On November 28, 2023, the IRS Office of Chief Counsel published a memorandum addressing whether modification of a grantor trust to add a tax reimbursement clause constituted a taxable gift. It concluded that it does constitute a taxable gift by the trust beneficiaries because the addition of a discretionary power to distribute income and principal to the grantor is a relinquishment of a portion of the beneficiaries’ interest in the trust.

The lesson here is don’t assume the IRS won’t find a reason to tax changes to a trust.