Trusts

Question 1

Trust Info

Answer 1

Separate legal and tax paying entity

Someone contributes assets to the trust
- earnings and proceeds will be paid overtime to a beneficiary
- Managed by a trustee (someone other than creator or grantor)
- trustee has legal title to the assets

• Required: Grantor, Trustee, Beneficiary
• valid trust purpose (legal purpose)

Why:
- protect assets for future generations
- reduce estate tax (death tax): taxes assets over $11,180,000
- reduce income taxes

The trust income is distributed to beneficiaries through the generations

Intervivos trust: created during the lifetime of the grantor

Testamentary trust: trust created after the death of grantor (must be in will)

Pourover Trust: starts over the lifetime of grantor and then upon death rest pours over

• Principal distributions: take money as needed

Question 2

Revocable trust

Answer 2

irrevocable trust - the assets leave the estate, grantor gives up control

“Grantor trusts” are revocable - the creator retains the rights to use the income of the trust or assets for their own benefit - they retain substantial control over assets
- assets will still be taxable to you, will still be in his estate
- if he dies before revoking the trust - assets will pass to the beneficiaries

Question 3

Taxes

Answer 3

Irrevocable:
- beneficiary pays tax on income distributed to them and trust only pays tax on whatever income the trust fails to distribute that year

Trust Income:
- Stocks and bonds: earns interest and dividends - taxable when distributed, taxable to trust if not distributed
- Property: Rental Income distributed to beneficiary would be taxable, not distributed taxable to trust
– normal expenses for property maintence would come out of beneficiaries rent income
– non ordinary expenses would be paid for by trust (roof, special assessment)

File a form 1041 by April 15 if it has taxable income for the year - gross of $600 or more
- simple trust may report cash or accrual and make estimated tax payments
- must use calendar year
- subject to AMT

Question 4

DNI

Answer 4

Distributable Net Income

If income is distributed to beneficiary, beneficiary is taxed on it and the trust takes the deduction so tax is only paid once

If Distribution includes principal - beneficiary does not have to report anything more than the income
- trust subtracts the amount of income distributed up to the DNI (even if distribution is greater)

Question 5

Trustee

Answer 5

• Fiduciary responsibility (manage like they would their own money)
• Abide by the trust instrument
• cannot profit personally from role as trustee (only receive compensation that is called on)
• cannot co-mingle personal assets nor borrow from the trust
• powers of trustee: sell property, buy property, pay trust expenses
• beneficiary can be a trustee as long as they are not the sole trustee
• cannot delegate your responsibilities
• if a trustee resigns or unable to serve, court will assign another trustee

Question 6

Testamentary trust

Answer 6

Testamentary trust: trust created after the death of grantor (must be in will)

Testate: If you die with a will
Intestate: If you die without a will (state law determines priority of property)
1. Spouse
2. Children
3. Parents
4. Siblings
5. State

Question 7

Simple vs Complex

Answer 7

Simple trust is required by law to distribute all income to beneficiaries (cannot hold any income)
- exemption of $300
K-1 for trust return (passthrough)
- no exemption on final return

Complex trust
can distribute less or more than current earnings in the year and make charitable contributions - includes principal
K-1 for trust return - only income is taxed for beneficiary
- $100 exemption
- no exemption on any final return