The IRS has updated the safe harbor for minors' trusts (also called IGRA trusts after the Indian Gaming Regulatory Act). Revenue Procedure 2011-56 (http://www.irs.gov/pub/irs-drop/rp-11-56.pdf) contains new provisions—some of which will likely be welcomed by tribes and beneficiaries. Tribes should review current trusts and their plans for new trusts in light of the updated safe harbor.
Per capita distributions held in minors' trusts are not taxable to the minor beneficiaries until they are actually or constructively received by the beneficiaries. Properly designed minors' trusts are taxed as grantor trusts, with the tribe, a nontaxable entity, as the grantor. In 2003, the IRS in Revenue Procedure 2003-14 provided that if a trust complied with the safe harbor set forth the in the Revenue Procedure, it would be taxed as a grantor trust and a beneficiary would be free from tax until the trust was distributed to her.
Revenue Procedure 2011-56 updates the safe harbor. Two items are of particular interest:
- A trust may be distributed at a specified age, or upon the occurrence or nonoccurrence of specified events. This should be seen as a welcome change. Under the prior safe harbor, the trust was required to terminate at a particular age (though distributions for health or welfare could be made before that age was reached). Distribution of a trust at a young age could result in a material amount of money being given to a person who was too young to wisely manage it. While the IRS indicated in other guidance that alternative distribution schedules would be allowed, the updated safe harbor should provide additional comfort and authority for distributing at several ages and/or events.
- In the event a beneficiary dies, the trust instrument may provide that her share may be paid pursuant to a valid will or trust, or to persons who may inherit under state or tribal intestacy laws. Under the prior safe harbor, if a beneficiary died before reaching the specified age, or died before reaching the specified age without a surviving spouse, parent, child or sibling, the trust had to revert to the tribe. The updated safe harbor provides additional flexibility for tribes and beneficiaries.
For a full description of the safe harbor requirements, including those that did not change, see Revenue Procedure 2011-56.
The updated safe harbor applies to minors' trusts established or amended after November 14, 2011. Tribes may apply the updated safe harbor to minors' trusts established before that date for taxable years for which the statute of limitation on refunds has not expired (very generally, three years). The IRS provided transition relief so that a modification of an existing minor's trust to conform to the updated safe harbor will not be a taxable sale or exchange.