Trusts

Question 1

In a revocable trust, the grantor retains control over and claim to the assets, may amend or terminate the trust, and is taxed on the trust income until death.

Answer 1

Question 2

Trust taxable income rule:

• Personal exemption: Allowed
  
  • $300 for simple trusts
  • $100 for complex trusts
• Standard deduction: Not allowed

Answer 2

Question 3

Irrevocable trust

• Grantor gives up control
• Trust follows the written terms only
• Terminates when the stated event occurs (e.g., fixed number of years)
• Death of grantor, trustee, or beneficiary does NOT terminate the trust unless stated

Answer 3

Question 4

Grantor (revocable) trust: The grantor retains control or beneficial interests, so the trust is ignored for income tax purposes and all income is taxed directly to the grantor.

Irrevocable trust: The transfer is permanent, the grantor retains no control or claim, and the trust is taxed as a separate entity (simple or complex) filing Form 1041.

Not a trust: A preneed funeral agreement.

Question 5

Trust Classifications

Step 1: Who is taxed?
- Grantor trust: Grantor retains control or benefits. All income taxed to the grantor. Ignore simple vs complex.
- Nongrantor (irrevocable) trust: Trust is a separate taxpayer (Form 1041).

Step 2 (only if nongrantor): How distributions work?
- Simple trust: Must distribute all income; no corpus distributions; no charitable contributions.
- Complex trust: Any nongrantor trust that does not meet simple trust rules (may distribute corpus, accumulate income, or make charitable gifts).

Answer 5

Question 6

A simple trust is allowed a $300 personal exemption in computing taxable income; it cannot take a standard deduction, cannot deduct expenses related to tax-exempt income, and cannot deduct charitable contributions because simple trusts are prohibited from making them.

Answer 6

Question 7

Bond sinking fund trust:
Corporation is both grantor and beneficiary → trust is not taxed.
All trust income taxed to the corporation when earned.

Answer 7

Question 8

A revocable trust lets the grantor keep control and avoid probate, but because the grantor keeps control, the trust assets are still included in the grantor’s estate and can be subject to estate tax.

Answer 8

Question 9

A grantor trust is a trust where the person who created it keeps enough control or benefit that the IRS ignores the trust and taxes all the income directly to the grantor.

A simple trust is a nongrantor trust that must distribute all of its income every year, cannot distribute principal, and cannot make charitable contributions.

A complex trust is any nongrantor trust that does not meet the simple trust rules, meaning it can distribute principal, keep income, or make charitable contributions.

Answer 9

Question 10

Corpus (principal):
- Contributed property
- Proceeds from sale of trust property (capital gains)
- Stock dividends and stock splits
- Expenses related to corpus items

Income:
- Interest
- Cash dividends
- Royalties
- Rents
- Expenses related to income items

Corpus items increase asset value (including capital gains).
Income items are earnings from assets, such as royalties, reduced by related expenses.

Answer 10

Question 11

DNI (Distributable NI) =
Interest income + Tax exempt interest - Trustee fees (if allocated to corpus)

If trustee fees are not allocated to corpus then ignore them.

DNI Most commonly it consists of interest, dividends, rents, and royalties, because those are income items under trust accounting. Tax-exempt interest is included, even though it is not taxable.Capital gains are usually excluded because they are normally allocated to corpus unless the trust instrument says otherw

Answer 11

Question 12

Corpus shares =
+Stock dividends
+Stock splits
+Shares contributed to the trust
+Shares purchased with trust assets

Answer 12

Question 13

Grantor (revocable) trust

CAN:
- Change or terminate the trust
- Income taxable to grantor
- Assets apart of Grantors estate

CANNOT:
- Transfer assets to trust conisdered a gift
- Protect assets from creditors
- Trust assets subject to probate

Answer 13

Question 14

Gross income is not always DNI — it equals DNI only when the beneficiary is entitled to all income and there are no corpus items flowing through.

If the trust were complex, had multiple beneficiaries, or discretionary distributions, gross income and DNI would diverge.

Answer 14

Question 15

Trust Accounting income (TAI) =
Interest income + tax exempt interest income - expenses attributable income

TAI excludes items related to corpus (capital gains, stock dividends)

Answer 15

Question 15

A grantor is repsonsible for creating a trust agreement. (contributes assets, appoints trustee)

A trustee manages the trusts assets/income. (Files Tax return).

Income beneficiary receives income (somtimes corpus)

Remainder beneficiary receives whats left over

Answer 15

Question 16

Transactions between a grantor and a revocable trust are disreguarded for tax purposes.

For irrevocable trusts, transactions between grantor and trust may be subject to tax

Answer 16

Question 17

Trustee fees: Unless trust agreement specifies otherwise, the fees are split evenly between income and corpus

Answer 17