Taxing Middle Class Trust(s)

The purpose of this article is to explain how courts came to such an inequitable interpretation of section 67(e) even as they tried to avoid that result; to present an interpretation of section 67(e) based on the principle that underlies the Code’s scheme for taxing trust income; and to illustrate how this interpretation produces optimal equity among trust beneficiaries as well as between trust beneficiaries and outright owners. The Code’s scheme for taxing trust income, set forth in Subchapter J of the Code, recognizes that the existence of a trust does not necessarily signify wealth or high income. The use of the trust income, however, does indicate whether the trust benefits a wealthy family or an individual with a modest income. Applying this principle of Subchapter J to the interpretation of section 67(e) is the key to achieving equity between trust beneficiaries and outright owners.