Abusive Trust Tax Evasion Schemes - Glossary of Trust Terms
Ordinary and necessary expenses of trust management that typically are allowable under IRC section 212, such as fiduciary fees, accounting fees, and fees relating to maintaining trust property. Does not include costs incurred in creating a trust. Administration expenses for sham trusts would not be considered ordinary and necessary and should not be allowed as an IRC section 162 or IRC section 212 expense, but are non-deductible personal expenses.
Any person having a substantial beneficial interest in the trust that would be adversely affected by the exercise/non-exercise of their power with respect to the trust. A person having a power of appointment over trust property is deemed to have a beneficial interest in the trust. A related party to the grantor, such as the grantor's spouse, is generally considered to be subservient to the grantor, and therefore a nonadverse party. IRC § 672(c).
Charitable Remainder Annuity Trust
A type of charitable remainder trust requiring a specified amount be paid from the trust to the non-charitable income beneficiaries at least annually.
Charitable Remainder Unitrust
A type of charitable remainder trust requiring payments that are based on a fixed percentage of the net fair market value of the trust's assets be made from the trust to the non-charitable beneficiaries at least annually. Also see charitable remainder trust.
The principal or capital of a trust, as distinguished from the income of a trust.
Distributable Net Income
Distributable net income is a tax concept and is commonly referred to as "DNI." It limits and characterizes income that will be taxed to the beneficiaries, if distributed or required to be distributed, rather than to the trust. It is the taxable income of the trust modified by generally excluding dividend distributions, personal exemptions, capital gains and losses, extraordinary dividends and taxable stock dividends, and including tax-exempt interest. IRC § 643(a).
One who receives a gift (in reference to beneficiary).
One who makes a gift (in reference to grantor).
Fiduciary Accounting Income
Fiduciary accounting income (FAI) does not refer to income for tax purposes; instead, it refers to receipts allocated to income rather than to corpus. It is the amount of income determined under local law or under the specific terms of the governing trust instrument. It is similar, but not identical, to the concept of book income. IRC § 643(b).
Income Distribution Deduction
A deduction allowed to a trust for distributions to beneficiaries sometimes referred to as "IDD." It is limited to distributable net income and is designed to avoid double taxation on income flowing from the trust to its beneficiaries. IRC sections 651 and 661.
A legal arrangement whereby the beneficiary (the "life tenant") is entitled to the use of or the income from a particular property during the lifetime of the beneficiary. Upon the death of the life tenant, the property will go to the holder of the remainder or reversionary interest.
Any person who is not an adverse party. IRC § 672(b). A person who is nonadverse and who has a certain relation to the grantor is termed a "related or subordinate party." Such party is considered to be subservient to the grantor in most instances with regard to the exercise of power, unless a preponderance of the evidence indicates otherwise. IRC § 672(c)
Power to Control
Defined in IRC § 674 as the ability of a grantor or nonadverse party to control the beneficial enjoyment of the corpus or the income therefrom without the approval of any adverse party. This results in the grantor being treated as the owner of the portion of the trust to which this beneficial enjoyment applies.
Power of Appointment
The right given to a person to control the disposition of property from a trust or estate. The power may be very broad or limited depending on the trust terms.
This term is generally used to refer to the entire process of administration and distribution of a decedent's estate. This process takes place under state law, not federal law, and the rules may vary from state to state.
A term used in some abusive trust schemes that refer to a person who is delegated powers in the trust instrument to replace/appoint trustees. Protectors are often used with foreign trusts. Its explanation in this context is not meant to imply that a "protector" isn't used in some legitimate trust arrangements as well.
A right of a third party to receive the use or control of property after termination of an intervening interest in that property, usually a life estate.
A transferor's right to have property returned after the termination of an intervening estate or interest. IRC § 673
One who creates and/or funds a trust. See grantor.
Generally used by the courts to describe an abusive trust that serves no legitimate purpose and lacks economic substance. The trust is disregarded for tax purposes, and all income and expenses are assigned to the true owner of the activity.
The person whose trust receives another grantor's assets to be passed through the original trust to a second, or possibly more, trusts for the purpose of disguising the true identity/ownership of the assets.
Rules that equitably tax the beneficiary of a trust that accumulates all or part of its income (rather than distributing it currently). It is an attempt to tax the beneficiary as if the income had been distributed currently. IRC § 665(b). For taxable years beginning after August 5, 1997, the throwback rules apply only to foreign trusts and certain domestic trusts. IRC § 665(c)
Refers to the total number of trusts purchased and the flow of income and expenses to and from the related entities. The related entities may include businesses that are not trusts, such as Limited Liability Company (LLC), Limited Liability Partnership (LLP), corporations, S Corporations, partnerships, and sole proprietorships.
Refers to the document created by a grantor to establish the trust. It provides the governing guidelines, identifies the grantor(s), identifies the beneficiaries, and identifies the powers of the trustees and others involved with the trust. It should also include a listing of the assets that were transferred to the trust and constitute the corpus of the trust. Also referred to as "trust document," "trust indenture," or "governing instrument."
Units of Beneficial Interest (UBI)
A term used by some trust promoters to identify interests in a trust and to disguise events surrounding the formation of the trust. It is not a term used by the Internal Revenue Code, but is used by trust promoters in an attempt to gain tax advantages (such as a tax-free exchange). The use of this term does not require the Service to grant favorable tax treatment to any transaction.
Refers to a scheme used by abusive trusts in which taxable income is reduced or eliminated by moving the income through a series of related trusts. For example, a separate trust may be set up to rent business equipment to the business trust at excessive amounts. The equipment trust then distributes any remaining income to another trust that deducts personal or unallowable expenses, and so forth.