I am the trustee of an irrevocable trust for my sister. I recently made a $22k loan to her from the trust's funds to help her get out of credit card debt. The terms of the loan (which are memorialized in a signed note) are 15 years at 5 percent interest with payments due monthly. I did this in the form of a loan rather than just making a straight distribution because I did not want her to have a huge tax bill and I wanted the monthly payments to be a constant reminder of the perils of unsecured debt. Will these admittedly favorable loan terms pass muster with the IRS or will the $22k be considered a distribution to her which she must claim as income? If this will be considered income to her, what can I do to fix it?
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