There are many estate tax planning benefits that trusts can provide. Some trusts even provide income tax benefits as well, and by reducing income tax people can be able to preserve more wealth for their heirs. The U.S. Tax Court ruled last year that a trust is able to “materially participate” in business activities for the purposes of passive activity loss (PAL) rules, and as a result creating income tax benefits by allowing more deductions for many trusts. “The PAL rules prevent taxpayers from deducting losses generated by “passive” business activities against “non-passive” income, such as wages and portfolio interest and dividends.” When it comes to determining what it means for a trust to materially participate in a business the definition of “materially” can become unclear. “The Tax Court disagreed with the IRS that a trust cannot materially participate in a business or qualify as a real estate professional.” This Tax Court ruling discussed in this article is another reason why it is important for people to update their estate plans.
See Tom Kosinski, Can You Reduce Your Trust’s Income Tax Bill?, Orba Blog, November 18, 2015.
