Flow Through Entities Test 4

what is a trust and why is it created?

A trust is a separate legal entity

It is created to manage and distribute property for the benefit of beneficiaries

what is a grantor and a trustee in a trust

a grantor:

• transfers property to the trust

  • corpus/principal

A grantor also appoints a trustee

• a trustee: manages the trust property

• according to the terms of the trust agreement

where does trust income go

the grantor or the beneficisaries

What are teh reasons for creating trusts(tax and nontax)

• Tax Saving Aspects of Trusts

  • Able to achieve income splitting

  • Minimize estate taxes

    • Provided the transferor does not retain

      • Right to receive income

      • Power to control who receives income

      • Power at death to alter who receives assets

• Nontax aspects of trusts

  • allow the trustee to manage assets:

    • minors or incapacitated adults are involved

    • Beneficiary does not have sufficient management skills

    • beneficiary is likely to consume the assets

    • protect assets from creditors

  • reduction in the cost of administering an estate

  • increased degree of privacy

what is a grantor trust? what is an example? are they required to file a tax return?

Grantor Trust:

• grantor retains power or control over trust property

  • receive income

  • borrow from the trust

  • change beneficiaries

  • Example: is a revocable living trust

    • used instead of a will

    • Grantor maintains control of the trust

      • during their lifetime

• Grantor trusts are not required to file a separate tax return

  • Trust assets are considered the grantor’s property

  • all income and deductions flow through to the grantor

    • included on teh grantor’s tax return

      • whether the income is:

        • retained in the trust or

        • distributed to beneficiaries

what are non-grantor trusts? what are the tax implications and are they required to file a tax return? what are the examples?

separate taxpaying entities:

• Trust income is taxable either to the:

  • trust or

    • taxed on trust income retained by the trust

  • beneficiaries

    • taxed on trust income:

      • distributed

      • required to be distributed

    • There is no double taxation there is a deduction for incoem distributed to benefiacaries

      • beneficiaries report the distributed income on their individual returns

    • There is a conduit approach:

      • distributed incoem has the same character in teh hands of the beneficary

• They can be simple or complex

  • Simple must meet these three requirements:

    • required to distribute all of its income to beneficiaries annually

    • cannot make distributions from the trust principal

    • cannot make distributions to charitable organizations

  • complex

    • do not meet all three requirements of a simple trust

  • could be simple one year and complex another year

• Yes they are required to file a tax return:

  • 1041

  • report distribtuions to beneficaries on schedule K-1s

What is trust accounting income

• book income of the trust

  • calculated in accordance with:

    • terms of teh trust agreement

    • state law

  • absent a provision in teh trust agreement

    • State law will control

• Used to determine the amount required to be distributed to beneficiaries each year

• Trust income and expenses are allocated to either principal or income

Principial and income(uniform principal and income act)

Used for trust accounting income:
Income

• current return from teh use of principal

  • rent

  • interest

  • dividends

principal

• property held in trust for dsitribtuion to the remainderman when the trust terminates

  • capital gain

  • sale of preoprty

  • life insurnace proceeds

expenditures

• amoutns for which income is reduced:

  • ordinary expenses

  • ½ trustee fees

  • incoem tax payable on income

  • depreication

• amounts for which principal is reducted:

  • principal payments on debt

  • ½ trustee fee

  • income tax on reciepts allocated to princpial

  • deprecitaion

start on slide 35