Take-Away: In response to new IRC 199A and its 20% income tax deduction for sole proprietorships and ‘pass-through’ entities, one planning strategy was for a business owner to transfer interests in an operating business into several non-grantor trusts, so that each trust could qualify for the IRC 199A deduction with regard to the income that the business paid to each trust-owner. In response to this potential strategy of ‘dividing’ taxable income (and thus creating multiple eligible entities where each could claim an IRC 199A deduction) among several non-grantor trusts, the Treasury published proposed Regulations that would allow Treasury to treat multiple non-grantor trusts as a single trust, in effect frustrating that planning strategy.

Background: In August Treasury published long-awaited (after 34 years) proposed Regulations to implement IRC 642(f.) Two or more non-grantor trusts will be treated by the IRS as a single trust if two conditions are met. If the two conditions are met then there is a presumption of income tax avoidance. [Proposed Regulation 1.642(f)-(1(c).]

  • Substantially Same Grantor and Primary Beneficiaries: The trusts must have substantially the same grantor and the same primary beneficiaries. The same grantor will usually be satisfied since the owner of the business will be the one who transfers interests in his/her business to multiple non-grantor trusts.  Proposed Regulation 1.643(f)-1(c) provides two examples:
  • Example #1: A creates three trusts. Trust #1 is for benefit of B (A’s sister), C and D (A’s brothers.) Trust #2 is for the benefit of E (A’s second sister) and C and D (A’s brothers.) Trust #3 is for the benefit of E (A’s second sister.) The proposed Regulation concludes that all three Trusts would be deemed to be one trust for income tax purposes because: (i) they have the same grantor; and (ii) they have substantially the same beneficiaries.
  • Example #2: X creates two trusts. Trust #1 is for the benefit of X’s son, S. Trust #2 is for the benefit of X’s daughter, D. S is the income beneficiary of Trust #1 with the right to receive income from the trust for his life; D is the remainder beneficiary of Trust #1. D is the income beneficiary of Trust #2; the income may be accumulated for her benefit, or distributed for her health, education and support. Trust #2 may also pay income or principal for S’s medical expenses. The proposed Regulation concludes that there is no presumption of income tax avoidance under these facts.
  • Planning: Instead of creating several non-grantor trusts with potentially the same primary beneficiaries, if the business owner creates a separate non-grantor trust for each child, for example, then there would be no ‘substantially the same primary beneficiaries’ in any of the trusts. Thus, multiple non-grantor trusts, one created for each child, hopefully with slightly different provisions for each, would avoid this condition, and thus no presumption of tax avoidance would be attached to the several trusts to which a fractional interest in the same business is transferred for IRC 199A purposes.
  • Principal Purpose is Tax Avoidance: A principal purpose of the trusts is tax avoidance. The proposed Regulations provide with regard to this condition: “A principal purpose for establishing or funding a trust will be presumed if it results in a significant income tax benefit unless there is a significant non-tax (or non-income tax) purpose that could not have been achieved without the creations of these separate trusts.” [Proposed Regulation 1.643(f)-1(b).]
  • Planning: It will be helpful if each trust recites a different nontax purpose for its creation, e.g. “my concern over my son’s spending habits” or “my goal is to keep the family business in the family for multiple generations.”


  • Multiple non-grantor trusts created after August 16, 2018 will be viewed subject to these proposed Regulations.
  • The proposed Regulations create a legal presumption, which may be rebutted, but the burden of persuasion will be on the taxpayer who created the non-grantor trusts.
  • This multiple trust rule may apply in many situations in which there is no evidence of a subjective tax-avoidance purpose, but the trusts have substantially the same grantors and primary beneficiaries and the trusts produce a significant tax benefit (but without a significant nontax purpose.)
  • Unlike IRC 199A which is set to sunset in 2026, these multiple trust Regulations with regard to IRC 643(f) are permanent.
  • At present it is still unclear what the proposed Regulations mean when they say that the multiple trusts will be Probably that means for tax reporting purposes only, and not property law purposes which is governed and controlled by state law. But does disregarded mean that the income from the non-grantor trusts will be attributed to the grantor of the trusts? Or will the income from multiple non-grantor trusts be attributed to just one of the non-grantor trusts, but not to the other non-grantor trusts? Or will each trust report its own income, but each will be precluded from claiming an IRC 199A income tax deduction, or just one trust will be entitled to claim an IRC 199A deduction?
  • While these proposed Regulations are intended to limit the use of multiple non-grantor trusts, the Regulations do not stop the use of a single non-grantor trust to, in effect, double the grantor’s threshold amounts where the grantor and the trust he/she creates may both qualify for the IRC 199A deduction.

Conclusion: Rumor has it that Treasury is attempting to finalize these proposed Regulations by the end of this calendar year, which is fast approaching.