IRS Warns About Complex Trust Tax Scam Used To Defer Income Taxes

I have previously written about the resurgence of scam trusts in my article The Complex Trust Is Simply The Criminal Tax Evasion Device Known As The Pure Trust Repackaged (Aug. 18, 2021). Today we look at a different type of trust which similarly — and just as falsely — claims to avoid income and capital gains taxes. Although sometimes pitched under different names, the trust is usually referred to as a “non-grantor irrevocable complex discretionary spendthrift trust”, as if the length of the name alone should justifies the fees that somebody pays to set one of these things up. Attention to this form of trust comes by way of an IRS Office of Chief Counsel Memorandum, AM 2023-006 and will give a more in-depth and technical description than shall be done here.

The basic idea is an old one when it comes to tax scams, being the idea that no income tax has to be paid on the trust’s income so long as no distributions are made to beneficiaries. Eventually, according to the promoters, when distributions are finally made then some tax might or might not have to be paid at that future time, but not now. Thus, also according to the promoters, if a taxpayer can get a heavily-appreciated asset into the trust, the taxpayer can use the trust to churn the asset without paying capital gains taxes on the sale now, which also of course means that they will have a much larger amount to invest in the meantime. The promoters also say that such trusts can effectively sponge up large income streams, such as from royalties, and not pay taxes on those moneys until they are distributed to beneficiaries. It sounds good; it is also totally false.