IRC Section 678 and the Beneficiary Deemed Owner Trust (BDOT)

99 Pages Posted: 6 May 2018 Last revised: 22 Jun 2018

Edwin P. Morrow

Independent

Date Written: April 19, 2018

Abstract

This article explores Section 678 of the Internal Revenue Code and how and when a beneficiary is deemed to be the owner of a trust for income tax purposes. More specifically, the article explores when and how this may be done without granting a withdrawal power over the entire principal of the trust, but only over its taxable income.

Income tax benefits of such trusts include simpler tax reporting, lower tax brackets, capital gains tax exclusions for residences, much more favorable Section 179 expensing, disregarded transactions, firmer S corporation status, charitable deductions for business income, more favorable life insurance and annuity rules, unlocking trapped capital losses, and many more benefits often overlooked.

Asset protection for such trusts, while seemingly substandard, is hardly a disaster. Any ill effects of a withdrawal power can not only be counteracted but even turned into an advantage over other trust designs. A 50 state comparison chart at the end summarizes the various state asset protection statutes and law around powers of withdrawal and lapses.

Keywords: Section 678, Grantor Trust, Income Tax

JEL Classification: K34

Suggested Citation

Morrow, Edwin P., IRC Section 678 and the Beneficiary Deemed Owner Trust (BDOT) (April 19, 2018). Available at SSRN: https://ssrn.com/abstract=3165592 or http://dx.doi.org/10.2139/ssrn.3165592

Edwin P. Morrow (Contact Author)

Independent ( email )

425 Walnut St.
7th Floor
Cincinnati, OH 45202
United States
1-513-632-4350 (Phone)

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