If the trust is not a sham and is not a grantor trust, the trust is taxable on its income, reduced by amounts distributed to beneficiaries. Transfers to trusts may be subject to estate and gift taxes. Personal expenses are generally not deductible . Personal expenses such as those for home maintenance, education, and personal travel are not deductible unless expressly authorized by the tax laws. The courts have consistently held that non-deductible personal expenses cannot be transformed into deductible expenses by the use of trusts.
Special rules apply to foreign trusts.
If an arrangement involves a foreign trust, taxpayers should be aware that a number of special provisions apply to foreign trusts with U.S. grantors or U.S. beneficiaries, including several provisions added in 1996. For example, a U.S. person that fails to report a transfer of property to a foreign trust or the receipt of a distribution from a foreign trust is subject to a tax penalty equal to 35 percent of the gross value of the transaction. Other examples of these provisions are the application of U.S. withholding taxes to payments to foreign trusts and the application of U.S. excise taxes to transfers of appreciated property to certain foreign trusts. The Service has undertaken a nationally coordinated enforcement initiative to address abusive trust schemes - the National Compliance Strategy, Fiduciary and Special Projects. This newsletter is not intended to provide legal advice on the matters discussed herein, such advice should only be obtained from a qualified attorney.