> Stuart Br>>> So what you want is atrustin which the income is taxed to
>>> thetrustbeneficiary for income tax purposes but is not
>>> included in his estate for estate tax purposes. This kind
>>> of thing is sometimes referred to as a "defective"trust.
>> Exactly!
>>> Your only way of having someone other than the original
>>> grantorbe considered the owner for income tax purposes is
>>> under section 678, which is the person has or had "a power
>>> exercisable solely by himself to vest the corpus or the
>>> income therefrom in himself...."
>> Some say yes, most say no--based on US v. DeBonchamps.
> Thanks. I wasn't aware of that case.
>
> Basically what it says is that having a limited power of
> appointment is not a "to vest the corpus or the income
> therefrom in himself" because any power to do so is limited
> by a standard.
>
> I've seen it done the other way - where property is included
> in the taxable estate of the beneficiary for estate tax
> purposes, but the income is not for income tax purposes.
> But it may not work the way you would like it to.
>> Why do you say my only way--did you look at section 679?
> Section 679 concerns foreign trusts with US beneficiaries.
> They don't want people to set up trusts in another country
> but have beneficiaries in the US, and allow them to get out
> of responsibility for tax on the income produced by those
> assets. It says thegrantoris taxable, but has nothing to
> do with making the beneficiary taxable.
>>> So it appears that a power to invade may cause the income to
>>> be taxed if it is limited to an ascertainable standard.
>> Yes. There is no "standard" in the 678 statute--only the one
>> court case as far as I know. Unfortunately, that is enough
>> to stop most CPAs from filing as agrantortrust--and you
>> can't really blame them-- it's basically the only data point
>> they have on the issue.
> That's actually not the only case - there turn out to be
> several others. Apparently the provision in 678 that says
> the person must be able to "vest" the property "in himself"
> does not apply when the power is limited.
>> I think you understand the goal perfectly. The only
>> question is how to get there, and I'll be happy to pay
>> reasonable legal fees for something of value. I'm not
>> inclined to pay somebody to think deeply about something
>> that they should already know.
> This is a very unusual request, so it's not the kind of
> thing most people would know off the tops of their heads.
> And it can't be guaranteed in advance that a way will be
> found.
>
> One approach would be to carefully parse the provisions of
> section 678 against the requirements of section 2041 and see
> if some sort of distinction could be found that would
> support your goal. But on my brief review I have not been
> able to find one. The only thing I could find was to give
> the person the unlimited right (not restricted by a
> standard) to withdraw all the income, but not more than 5%
> or $5,000, whichever is greater. That would exclude it from
> his estate, but include at least a portion of it in his
> income tax.
>
> But I don't know if that would accomplish your goal.
>
> Explain again, if you would, why you want the beneficiary
> taxed on income generated by thetrust? The stepped up
> basis is as a result of inclusion in estate tax and not
> related to income tax issues, so I don't really understand
> why you need to do that. Remember that any income actually
> distributed is taxed to the beneficiary.
The Trust has unrealized capital gains and losses in the beneficiary's investment accounts. If realize the gains in the trust, we either have to pay out the income to the beneficiary or pay tax at trust tax rates---neither one of which is desirable. If the surviving spouse dies with an unused loss, the loss is wasted since his assets get stepped up to market value at death. If, however, the gains can be realized in the Trust and taxed on the beneficiary's return (by making the Trust a grantor trust), then the basis of the Trust investments is increased--no tax is paid currently and beneficiaries save capital gains tax in the future-15%, 20%, or ??%. I am still working on the 679 possibility. I'm curious why no one seems to want to look seriously at it. It's probably unfamiliar to most people, but I still think it will work very well. Look at the definition of "foreign" trust--sec.
301.7701-7. It has nothing to do with moving money to a foreign country, and the trust income is taxable to the "transferor". Furthermore, I don't mind if we have to recognize a gain per sec. 684, since that's what we want to do anyway.
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