There's more than one way to turn a common trust fund into a mutual fund and avoid paying capital gains to the Internal Revenue Service.

Banks on the acquisition trail, for instance, might do well to consider a conversion of their common trust assets into a fund that's part of a master-feeder mutual fund structure, several experts said.

"The simplest way to consolidate multiple common funds with identical investment objectives ... is a master-feeder system," said John Pelletier, senior vice president and general counsel at Fund Distributors Inc., a Boston-based mutual fund service company.

In a master-feeder arrangement, also called a hub-and-spoke structure, assets of many apparently separate funds are managed by a "master" in a centralized pool. The "feeder" mutual funds appear to be independent and can carry different names, sales charges, or even expense ratios.

Recent rulings by the IRS and the Office of the Comptroller of the Currency opened the door for a common trust fund to be converted, in effect, into a mutual fund by letting the common fund use a mutual fund as its sole investment. And several banks have sought government approval to use this method to convert single common trusts into mutual funds.

But the method requires, in order to qualify for tax-free status, that common trust assets account for at least 80% of the mutual fund resulting from the conversion.

That IRS standard - which is difficult to meet when several common trusts are added to a mature mutual fund - doesn't apply to a master-feeder conversion, Mr. Pelletier said.

As a result, banks that plan on digesting a slew of common trust funds, from a series of bank acquisitions, for example, might look to a master- feeder method to consolidate the funds.

One factor to consider, several experts said, is whether a bank plans to offer its mutual funds through different sales channels, each with its own pricing.

Running a master-feeder system can almost double costs over a single- class mutual fund, said Geoffrey R. Bobroff, a mutual fund consultant based in East Greenwich, R.I.

"To create another cost layer doesn't make sense unless you have a real game plan," he said.

Still another solution may be simply to merge many common trust funds into a single trust.

"We've chosen the route of consolidating them internally to get the mass of one common trust fund for each investment objective," said Mark A. Beeson, senior vice president and chief financial officer at Banc One Investment Advisers.

Since 1994 the Columbus, Ohio-based company has reduced almost 130 common trust funds to fewer than 20, he said. But Mr. Beeson said he didn't rule out at least considering master-feeder as a new approach.

"Maybe it's a good strategic move and something worth looking into," he said.

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