The AICPA recently submitted recommendations to the IRS and Treasury regarding the tax classification of purpose trusts, and functionally similar structures, for federal income tax purposes.
The recommendations would simplify filing for taxpayers and practitioners and will reduce the administrative burden on the IRS, the AICPA said.
A purpose trust lacks identifiable beneficiaries. Historically, common law deemed such trusts invalid due to this lack of beneficiaries. The trust’s validity may hinge on whether someone else can enforce it.
Additionally, uncertainty about the tax status of purpose trusts complicates compliance, leaving taxpayers and advisors unsure about applicable rules and required filings.
“The growth in the use of noncharitable purpose trusts makes this issue important,” said Eileen Sherr, AICPA’s Director of Tax Policy & Advocacy. “If a purpose trust is not treated as a trust, the existing regulations do not provide any guidance on how it should be classified.”
“A purpose trust, or an alternative structure functioning as a purpose trust, should be able to elect its tax classification because an entity can already de facto elect by choosing to organize as a trust, foundation or corporation under state law,” Sherr added. Read more.