Can you borrow from your trust fund for your own benefit?

[nineinchal]

Dad grants son $10 million in trust fund. Son is a sick gambler.

Son loses $28 M in stock market, fulltilt and Bellagio.

Father funds another $20 M to the trust. Son squanders more $$$, but withdraws these amount as loans with a promissory demand note due back to dad.

Wouldn't these withrawals be construed as income by the IRS?
This has been going on for thirty years. Son never paid back a dollar, even though there are demand notes for all these "loans." Interest income/expense has not been recognized on any tax return, either for the 1040 or 1041.

Any attorneys, CPA with an opinion?

No this isn't me, I should be so lucky.

Nineinchal CPA

[NajdorfDefense]

Issue is does IRS believe promissory notes were legit. If so, no problem. If not...

[nineinchal]

Even if they were legit, shouldn't there have been some effort to repay by son?

My take on this is that the son received $30 M in income and never paid tax. Also, no interest income was recognized by the father on any of the returns. No gift tax was paid.

At some point in time, the nature of the loans became a gift, even if there were legit notes. The son can never hope to repay that money.

[jively]

[ QUOTE ]
At some point in time, the nature of the loans became a gift, even if there were legit notes. The son can never hope to repay that money.

[/ QUOTE ]
So if this is true, the son does not have to pay income taxes. You don't pay income taxes on gifts you receive.

-Tom

[jaydub]

[ QUOTE ]
[ QUOTE ]
At some point in time, the nature of the loans became a gift, even if there were legit notes. The son can never hope to repay that money.

[/ QUOTE ]
So if this is true, the son does not have to pay income taxes. You don't pay income taxes on gifts you receive.

-Tom

[/ QUOTE ]

The IRS does not agree with you. The son pays or dad pays for him. Someone pays.

NIN,

I have a hard time not seeing tax fraud here. The IRS is very harsh on below market loans and as you point out, it is very transparent. Maybe there's some corporation / partnership shenanigans here but I have a hard time not seeing fraud.

J

[nineinchal]

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
At some point in time, the nature of the loans became a gift, even if there were legit notes. The son can never hope to repay that money.

[/ QUOTE ]
So if this is true, the son does not have to pay income taxes. You don't pay income taxes on gifts you receive.

-Tom

[/ QUOTE ]

The IRS does not agree with you. The son pays or dad pays for him. Someone pays.

NIN,

I have a hard time not seeing tax fraud here. The IRS is very harsh on below market loans and as you point out, it is very transparent. Maybe there's some corporation / partnership shenanigans here but I have a hard time not seeing fraud.

J

[/ QUOTE ]

The notes are at market and at the published IRS rates. What troubles me here is that there were no repayments of any of the loans. Now for the estate planning, they are intending to make this all go away with a journal entry by rolling these loans into the next trust, making the son sell some of his shares in the famliy biz, and everybody laughs all the way to the casino. So in substance, the son got all this money to use as he pleased, without ever repaying a dime, recognizing no income from the loans, adn paying no interest in the course of thirty years.


It seems the IRS has to re-write the rules covering borrowing against trust funds in this type of transaction. I am trying to cite a specific point in the tax laws about this. There has got to be some poker playing tax attorney here that can clarify this for me.

Thanks,

Nineinchal CPA