Discussion:Trust income distribution
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Discussion Forum Index --> Advanced Tax Questions --> Trust income distribution
Discussion Forum Index --> Tax Questions --> Trust income distribution
| 17 April 2008 | |
| I have a complex trust with interest, qualified dividend, and capital gain income. There is one beneficiary. Can just the interest be distributed to the beneficiary, leaving the dividends and cap gains to be taxed at the trust level? | |
| 17 April 2008 | |
| John - if you noticed none of the regulars cared to answer your question - because you did not fill out your Profile. | |
Taxprep101 (talk|edits) said: | 17 April 2008 |
| NO: Income in the hands of the beneficiary must be the same as in the trust. It would seem advantageous to distribute the QDiv at 0%, 5% or 15% iin ahigher bracket for the bene than the trust. LTCG get taxed in the trust anyway. I can answer you becasue I don't have a profile either.
tp | |
| 17 April 2008 | |
| A complex trust gives you the option of distributing income / princ both or neither. The tax in the hands of the bene w/b less than in the trust, so if there is some particular reason that the bene should not get it, leave it in the trust and have the trust pay the tax. | |
Ksnoopytax (talk|edits) said: | 17 April 2008 |
| On a sort of similar subject, i've had a couple trusts during tax season where my boss has come up to me and said, "have the trust pay the tax on the income" even though there were distributions to the beneficiary during the year. The reasoning was either that the beneficiary wouldn't have the sense to include it on their return because they are incompetent, or because their tax returns were already filed. The end result would probably be that the trust would be taxed at a higher rate than the individual anyways. I got into a debate saying that nowhere in my research does it say you can choose who pays the tax on the trust income. Am I right on this? I am by no means a trust expert but I am learning:) | |
Taxprep101 (talk|edits) said: | 18 April 2008 |
| The question was whether just the interest and not the dividends or gains can be distributed. The answer is NO. If the trust income is 40% dividends and 50% interest and 20% gains the first distribution would be 50% interest and 40% dividends. In most States the next distribution after all the divs and int are distributed would be Principal and the gains would be taxed in the trust. If permissable in the trust's State the second distribution could be gains. At specific direction of the trust instrument gains can be defined as income in distributions.
The tax rates would be the same in the trust or by the beneficiary for Qualified Dividends and gains, depending on minor differences due to the lowest income brackets of each. Interest income is subject to steeper brackets in the trust so it would seenm avantageous to distriubute just interest, but rules of distributions prohibit seleting what you distribute. Same rule applies to no-txable income distributions. | |
| 21 April 2008 | |
| Ksnoopytax -
You are absolutely right in your thinking that who pays the tax on trust income is not discretionary. The trust document and local law govern. Possibly more serious than the taxes being paid via the wrong return, is the issue that if the remaindermen of the trust are different individuals than the current beneficiaries, I think they could have a valid claim that their funds were depleted illegally. Not much fun being "too honest", is it? | |
| 21 April 2008 | |
| I will point out that sometimes it is not so simple. I was involved in a court case a while back where the trustee was in the habit of purchasing securities just prior to the ex-dividend date. ♫ | |
