The recent amendments of "Trust Act" introduce the concepts of "trust as substitute for will" and "trust with successive beneficiaries". In order that the two trusts just mentioned work well, the tax treatments of them are to be well established. This paper explores the tax treatments of them, the results of which are as follows.
First, "trust as substitute for will" and "trust with successive beneficiaries" are to be treated as pass-through entities without any special circumstances.
Second, even if "trust as substitute for will" and "trust with successive beneficiaries" are treated as pass-through entities, they may well be subject to taxes, unless they are manipulated by grantors or their properties belong to grantors. And the beneficiaries should be taxed at the time of receiving trust"s principals and incomes therefrom.
Third, the tax rates applicable to the trusts are those the grantors are subject to if they still possess the trust"s principals and incomes.
Fourth, the taxes levied on the trusts in gift or inheritance transactions should be integrated through credit against gift or inheritance taxes levied on beneficiaries.
Fifth, "trust as substitute for will" and "trust with successive beneficiaries" themselves may well not be subject to gift or inheritance taxes.
Sixth, it is inappropriate to determine whether grantor trust rules are applied only due to the standard of whether beneficiaries are specified.
Seventh, the trust"s principals and incomes should be valued as of the transfer date from the trusts to their beneficiaries. But trust interests with certain time limits or conditions should be valued through discounting the cash flows from trust interests.
Eighth, if trust interests are divided into principal interests and income interests, the interests should be valued in the same manner as trust interests with certain time limits or conditions.
Ninth, in case that "trust with successive beneficiaries" is set up and its interests are divided into principal interests and income interests, the interests should be valued as of transfer date to next beneficiary in the same manner as trust interests with certain time limits or conditions. But if the next beneficiary belongs to the next generation, the interest should be valued as if trust"s principal is transferred in total.
Tenth, even if "trust as substitute for will" and "trust with successive beneficiaries" belong to "trust with no beneficiary" for the time being, there is no need to establish the special rules. It is enough to treat the trusts in the same manner as the other types of "trust as substitute for will" and "trust with successive beneficiaries".