Intentionally _______ trusts are often used to get a lower tax result than a complex trust would have otherwise by taxing an individual rather than a trust.

• A. Defective
• B. Irrevocable
• C. Grantor
• D. Charitable

Answer: (A)

The concept being tested is how trusts can be taxed under grantor-trust rules to shift the tax burden from the trust to the individual. Intentionally defective trusts are designed so they are treated as grantsr trusts for income tax purposes. This means the trust’s income is taxed to the grantor on the grantor’s personal return, not at trust tax rates. Since trusts face compressed tax brackets and reach the top rate much sooner than individuals, having the grantor pay the tax can produce a lower overall tax bill and let more assets remain inside the trust for future transfers. The trust can still be used for estate planning purposes, while the income tax burden stays with the grantor.

Charitable or irrevocable trusts don’t specifically describe this tax treatment, and simply labeling a trust as a grantor trust doesn’t convey the intentional “defect” used to achieve the tax outcome.