‘Spendthrift Trust’ Gains Must Be Reported as Income, IRS Says

Non-grantor, irrevocable “spendthrift” trusts must report their capital gains and extraordinary dividends as taxable income, in spite of what some promoters have claimed, the IRS said Friday.

The promoters’ claims are based on mistaken interpretations of Section 643, and all such trusts should be examined to make sure they’re reporting all of their taxable income, the IRS’s Office of Chief Counsel said in an Aug. 9 legal advice memorandum released Friday.

Spendthrift trusts are those in which the trust’s beneficiary doesn’t control the trust’s assets and the trustee has sole discretion to make distributions to beneficiaries. Some ...