Suppose a person who is a beneficiary of a trust holds assets generating $100,000 annual income in one irrevocable trust, and they are taxed by the IRS at about 37% of all income above about $12500. The marginal tax rate for income between $0 and $2500 is only 10%.

Suppose all beneficiaries and the trustee(s) agreed to the following:

What section of code or law would prevent this tax payer from splitting all of his assets into 40 separate trusts, each with income of only $2500 each, and obtaining the 10% tax rate for all of his income?

  • Do you think your employer is going to he happy employing your trusts so you can avoid some taxes? – quid Jan 8 '20 at 0:47
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    Each trust would have your SSN or other taxpayer ID. If you pretend to be 40 different people, you will be in deep trouble. – ab2 Jan 8 '20 at 1:20
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    Why do people think the IRS employees idiots who haven't see every scam under the sun? – RonJohn Jan 8 '20 at 2:53
  • Surely you jest! – Jack Fleeting Jan 8 '20 at 12:25
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    Just pay your taxes people, please. "Baby's first tax evasion scheme" should be a close reason. – Grade 'Eh' Bacon Jan 8 '20 at 14:27

The answer is that the assets are not "his" anymore if they are they are not taxable to the grantor.

If the trust is revocable, meaning that the grantor can get the assets back, then all income the trust(s) receive is reportable and taxable to the beneficiary.

The scenario you describe, where the trust pays taxes on its own income, only applies to irrevocable trusts. In that case, the grantor has no way to get the assets in the trust back. So, your scheme might work for the beneficiaries, but not the grantor. To get more specific than this, you would have to specify exactly what kind of trust you are describing.

  • Updated the question. I like the answer if we can include what happens with irrevocable trusts that all beneficiaries and the trustee agree to amend into 40 separate trusts – Mr. A Jan 8 '20 at 14:07
  • @Mr.A As I said in my answer, you need to specify what kind of trust this is. – Five Bagger Jan 8 '20 at 14:36

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