On June 4, 2020, the Internal Revenue Service issued Revenue Procedure 2020-34, which allows certain coronavirus-related modifications to be effected inside of grantor trusts without jeopardizing their treatment as grantor trusts. If the modifications gave rise to a "power to vary" a trust's investments, then the trust could instead be treated as a partnership for tax purposes, which could (1) result in withholding tax on payments to non-US beneficiaries, (2) materially change the trust's tax reporting requirements, and (3) deny like-kind exchange treatment for any beneficiaries that exchange trust certificates for other real property assets or vice versa.
Revenue Procedure 2020-34 modifies a 2004 ruling that generally prohibits grantor trusts from (i) renegotiating the terms of any mortgage loan encumbering the trust's property, (ii) renegotiating the terms of any lease entered into by the trust with respect to some or all of the real property, and (iii) accepting additional contributions of assets (including cash):
- Mortgage Loan Modifications.
A trust may agree with its lenders to a qualified forbearance on
any mortgage loan that secures the trust's real property. For
these purposes, qualified forbearances are:
- Forbearances under certain federally backed residential and multifamily mortgage loans that are granted under the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act); and
- Similar forbearances of up to six months that are provided to trusts experiencing a financial hardship due, directly or indirectly, to the COVID-19 emergency and are requested or agreed to between March 27, 2020 and December 31, 2020.
- Lease Modifications. A trust may modify leases entered into on or before March 13, 2020 to (1) coordinate the lease cash flows with the cash flows that result from a qualified forbearance or (2) defer or waive one or more tenants' rental payments for any period between March 27, 2020 and December 31, 2020, so long as the modifications were requested and agreed to during that time period and the tenants are experiencing financial hardship due to the COVID-19 emergency.
- Additional cash contributions. A trust may accept cash contributions that are made between March 27, 2020 and December 31, 2020 as a result of the trust experiencing financial hardship due to the COVID-19 emergency, provided that any such contribution is needed to increase permitted trust reserves, to maintain trust property, to fulfill obligations under mortgage loans, or to fulfill obligations under real property leases. If the contribution is made by new interest holders in exchange for new interests in the trust, or is a non-pro rata contribution made by one or more existing interest holders, it will be treated as a taxable sale by each non-contributing (or lesser contributing) trust interest holder of his or her proportionate interest in the trust's assets.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.