Statutory and Common Law Trusts

Definition

A trust is an arrangement in which a trustee holds legal title to property for the benefit of beneficiaries; a common law trust arises under judge-made trust law, while a statutory trust (such as a Delaware statutory trust) is created under a state statute and is often used to hold investment real estate or pooled assets. For federal tax purposes an arrangement to protect or conserve property for beneficiaries is a trust, but one used mainly to carry on a profit-making business is classified as a business entity instead,^[2] and an ordinary trust is itself a federal income taxpayer.^[1]

Federal law

Formed under state law. No Act of Congress creates it; the federal laws below apply to it as described.

1. Internal Revenue Code of 1954, Pub. L. 83-591, ch. 736, § 641, 68A Stat. 215. Applies the individual income tax to the taxable income of estates and property held in trust (26 U.S.C. § 641); Subchapter J governs the split between trust and beneficiary. Official text: govinfo.gov, U.S. Government Publishing Office.

Federal regulations

Rules issued by federal agencies under the laws above.

2. Trusts, 26 CFR 301.7701-4 (Internal Revenue Service, Department of the Treasury). Distinguishes ordinary trusts (protecting or conserving property for beneficiaries) from business or commercial trusts, which are classified as business entities. Official text: govinfo.gov, U.S. Government Publishing Office.