BY JACK MACY PRINCIPAL, CHICAGO OFFICE
Presented at the Tax Seminar of the Illinois Society of Certified Public Accountants, Chicago — November, 1955
One of the areas of possible tax saving that is frequently overlooked
is the field of short-term trusts.
In the typical short-term trust, the grantor gives the income from the property placed in trust to a designated beneficiary for a period of years. At the end of the period, the property reverts to the grantor. The objective is to remove the income from the grantor's usually high brackets and transfer it to the beneficiary's lower brackets.
We recognize at the outset that this type of trust will be includible in valuing the grantor's estate because of the retained reversionary interest.
For this reason it is not often a suitable vehicle for the major shifts of interest that are frequently a part of a well integrated estate plan. However, we should not overlook important benefits just because they may not be quite as dramatic as other benefits that can also be obtained.
Another reason for the comparatively infrequent past use of the short-term trust is the uncertainty that surrounded them. In the famous Clifford case the grantor of a five-year trust was held taxable on income
payable to his wife under the broad provisions relating to "income derived from any source whatever." In finding the grantor as the owner of the corpus in substance, the Court relied on no one fact but rather on "all considerations and circumstances." Obviously, this type of holding makes intelligent tax planning very difficult.
The situation was clarified somewhat by the issuance of Treasury Regulations on the subject, but their validity has been questionable and there were at least a few published cases where the Treasury seemed to attack trusts that met the regulation requirements. Nevertheless, a number of trusts have been established in reliance on the regulations.
Now, however, the Code itself sets out the circumstances under which trust income will be taxed to the grantor, and appears to close the door on the contention that such income is to be taxed under general principles rather than under the specific provisions. It is to be understood
that the new provisions do not deal with matters such as the as-