The IRSs Renewed Focus On Abusive Trust Arrangements

Taxpayers have long utilized trust arrangements for the transfer of wealth to beneficiaries or for the protection of assets from creditors. Generally, there is nothing nefarious about these types of arrangements. Rather, the Internal Revenue Code of 1986, as amended (the "Code") simply provides special rules for the taxation of trusts and/or beneficiaries in addition to certain reporting requirements-particularly if the trust is foreign.

Recently, the IRS cautioned taxpayers that it has become aware of taxpayers who are using trusts in a manner that crosses the bounds into illegality. Given these warnings, taxpayers who have entered into trust arrangements should be diligent in ensuring that their arrangements comply with federal income tax laws. This article discusses general tax concepts applicable to trusts and also discusses the IRS's renewed push to focus on abusive trust arrangements. It concludes with potential options taxpayers may have to eliminate or