Are these two trusts substantial identical?

Question

The following is a quote from IRS Instructions for form 1041:

Two or more trusts are treated as one trust if the trusts have substantially the same grantor(s) and substantially the same primary beneficiary(ies) and a principal purpose of such trusts is avoidance of tax. This provision applies only to that portion of the trust that is attributable to contributions to corpus made after March 1, 1984.

Now if two irrevocable trusts have the same grantor and the same primary beneficiary but a different number of trustees (One trust has asset protection, one does not.) are they considered substantially identical for income tax purposes?

Answer 1

Now if two irrevocable trusts have the same grantor and the same primary beneficiary but a different number of trustees (One trust has asset protection, one does not.) are they considered substantially identical for income tax purposes?

You can't determine if the principal purpose of such trusts is avoidance of tax without knowing facts that are not disclosed in the question and are not discernible on the face of the trust agreements.

The main point of this provision is to prevent grantors from creating a whole lot of small trusts with slight differences, for example, in contingent beneficiary, in order to maximize the benefit of the lower marginal rate applicable to the first few thousand dollars of income in complex trusts. If the fact pattern is consistent with that goal, this rule is likely to apply. If not, it is unlikely to apply.

Answer 2

Let's name them...

• Trust A was granted by Adam to Beatrice alone.
• Trust B was granted by Adam to Beatrice and Charlotte.
• Trust C was granted by Adam to Charlotte and Dorian.
• Trust D was granted by Xavier to Beatrice and Dorian.
• Trust E was granted in halves by Adam and Julia to Beatrice alone.

How the trusts are summed up

For Beatrice, the sum of Trust A and the amount allotted to her in Trust B are summed up. To this, the half that Adam added into Trust E is added and the whole sum treated as one item in the amount of this sum. Trust D and the Julia portion of Trust E are two separate items, resulting in 3 entities.

As for Charlotte, only the portions of Trust B and Trust C reserved for her are relevant, but both are summed and treated as one item.

Dorian, who only is a beneficiary of a part of Trust C, has only that part taken into account for him, and the Trust D from a different donor is a separate item (again, worth his portion).