Trusts Flashcards
Which type of trust is required to distribute all accounting income to beneficiaries in the year they are earned?
simple
Which type of trust can accumulate income?
complex
Which type of trust may have a charitable beneficiary?
complex
Which type of trust can distribute principal?
complex
Which type of trust cannot distribute principal?
simple
Personal exemption for simple vs complex trusts
$300 simple vs $100 complex
Identify the category of trusts that allows the grantor the right to terminate the trust
revocable
Identify the category of trusts that does not allow the grantor the right to terminate the trust
irrevocable
Gift and tax treatment of gift transfer into trusts
Revocable: not a completed gift
Irrevocable: completed gift subject to gift taxes
Estate tax on assets in trusts
Revocable: subject to estate tax at the time of the grantor’s death
Irrevocable: generally not subject to estate tax when the grantor dies
Identify the characteristics of an Irrevocable Trust
- Asset Protection
- Must be funded to legally exist
- Asset transfer is complete to the owner, the trust
- Grantor gives up control
- Medical Planning
- Tax Deductions
Identify the characteristics of a Grantor Trust
- Revocable (amendable)
- Income is taxed to the grantor
- Allows rights or powers as specified in the trust rules
Identify the characteristics of a living trust
AKA Inter-Vivos
1. Established and funded during the grantor’s lifetime and takes effect immediately.
2. Funds pass outside the will and the probate process, saving costs & time.
3. Title to property inside is held in the name of the trust.
Identify the characteristics of a testamentary trust
Created through a will, funded with assets after death.
Possible reasons:
-reduce taxes
-providing professional investment management
-ensuring estate ends up in the right hands
Identify the characteristics of a Revocable Trust.
- Flexibility
- Grantor retains the right to amend trust /property
- May be funded or unfunded
- Becomes irrevocable when grantor chooses or dies
- Incomplete gifts and therefore tax owed in the future
Grantor
AKA Settlor, Trustmaker, or Trustor
A person who transfers property to and dictates the terms of a trust
Trustee
A party to whom property is transferred by the grantor and receives legal title to the property placed in the trust.
-Manages, distributes, and accumulates income + principal.
-Must follow a formal written agreement (i.e., terms of the trust) for the benefit of the beneficiaries.
-Serves as a fiduciary.
65-Day Rule
allows fiduciaries to make distributions within 65 days of the new tax year
Section 645 Election
Allows the executor of an estate and the trustee of a revocable trust to elect to treat the estate and the trust as one for tax purposes
Corpus
AKA res
the amount of principal in a trust
Terms
Document outlining a trust’s provisions
Beneficiary
AKA Remainderman
A party that will receive the benefit of the use of the trust property and/or income
When Form 1041 filing is required:
- Any taxable income
- Gross income of $600+
- Any beneficiary is a non-resident alien
Trust Accounting Income
-Items of income and expense that are used to determine the amount the income beneficiaries are entitled to receive from the trust each year.
-Does not determine the trust’s taxable income or who will pay the tax (beneficiary or trust).
-Trust document will usually specify what accounting income is (i.e., how capital gains and expenses are allocated to income and principal).
-In cases where accounting income is not specified, the allocation is made according to state law.
