For example, trusts are frequently used properly in estate planning, to facilitate the genuine charitable transfer of property, and to hold property for minors and incompetents. Under these laws and certain court developed doctrines, either the trust, the beneficiary, or the transferor, as applicable, must pay the tax on the income realized by the trust including the income generated by property held in trust. These promised benefits are inconsistent with the tax rules applicable to the abusive trust arrangements, as described below. Abusive trust arrangements often use trusts to hide the true ownership of assets and income or to disguise the substance of transactions. Funds may flow from one trust to another trust by way of rental agreements, fees for services, purchase and sale agreements, and distributions.
Some trusts purport to involve charitable purposes.
In some situations, one or more foreign trusts also may be part of the arrangement. Described below are five examples of abusive trust arrangements that have come to the attention of the Internal Revenue Service. An abusive trust arrangement may involve some or all of the trusts described below. The type of trust arrangement selected is dependent on the particular tax benefit the arrangement purports to achieve. In each of the trusts described below, the original owner of the assets that are nominally subject to the trust effectively retains authority to cause the financial benefits of the trust to be directly or indirectly returned or made available to the owner.