Taxation

Ca. Tax Lawyer 2016, VOLUME 25, NUMBER 1

The Taxation of Trusts After a Divorce or Marital Dissolution: A Need to Define "Income"1

By Justin T. Miller2

EXECUTIVE SUMMARY

If one spouse (the "Moneyed Spouse") creates an irrevocable grantor trust (a "Support Trust") for the benefit of another spouse (the "Non-Moneyed Spouse"), the tax consequences during marriage are fairly straightforward. In general, the Moneyed Spouse would be subject to tax directly on the trust’s taxable income regardless of any distributions from the Support Trust to the Non-Moneyed Spouse.3

After a divorce or marital dissolution, it is highly unlikely that a Moneyed Spouse would want to continue to be subject to taxes on trust income that is distributed to his or her former spouse. Fortunately, section 682 of the Internal Revenue Code of 1986, as amended (the "Code"), provides a special exception to the usual grantor trust tax rules by requiring the Non-Moneyed Spouse – not the Moneyed Spouse – to include the amount of the "income" he or she is entitled to receive from the Support Trust in gross income.

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