There’s a particular type of trust scheme making the rounds again—one that’s been floating around tax circles for years, promising to eliminate capital gains taxes through the “right” trust structure. You may have seen it dressed up in legal jargon: Non-Grantor Irrevocable Complex Discretionary Spendthrift Trust—or something equally intimidating and overly complicated.
Despite the mouthful, the idea behind this tax strategy is surprisingly simple (and deeply flawed): create a specific type of trust, and voilà—no capital gains tax at the trust or beneficiary level. Sounds too good to be true, right?
That’s because it is.
What These Trust Promoters Get Wrong
The core of the argument misuses IRC Section 643(a)(3), which says:
Gains from the sale or exchange of capital assets shall be excluded to the extent that such gains are allocated to corpus and are not (A) paid, credited, or required to be distributed to any beneficiary during the taxable year…
And then they cherry-pick Section 643(a)(4), which talks about excluding certain types of income like extraordinary dividends for purposes of calculating DNI (Distributable Net Income).
Here’s the catch: Section 643 isn’t saying capital gains aren’t taxable. What it is doing is helping determine who pays the tax—the trust or the beneficiary. That’s it.
These sections are about DNI calculations, not an invitation to erase income from your tax return.
Why This Scam Keeps Circulating
Trust returns are not heavily audited, and unfortunately, that opens the door for promoters to push these structures under the radar—sometimes for years. They take advantage of how complex trust law is, how technical the Internal Revenue Code can be, and how appealing a “never pay taxes again” pitch sounds.
But the IRS is catching on.
What Happens If You Get Caught?
The consequences aren’t pretty:
That’s the kind of “return” that makes any tax savings look trivial.
Final Thoughts
If you come across someone pitching a trust that promises to legally eliminate capital gains taxes—pause. Consult someone who knows how to read all of the Internal Revenue Code, not just the parts that sound convenient.
At our firm, we’re happy to help clients explore legitimate trust strategies that serve real estate, estate planning, or business needs—but we draw a hard line between tax planning and tax evasion.