Trusts come in many variations, rendering them often difficult for non-attorneys to follow and comprehend. Indeed, this variation can often be seen in the nomenclature used for trust arrangements, which includes terms such as grantor and non-grantor, simple and complex, revocable and irrevocable, and discretionary or non-discretionary. In many instances, trusts may also have provisions designed to protect the trust principal from third-party creditors—such as spendthrift clauses—making trusts even more difficult for a layman to understand.
Of course, the many variations of trusts also give rise to income tax reporting complexity. Although the IRS has readily recognized that there is nothing unlawful in establishing a trust, it has also actively communicated that it will police trust arrangements to ensure that trusts and trust beneficiaries are complying with the federal income tax and reporting laws. Accordingly, taxpayers establishing trusts—and particularly those where the drafter intends to charge a large fee—should have the trust agreement carefully scrutinized by a tax professional to make sure that the trust complies with these tax laws.
Recent Comments