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Irrevocable Trust and IDGT problem

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    Irrevocable Trust and IDGT problem

    New Client and it's messy. Hasn't filed since 2006.

    Client (Grantor) set up an Irrevocable trust that holds vacation rental houses and forest land. The houses and some of the Land is up for sale. Proceeds from past sale of Land and other Trust assets were deposited into CCorp's account and used at the discretion of the Client/CEO.

    Client has a C-Corporation (CCorp) where he is the CEO, and the trust beneficiaries (his children) are the shareholders. His children have absolutely no knowledge or control over the CCorp.

    Attorney is the Trustee, and is asleep at the wheel. Trustee agreed to hire CCorp as a Management company for these properties. No money has ever changed hands between CCorp and Trust. This is obviously not an arms-length situation.

    Vacation rentals were remodeled. The remodeling was paid for with equity loans secured by the properties. CCorp received the loan proceeds. CCorp paid for improvements. Improvements are sitting as Assets on CCorp's balance sheet. What to do with them?

    Vacation rentals are rented. CCorp takes all rental income and pays all rental expenses. Prior preparer recorded this in the CCorp 1120 as ordinary income/expense.

    Forestry income was also recorded as income to the CCorp.

    The Trust has, to my knowledge, not recorded any income or expenses at all since its inception. I am not preparing the 1041 forms and have not seen the prior years.

    I'm going to speak with the Trustee and will have questions. Need your suggestions.

    1. Is this an IDGT?
    2. Is the intended purpose of the Trust quashed by the related party CCorp's apparently complete control over the Trust assets?
    3. Would you send this client packing? Could he could be unintentionally be violating the law with an abusive tax shelter? I know this guy personally and he is completely ignorant of what he is doing. Has no clue. His attorney set up an Irrevocable Trust and then gave the Grantor complete control of the assets.

    Thanks for any advice.

    #2
    Disregarded Entity?

    I'm wondering if the trust is a disregarded entity. IRS tends to do that with various estate planning devices which vest ownership of properties into the trust but all control, including income and expenses, still rests with the grantor. Don't know what happens when the control is a corporation and not an individual.

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      #3
      Hi Nash and thanks for your response.

      Client claims Trust files form 1041, but he is clueless. I have to ask the Trustee what is going on, and hope the Board will be able to give me more insight before tomorrow

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