Budget Fight Imperils Tax-Free Trust Conversion

Bankers hoping to convert their common trust assets into mutual funds without triggering a tax bite will have to cross their fingers and wait a little longer.

President Clinton's veto of the federal budget bill last Wednesday has at least temporarily derailed the tax-free conversion.

The trust conversion measure, which was included in the large budget bill, would allow banks to move assets managed in common trust accounts into proprietary mutual funds without paying capital-gains taxes.

If passed, the measure could trigger a flood of new assets into bank proprietary funds next year.

Common trust fund assets stood at $131 billion last year, according to a report by the Federal Financial Institutions Examination Council.

But advocates worry that wrangling over Medicare and tax cuts could lead budget negotiators to simply overlook the trust provision as they craft new budget legislation.

"The biggest danger is that tax-free conversion will slip off the table," said Robert M. Kurucza, an attorney at Morrison & Foerster and general counsel to the Bank Securities Association.

For better or worse, the provision isn't on the radar screens of most legislators, several observers said.

"Common trust conversion is not even a part of the debate," said James McLaughlin, director of agency relations, trust and securities at the American Bankers Association.

But long-time supporters of the provision think it will make it into law next year. "Absent the whole budget process blowing up, I would think the common trust fund proposal will be back," said G. Andrew Bonnewell, vice president and corporate counsel at Federated Investors Corp., Pittsburgh. "My best guess is that it will become law in January and would be available for use on the day of enactment."

But if Congress and the White House could settle the budget impasse sooner and include trust conversions, it would make for a happier holiday for hundreds of bankers.

"Hopefully, this is a wish that Santa Claus will put under the Christmas tree," Mr. Kurucza said.

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