IRS Dissects Trusts with Pass-Through Entities


So make sure the trustee is one of the officers of the company, which in a family business is pretty likely anyway, and you are all set right?  Not so fast according to the IRS’ Associate Area Counsel who authored TAM 201317010.

Trusts can accomplish many goals and, usually, can secure some real tax advantages. Powerful estate planning tools indeed! But take note – ObamaCare may be changing all of that in the pursuit of revenue to pay for the program.

It may not be a game changer, but it may be worth noting that some trusts might get a bit more dinged up this year with the new 3.8% surtax on investments created by ObamaCare.

Indeed, the accountants are just starting to do the math after the IRS staked out its position in a new “technical advice memorandum” (see TAM 201317010). Forbes has weighed in on the consequences of this new TAM in an article titled “Tough IRS Position Means More Trusts Will Get Hit With New ObamaCare 3.8% Tax.

Cutting to the chase, the new 3.8% ObamaCare surtax hits investment income, and trusts that own interests in pass-through entities are construed as ‘passively active’ (a bitter oxymoron in accounting-speak) and thereby produce investment income to tax.

To make matters worse, such trusts see the tax kick in at a much lower income rate than for an individual. And, to further complicate things, such trusts are not often designed to be “active” entities. A complex plan might involve various trusts with various holding interests in companies, and might be targeted at various levels. As you can see, things can get complicated fast.

Like most matters on the tax (and political) front, it remains to be seen how the year and the tax battle will be played out. Nevertheless, you should keep an eye on Washington, D.C., and a hand on your wallet.

To talk to Terry Bertram, an estate planning attorney about your estate planning needs, visit

Reference: Forbes (April 29, 2013) “Tough IRS Position Means More Trusts Will Get Hit With New ObamaCare 3.8% Tax

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