Legal Question in Tax Law in California

Re: grantor trust rules

The answer is complicated. Some "business trusts" are in fact taxed as corporations. Even if the trust is taxed as a trust, it depends on whether it is a "grantor trust" as to whether the grantor is taxed, or the trust pays its own taxes and/or the beneficiary is taxed. I'd need to read the trust to determine who should be taxed. (This statement does not constitute my representation of you, nor is it an attorney-client communication. However, I would be pleased to discuss representing you on a formal basis.)

Re: grantor trust rules

Under grantor trust rules, if a trust meets any of the conditions specified, the grantor is responsible for paying the taxes. Sometimes that is the intended result, as in an Intentionally Defective irrevocable trust, a sophisticated estate planning vehicle. Otherwise, the grantor is not responsible.

Liability protection ... a suit against the trustee or the beneficiary? The rules are very complex but a simple rule of thumb would tell you that anyone who could produce money by choice can also be forced to do so to pay off a creditor. Only certain kinds of trusts provide any measure of asset protection.

A Massachusetts Business Trust is the only one I've ever heard of, though it is used throughout the country. Does CA know have such a beast by statute? Under Mass. case law, which goes back to the turn of the century, they had little to do with federal taxes, and in any case, you can apparently ask the IRS to treat your entity however you like (within limits!), for example, as a partnership with pass-through accounting or as a corporation with entity-level taxation.

One reason the IRS may hate such beasts (OUTSIDE of CA, if CA has statutes to authorize them!) is that throughout the country so called "illegal tax protestors" promote the use of [ Massachusetts ] Business Trusts by quoting from ancient case law in Mass. which seems to say that the entitities are not taxable. The tax protestors are generally lying outright, or else hoping so hard that they willfully ignore the truth. They want you to pay them to tell them how to set up something for which you take the risk of going to jail or paying big taxes and for which they take no such risk (being out of state and/or not licensed to give advice you can rely upon.) The advice that you can LEGALLY shelter taxable income forever using one is 100% false. Some such promoters have gone to jail but the bulk remain free.

Re: grantor trust rules

Who's really in charge if not you, the Grantor? If it's your spouse, or the kids, you're fooling nobody, and you're still taxable. IRS is worried about tax fraud! Good luck!!

Re: grantor trust rules

The perception of the IRS is that most business trusts are set up to avoid taxation either by hiding income or taking deductions which would otherwise be nondeductible. Generally, if you apply for a Fed ID from the IRS and list business trust on the SS-4, the IRS will automatically classify the entity as a corporation or partnership. While some business trusts have a lawful purpose, inorder for the IRS to give it's blessing, they would have to be convinced, probably with a Private Letter Ruling application.