By: Ted Sutton, Esq.

There are some promoters out there who claim that they have a trust strategy whereby the trust avoids paying income taxes. But recent IRS rulings have started to crack down on this practice.

The most recent ruling came from Chief Counsel Memorandum (CCM) 2023-0006. The IRS made this ruling because some promoters claimed that if the trustee allocates trust income to the trust corpus, and the trustee doesn’t make distributions to the beneficiaries, then the trust income won’t be taxable.

However, this section misrepresents the tax law. Section 643 defines Distributable Net Income (DNI), which is the part of income that’s taxable to the beneficiaries. The promoters argue that because no distributions were made to the beneficiaries, that income held in the trust would not be taxable.

Even so, Section 641 says otherwise. This section of the tax code defines taxable income for estates or any kind of property held in trust. Under this section, if the trustee allocates trust income to the trust corpus, then the trust income is taxable.

Be very wary of promoters who suggest that they can set up trusts to help you avoid paying taxes. We here at Corporate Direct will help you be on the lookout for them.