This type of arrangement has the same pitfalls as the business trust, and it will result in no tax reduction. Family residence trust. Taxpayers transfer family residences, including furnishings, to a trust, which sometimes rents the residence back to the taxpayer. The trust deducts depreciation and the expenses of maintaining and operating the residence including gardening, pool service and utilities. The courts have consistently collapsed these types of trusts, taxing income to the taxpayer and disallowing personal and nondeductible expenses.
Taxpayers transfer assets or income to a trust claiming to be a charitable organization.
The trust or organization pays for personal, education or recreation expenses on behalf of the taxpayer or family members. The trust then claims the payments as charitable deductions on its tax returns. Charitable deductions are not allowed when the donor receives personal benefit from the alleged gift. These trusts often are domiciled in a foreign country that imposes little or no tax on trusts and also provides financial secrecy. Typically, abusive foreign trust arrangements enable taxable funds to flow through several trusts or entities until the funds ultimately are distributed or made available to the original owner, purportedly tax-free.