identical trusts combined into one trust with similar terms, and all the trusts held similar assets, the merger would not generate gain or loss to the trusts or their beneficiaries. The IRS further went on to provide that the tax attributes of the trusts merged into the new trust, such as net operating loss carryforwards and tax basis, would carry over to the new trust.

In the Private Letter Ruling, the new trust then proceeded to subdivide into separate trusts, one for each beneficiary (but otherwise with the same terms as the initial trusts). The IRS likewise ruled that such division would not generate gain or loss to the trusts or the beneficiaries, and that the tax attributes of the trusts would pass to the successor trusts on the division.

PLR 200552009, December 30, 2005