Question

Accounting Question (Estate Finance Family Tax Planning)

1. In 2001, Larry creates a trust with Ted as trustee. Ted (as trustee) may distribute income and principal to Susie, Jeff and Leon at his discretion to provide for their health, education, maintenance, and support. Upon Larry's death, the trust terminates and the remainder is distributed to Susie, Jeff and Leon in equal shares. In 2012, Larry dies. In 2012, the trust has $15,000 of interest and $15,000 of dividends. Additionally, the trust received $115,000 for the sale of an asset with a basis of $100,000. How much income does each of Jeff, Susie, Leon and the trust report for 2012 and why?

Answer 1

SOLUTION:

The given scenario is a case of discretionary trust, where trustee has the sole power decide on the allocation of the trust's profits and capital of the trust.

When such trust terminates under its own terms, its assets are distributed among beneficiaries as mentioned.

Here,

In 2012, upon Larry’s death when trust terminates, the trust report for 2012 is as follows:

Trust Accounting Income = Interest + Dividends

                                    = $ 15,000 + $ 15,000 = $ 30,000

Trust Taxable Income = Capital Gain from the sale of an asset + Accounting Income

                                  = ($115,000 - $100,000) + $30,000

                                 = $15,000 + $30,000   = $45,000

Hence, this amount is to be distributed among Susie, Jeff and Leon in equal shares (as mentioned in the question)

i.e. 1/3 of $45,000 to each one = $15,000.

Taxes on taxable income usually have to be paid either by the trust or the beneficiaries, but not both. Because the trust is terminated in this case and the profit is distributed among the beneficiaries, the beneficiaries pay taxes on it.