Question

True Or False

1. Under the Rules Against Perpetuities, a trust can be established to benefit various generations based on individuals alive at the trust creation plus an additional 25 years.
2. A simple trust allows the trustee to pay or accumulate the income generated during the year.
3. Trusts, like individuals, are subject to a progressive income tax system. However, the taxable income brackets are more compressed.
4. A grantor trust will avoid probate and will also minimize estate tax.

Answer 1

1. The statement is False - Under the Rules Against Perpetuities, any present or future interest is void if it extends the absolute power of alienation for a period beyond "lives in being" at the creation of the estate, plus 21 years and not plus an additional 25 years.

For eg: In a trust created with income to S for life, and the remainder to K, K's interest is vested and determinable upon creation of the trust and does not violate the rule. However, a trust wherein S gives income to his children for life, and the remainder to his grandchildren, the remainder interest is invalid because it only vests if all of the grandchildren were born within lives in being (at the time of trust was created) plus 21 years.

2. The statement is False - A simple trust must distribute all its income currently. Generally, it cannot accumulate income, distribute out of corpus, or pay money for charitable purposes. If a trust distributes corpus during a year, as in the year it terminates, the trust becomes complex trust for that year and loses its status of being simple trust.

3. The statement is True - Trust, like individuals, are subject to a progressive income tax system. A progressive tax is a tax in which the tax rate increases as the taxable amount increases i.e. the tax rate progresses from low to high.

Trust has compressed tax brackets when compared to the tax brackets of the individuals.

For eg: For the trust the tax rates are -

If taxable income is Not over $2,500 the tax rate is 15% of the taxable income

Over $2,500 but not over $5,800 - $375 plus 25% of the excess over $2,500

etc..,

Whereas for Individual the tax rates are - Single filers

10% tax bracket - $0 to $9,225

15% tax bracket - $9,225 to $37,450

25% tax bracket - $37,450 to $90,750

etc..,

4. The statement is True - The grantor reports trust income on their personal return and pays any taxes due, but the trust assets are not included in the grantor's estate for estate tax purposes when they die. This is one of the major advantage not shared with revocable trust.