Pattern of Distributions Test for Discretionary Trusts: Defects Reveal Questionable Policy Design and Implementation

Abstract

The pattern of distributions test (PODT) is a qualifying rule for revenue loss usage by discretionary trusts (non-fixed trusts) that are not a family trust. The PODT has received little attention from tax commentators. This article is related to an earlier article. The earlier article outlined the technical deficiencies in the PODT and concluded that the PODT is largely ineffective, or at least severely compromised, as a loss-access qualifying criterion for discretionary trusts. This article focuses on the policy challenges in designing an effective continuity of ownership type test for discretionary trusts, which is what the PODT is. This article concludes that while there are considerable challenges in designing an effective loss-access qualifying criterion for discretionary trusts, the current PODT falls far short of a credible loss-access qualifying rule.