Intentionally defective trusts are often used to achieve a lower tax result by taxing the individual rather than the trust.

Intentionally defective trusts are often used to achieve a lower tax result by taxing the individual rather than the trust.

• A. True
• B. False
• C. Not applicable
• D. Not typical

Answer: (A)

Intentionally defective trusts operate under grantor trust rules, where for income tax purposes the grantor is treated as the owner of the trust’s income. That means the trust itself isn’t taxed at the trust level; instead, the grantor reports the trust’s income on their personal tax return and pays the taxes as if they earned it directly. This setup shifts the tax burden from the trust to the individual. This can be advantageous because trust tax brackets are very compressed—trusts reach the top tax rates at relatively low levels of income—whereas individuals have broader brackets and may be in a lower marginal rate. By taxing the income to the individual, the overall tax may be lower, achieving the intended tax result. So the statement is true: these trusts are used to achieve a lower tax result by taxing the individual rather than the trust.

Intentionally defective trusts operate under grantor trust rules, where for income tax purposes the grantor is treated as the owner of the trust’s income. That means the trust itself isn’t taxed at the trust level; instead, the grantor reports the trust’s income on their personal tax return and pays the taxes as if they earned it directly. This setup shifts the tax burden from the trust to the individual.

This can be advantageous because trust tax brackets are very compressed—trusts reach the top tax rates at relatively low levels of income—whereas individuals have broader brackets and may be in a lower marginal rate. By taxing the income to the individual, the overall tax may be lower, achieving the intended tax result. So the statement is true: these trusts are used to achieve a lower tax result by taxing the individual rather than the trust.