Question

3. On January 2, 2000, Larry creates a trust with himself as trustee. Larry as trustee may distribute income and principal to Susie and Leon to provide for their health, education, maintenance and support. Upon Larry’s death, the remainder is distributed to Susie and Leon equally. Does Larry’s power to distribute principal and income cause the trust to be grantor as to Larry under § 671? Why or why not?

Answer 1

Solution:

A power to distribute trust income to support a beneficiary whom the grantor is legally obligated to support does not cause the trust to be treated as a grantor trust, except to the extent that the income is in fact used for such purpose. This exception applies even if the power is held by the grantor or the grantor’s spouse. [IRC §674(b)(1).]

A grantor will not be treated as the owner of a trust based on a power to determine the beneficial enjoyment of the trust corpus or income if the corpus or income is irrevocably payable for a charitable purpose as defined in IRC §170(c). [IRC §674(b)(4).]

A grantor is not treated as the owner of a trust merely because the trust income, at the discretion of the grantor (as trustee) or another person, may be used for the support of a beneficiary (other than the grantor’s spouse) whom the grantor is legally obligated to support. The grantor is only taxed on the trust’s income if the income is actually distributed for such purposes. [IRC §677(b).]

In the given case, Larry as trustee may distribute income and principal to Susie and Leon to provide for their health, education, maintenance and support and and upon Larry’s death, the remainder is distributed to Susie and Leon equally. Hence in view of above citations from section 674 and 677, the trust will not be a grantor trust except to the extent that the income is in fact used for such purpose.