Trust Matrix – Inter vivos Trusts

This table lays out the Income Tax and Estate Tax treatment of various inter vivos trusts (i.e. trusts funded during a taxpayers life).

Inter vivos
Trust Matrix
Estate Tax Inclusion
Excludable from Taxpayer’s Estate Includable in Taxpayer’s Estate
Income Tax Taxation Non-grantor Trust
  • Simple or complex inter vivos trust
  • Incomplete gift Non-Grantor Trust = ING (e.g. DING, NING)
Grantor Trust
  • Intentionally Defective Grantor Trust (IDGT)
  • Revocable Trust
  • QPRT (during initial trust term)
  • GRAT (during initial trust term)
  • CRAT and CRUT (during initial trust term)

Tips on 2015 Capital Gains

The rules for recognizing capital gains are the same for a trust or estate as they are for an individual. Here is a good recap of some important concepts related to the taxation of capital gains.

Capital Gains Taxes in 2015

Hat Tip of the Wills, Trusts & Estates Prof Blog.

Valuation of Indirect Ownership Through a Trust


Valuation of indirect ownership of a capital or profits interest in a partnership through a trust.

Last Monday’s post discussed a recent CCA and its conclusion regarding grantor trusts as disregarded entities. This post reviews the CCA’s analysis of non-grantor trusts and their interaction with IRC §267 and IRC §707(b)(1)(A).

Both code sections (mentioned above) aim to limit loss recognition when a transaction occurs between related parties. While IRC §267 applies more broadly, IRC §707(b)(1)(A) (which is part of Subchapter K) applies to transactions between a partnership and its partners.

The memorandum’s analysis of the application of IRC §707(b)(1)(A) requires the application of IRC §267(c). Part (c) of IRC §267 details the rules for constructive ownership for stock (or other interests) owned through corporations, partnership, estates or trusts. However, there are no rules provided as to **how** an estate or trusts’ beneficiary’s interest should be valued. Are only current income beneficiaries considered? Or should remaindermen be factored in?

The analysis focused on a review of Hickman v. Commissioner (T.C. Memo. 1972-208). This this case, the IRS argued that the beneficiaries (a husband and wife) were more than 50% owners of stock because they were the sole income beneficiaries of the trust. The taxpayers argued that their ownership should be determined actuarially, which would have resulted in ownership of less than 50%.

The taxpayers relied on Rev. Rul. 62-155 which says that “shares held by a trust are considered to be owned by its present or future beneficiaries in proportion to their actuarial interests.” While this Revenue Ruling was specifically referring to different parts of IRC (the Code of 1954 at that!), they thought the valuation should be applied to them.

The court found that the Rev. Rul. 62-155 argument was not applicable to the valuation for §267(c) purposes. The IRS prevailed with its position that the income beneficiaries were the owners though the trust of the stock.

[In addition, the court squashed another taxpayer argument that the fair market valuation rules of Treas. Reg. §20.2031-1 should be used to value the present and remainder interests.]

The current memorandum summarized its analysis of §267 and §707(b)(1)(A) here:

“We believe that to apply the §267(c) rules in the instant case, it is necessary first to ascertain the total capital or profits interest in Taxpayer owned by each selling trust. Second, it is necessary to determine the specific beneficiaries of each selling trust that should be treated as proportionately owning a capital or profits interest in Taxpayer. Third, it is necessary to determine each beneficiary’s proper ownership portion of the capital or profits interest in Taxpayer that is owned by the respective selling trust in comparison to all other beneficiaries’ proper ownership interest or total capital or profits interest. The factors considered to determine the beneficiaries that should be taken into account as owning a capital or profits interest and to compute a specific beneficiary’s proper ownership portion of the capital or profits interest of Taxpayer owned by a particular trust should be in accordance with the intendment of §707(b). Once a beneficiary’s proportional capital or profits interest in Taxpayer is established under §267(c)(1), the constructive ownership rules of §267(c) must be further applied to attribute ownership to other specified persons (e.g., family members) for purposes of determining a person’s direct and indirect ownership of the capital or profits interest of Taxpayer.”

Source: CCA 201343021
Source: Hickman v. Commissioner, T.C. Memo. 1972-208

Grantor Trusts and IRC §267


Updated 2013-11-5

A recent IRS advisory opinion addressed the application of the grantor trust rules and the rules disallowing losses on sales between related parties.

The Chief Counsel Advisory 201343021 (“memorandum”) examined the question of whether grantor trusts are disregarded entities for the purposes of IRC §267 and IRC §707(b)(1)(A). In short, the memorandum concluded that grantor trusts are disregarded, and that the loss limitation would apply to transactions between related parties.

The question concerned the sale of LLC assets to a set of purchasing trusts. These purchasing trusts are all irrevocable grantor trusts, the grantors of which are three siblings. The facts of the case are that the three siblings are constructive owners of the LLC, and the memorandum concludes that they are the constructive acquirers of the property from the LLC. Therefore the memorandum concludes that they are selling assets to themselves at a loss, and the the loss is not recognized.

In reaching its conclusion to disregard the grantor trusts, the memorandum provides a thorough analysis of the relevant IRC sections, and leans heavily on Rev. Rul. 85-13. This Ruling basically says that the grantor not only recognizes the income (and deductions) of the grantor trust for income tax purposes, but that the grantor “is treated as the owner of the trust’s assets for federal income tax purposes”. The memorandum concludes that this “ownership” extends to the application of the loss limitation provisions of IRC §267 and IRC §707(b)(1)(A):

“Rev. Rul. 85-13 reasons that it would be anomalous to suggest that Congress, in enacting the grantor trust provisions, intended that the existence of a trust would be ignored for purposes of attribution of income, deduction, and credit, and yet retain its vitality as a separate entity capable of entering into a sales transaction with the grantor. The reason for the attributing items of income, deduction, and credit to the grantor under §671 is that, by exercising dominion and control over a trust, either by retaining a power over or an interest in the trust by dealing with the trust property for the grantor’s benefit, the grantor has treated the trust property as though it were the grantor’s property. The Service position of treating the owner of an entire trust as the owner of the trust’s assets is, therefore, consistent with and supported by the rationale for attributing items of income, deduction, and credit to the grantor.”

Source: CCA 201343021
Source: Rev. Rul. 85-13, 1985-1 C.B. 184

Passive Income: Good or Bad?

Passive activity loss rules are complicated and require careful attention. In general, their purpose is to limit or prevent taxpayers from deducting passive losses, unless the taxpayer has offsetting passive income.

Previously, passive income had been a positive: a taxpayer without passive losses would recognize the passive income regardless; a taxpayer with passive losses could offset the passive losses with passive income.

But starting in 2013, the recognition of passive income has a down side: the Medicare Tax on Net Investment Income (MTNII) [IRS §1411]. “Excess” passive income, that is passive income left after offsetting passive losses, may be subject to an additional 3.8% excise tax.

Taxpayers must take time to review their passive income, and investigate the options available for reducing or eliminating “excess” passive income. If a taxpayer can change his involvement with the activity (see the material participation rules in Regs. §§1.469-5T(a)(1)-(7)), he may be able to reduce his passive income and his exposure to the MTNII.

Fiduciaries will be hard-pressed to avoid the MTNII, since it is generally difficult for a fiduciary to demonstrate material participation. Combined with the trust’s low threshold, any trust which does not distribute out its net investment income will likely be subject to the excise tax.

Passive Activities: TAM 201317010

Trustees, executors, and their tax advisers have long struggled with the application of the passive activity rules to trusts and estates. While the rules for individual taxpayers are clear (or, clearer), the rules for fiduciaries remain vague.

A recent Technical Advice Memorandum (TAM ) from the IRS advance the set of parameters that fiduciaries must use to determine when an activity is treated as passive by a trust or estate.

An activity is passive if the taxpayer does not materially participate in the activity. IRC §469(h)(1) defines material participation. More specific guidance for individuals is given in the regulations [Temp. Treas. Reg §§ 1.469-tT(a)(1)-(7)].

However, no statutes or regulations specifically address how to determine material participation for a fiduciary. Instead, only one court decision and a few PLRs are available for guidance.

The one court case is Mattie K. Carter Trust v. U.S. (256 F. Supp.2d 536). In this case, the IRS argued that only the activities of the trustee could be used to determine material participation. Instead, the court considered the activities of the trustee, employees, and agents in terming material participation.

In the present TAM, the trustee argued that he materially participated in the activities of businesses owned by the trust. The TAM distinguished between the activities of the trustee in his fiduciary capacity and his activities as an employee of a business subsidiary, and found (in this case) that the trustee’s fiduciary authority was limited by the trust document.

See:  TAM 201317010

For more on this TAM, see Peter Reilly’s post on his Forbes blog.

Also, Joe Kristan has a great post on his blog at Roth & Co.

Tax Season 2013

Tax season for many tax professionals is already in full swing.

Tax season for the IRS begins this year on Wednesday, January 30, 2013. This is the date that the IRS will accept paper or e-filed income tax returns (except for returns with certain forms attached, as these forms are not quite ready for processing by the IRS).

The IRS generally begins accepting returns around January22 each year. However, the late passage of the American Taxpayer Relief Act (ATRA) of 2012 caused delays. The ATRA passed the Senate around 2 a.m. on January 1, 2013, passed the House around 11 p.m. on January 1, 2013, and was signed by the President on January 2, 2013. The ATRA retroactively made changes to 2012 income tax law, such as ATM exemption amounts.


See: IRS Announcement