Trusts Flashcards
How do you create a trust?
When someone contributes assets and turns over ownerships. They must agree that the proceeds will be paid over time to a beneficiary.
Who is a trust managed by?
The trust is managed by someone other than the creator/grantor known as the TRUSTEE.
What is the purpose of a trust?
- Protect assets for future generations
- Reduce the Estate Tax (Death Tax) on assets owned over $11M
- Reduce income taxes
3 parties to create a trust
Creator/Grantor
Trustee
Beneficiary
Once validly created, can a trust be revoked?
Generally, NO, a trust is irrevocable.
Exception: Grantor/Revocable trusts
What is the CON of a Grantor/Revocable trust?
PRO?
CON: All income still taxed to Grantor, still receive Estate tax upon death.
PRO: Avoid probate.
Irrevocable trust, who pays income tax?
Either the trust or the beneficiary, depending who gets the income
What does “intervivos” mean related to a trust?
Created during the lifetime of the grantor
What is a Testamentary Trust?
Created upon grantor’s death
What is a “Pourover Trust”?
Starts during the grantor’s lifetime but only some of the grantors assets are given to the trustee. Then, upon death, the rest pour over.
once validly created who has legal title to trust assets?
The trustee
What is the trust corpus?
The assets held in trust.
Is a trustee allowed to profit personally from the trust?
No, not other than the compensation called for by the trust.
When there is no written trust instrument, how is income handled?
Defaults to trust beneficiary.
Not enough income in trust, beneficiary granted an allowance. What happens?
Trust assets may need to be sold to fund the allowance.
Default: what assets stay with trust?
- Proceeds from the sale of assets
- Stock dividends and stock splits
- Extraordinary expenses on Trust Assets
Dying without a will is known as what?
“In testate”
Typical beneficiary priority:
1) Spouse
2) Children
3) Parents
4) Siblings
5) State
Can a beneficiary be the trustee as well?
Yes, as long as the person is not the sole beneficiary.
Can a person delegate their duties as a trustee?
NO
A trust must file FORM ____ by _____ __th if it has any taxable income for the year, gross income of $600 or more for the year.
A trust must file FORM 1041 by April 15th if it has any taxable income for the year, gross income of $600 or more for the year.
Do trusts have to use a calendar year like individuals? Make estimated payments?
YES
A simple trust is required by law to do what?
Distribute all income to the beneficiaries, no income can stay with the trust. Beneficiary pays all the tax.
What tax form is used for trust to report income to beneficiaries?
K-1
Standard deduction for a trust is what?
NO STANDARD DEDUCTION
COMPLEX TRUST distribution rules?
Allowed to distribute less than their current earnings for the year. (but can distribute all)
Can even distribute more than current earnings (principal).
Can distribute whatever it wants.
What kind of trust can make a charitable contribution?
Only a COMPLEX trust
Trust exemptions:
Simple?
Complex?
Simple - $300 exemption
Complex - $100 exemption
No exemption on the FINAL RETURN of any trust.
Which trusts must use a calendar year?
Both simple and complex
If the beneficiary receives income and principal from a complex trust, what do they pay income tax on?
Income only, not the principal
The DNI sets the limit for:
what the trust can deduct AND
what the beneficiary picks up as income
What does DNI stand for?
Distributable Net Income
What kind of trust can distribute to more than one beneficiary?
Both Simple & Complex
What kind of trust may distribute its corpus?
Complex only
What type of trust may have a beneficiary that is not an individual?
BOTH Simple & Complex can have beneficiaries that are NOT individuals.
Which type of trust may have a grantor that is not an individual?
BOTH simple & complex
