In many cases, a person will provide in their estate planning documents for a testamentary trust to be established to provide a vehicle for the management and protection of the assets being left for children or grandchildren.  Such a trust has many advantages, including the ability through a spendthrift provision to protect the assets from the trust beneficiaries creditors, to provide for professional management of the assets in the trust, to provide for an independent trustee who can prevent the beneficiaries from squandering their inheritance.

However, it is not uncommon in those situations for the different beneficiaries to have different circumstances, and thus different needs.  In some situations the different beneficiaries will also be antagonistic towards each other, which might promote trust litigation between one or the other of them and perhaps the trustee.

In such situations it may be desirable for the trustee to separate the trust into multiple trusts so that each beneficiary's share can be dealt with by the trustee in a manner that more appropriately fits each beneficiary's needs - or avoids conflict and unnecessary litigation.

Until now, splitting such a trust into multiple trusts carried with it the concern that there may be income tax, or capital gains tax, consequences.  However, in Private Letter Ruling (PLR) 201003015, the IRS ruled last week that the severance of a trust created for five grandchildren into five separate trusts (with terms identical to the initial trust) will not be deemed a sale or exchange under Cottage Savings Ass'n v. Commissioner, 499 U.S. 554 (1991). The severance will not cause income or gift tax consequences and the basis and holding periods of the trust assets will remain the same.

A private letter ruling can not be cited as legal support for another taxpayer's situation.  It is specifically responsive to the facts and circumstances submitted to the IRS in the request for a private letter ruling.  However, a private letter ruling does provides what is the current interpretation of the tax law by the IRS's general counsel's office.  It offers guidance on how the IRS will treat other similar legal issues, and it is possible to structure the facts of a given situation to fit within the four corners of the facts in the PLR.

This ruling provides an opportunity for dividing a spendthrift trust or dynasty (generation skipping tax) trust into separate trusts for the individual beneficiaries of the trust, without negative tax consequences. It creates a number of desirable planning options to deal with specific circumstances that exists in many trust situations.

If you are the trustee or a beneficiary of an existing trust, and the separate individual beneficiaries have very different needs, you may want to consult with a Florida trust attorney to determine whether this private letter ruling may be applicable to your situation.