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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 4197
Experience:  Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
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My children are beneficiaries of a simple trust. Is the trust

Resolved Question:

My children are beneficiaries of a simple trust. Is the trust income requirement for filing $600? I am confused because the tax calculation schedule G form 1041 shows 15% tax on amounts $0 to $2400 dollars. The income is reinvested so they have received no distributions.
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

Customer:

Hi, can you tell me whether the trust is revocable or Ir-revocable?

Customer:

If a trust is classified as simple, this merely refers to how the trustee distributes income to the beneficiaries of the trust. A simple trust can be either revocable (also known as a living trust) or irrevocable,

Customer :

Irrevocable

Customer:

ok let me check one thing

Customer:

With a simple trust, the beneficiary or beneficiaries have an absolute and immediate right to both income and capital that is left behind by the grantor. The beneficiaries of the simple trust have a right to take possession of the trust property. The property is held in the name of the trustee. Nonetheless, the trustee has no discretion over what income the beneficiary is paid.

Customer:

Sorry was just looking at something ... I'm sur you know this (theabove)

Customer:

BRB

Customer :

I am to offer access to the trust annually and distribute the amount requested by the beneficiary

Customer:

Right, as per thee terms BUT if it;s not distributed thetrust should pay the taxes

Customer:

and the brackets you mantioned ARE right for trusts

Customer:

what kind of income is it .... what's generating the income?

Customer :

So I should file a 1041 if there is any income. Dividends.

Customer:

yep

Customer :

OK, what happened to the $600 limit. Law change?

Customer:

since it's irrevocable it pays tax as a separate entity if nothing is distributed... AND as you can see trust brackets ae much lower

Customer:

just sec that rings a bett, but I thing it has to do with the type of trust, jjst a second

Customer :

Thank you. Is there a way to print this out?

Customer:

sure you can copy and paste to a word doc OR print from your browser ... also feel free to bookmark ... let me look at the regs for just a minute

Customer:

It's $300 for a simple trust, 100 for and estate and 500 for a complex trust

Customer:

Here's a great overview

Customer:

sorry, typo $600 for comples

Customer:

"complex," Cant type this evening

Customer :

Hmm the attorney told me $600 but that was years ago. Then a CPA told me $950. Ah, so maybe it is complex?

Customer :

I'll definitely use the link you have provided.

Customer:

(50 makes no sense at all

Customer:

950

Customer:

Yes look it over pretty readable

Customer :

Yes, that's why I've continued to look for info.

Customer:

Hang on and I'll give you a good reference for determning whether it's simple (although I think I gave you that early on)

Customer:

Yours doe sound like simple trust given your statement about offering the payout

Customer:

Nope sorry if you don't AUTOMATICALLY pay out income it MAY not be a simple trust

Customer:

See This:

Customer:

A grantor trust allows the grantor to control assets and functions within the trust. The IRS sees this as the taxable equivalent of owning assets outright. Therefore, all income in grantor trusts is taxable to the grantor at the federal level. If the trust is not a grantor trust, the tax obligation is split. The trust pays federal income tax on all income that stays inside the trust, while beneficiaries pay tax on any income they remove from the trust. Simple trusts pay out all income, so all income tax is the responsibility of beneficiaries who receive it. Complex trusts may or may not pay out income. Trustees are responsible for paying the tax on income that remains in a complex trust, while beneficiaries pay income tax on their portion of the income.

Read more: Income Taxes and Irrevocable Trusts | eHow.com http://www.ehow.com/info_8055582_income-taxes-irrevocable-trusts.html#ixzz2PXmjj8ZT

Customer:

Your is complex

Customer:

because of the may or may not ...

Customer:

No that this is pinned done, let me go the actual IRS regs on complex trusts

Customer:

OK here we go ... it is $600, based on default rule (not a simple trust)

Customer :

OK so the botXXXXX XXXXXne is the $600 limit for filing. But if I must file, then the income is fully taxable $0 to$2400 at 15%

Customer:

That's correct ... See this:

Customer:

Like Print


Abusive Trust Tax Evasion Schemes - Questions and Answers

Basic Trust Law


Q: What is a trust?


A: A trust is an entity created and governed under the state law in which it was formed. A trust involves the creation of a fiduciary relationship between a grantor, a trustee, and a beneficiary for a stated purpose. A trust may be created by any of the following methods:



  • A declaration by the owner of property that the owner holds the property as trustee;

  • A transfer of property by the owner during the owner's lifetime to another person as trustee;

  • A transfer of property by the owner, by will or by other instrument taking effect upon the death of the owner, in trust, to another person as trustee or

  • An exercise of a power of appointment to another person as trustee or an enforceable promise to create a trust.


Q: Who is a grantor of a trust?


A: The grantor (also known as trustor, settlor, or creator) is the creator of the trust relationship and is generally the owner of the assets initially contributed to the trust. The grantor generally establishes in the trust instrument the terms and provisions of the trust relationship between the grantor, the trustee, and the beneficiary. These will usually include the following:



  • The rights, duties, and powers of the trustee;

  • Distribution provisions;

  • Ability of the grantor to amend, modify, revoke, or terminate the trust agreement;

  • The designation and selection of a trustee or successor trustees; and

  • The designation of the state under which the terms and provisions of the trust agreement are to be governed.


Q: What is a trustee/fiduciary?


A: The trustee obtains legal title to the trust assets and is required to administer the trust on behalf of the beneficiaries according to the express terms and provisions of the trust agreement. A fiduciary is an individual or organization charged with the duty to act for the benefit of another. A trustee is a fiduciary.


Q: What is a beneficiary?


A: The beneficiaries are those entitled to receive benefits from the trust.


Q: What is a simple trust?


A: "Simple trust" is a term used in the Internal Revenue Code to define a trust that:



  • Is not a grantor trust or required to be treated as a grantor trust;

  • Is required to distribute all income annually; and

  • Does not distribute the corpus of the trust or make charitable contributions. (IRC Section 651).


Q: What is a complex trust?


A: A "complex trust" is a trust that is not defined as a "simple trust" or a "grantor trust" under the Internal Revenue Code.


Q: What is a grantor trust?


A: "Grantor trust" is a term used in the Internal Revenue Code to describe any trust over which the grantor or other owner retains the power to control or direct the trust's income or assets. If a grantor retains certain powers over or benefits in a trust, the income of the trust will be taxed to the grantor, rather than to the trust. (Examples, the power to decide who receives income, the power to vote or to direct the vote of the stock held by the trust or to control the investment of the trust funds, the power to revoke the trust, etc.) All "revocable trusts" are by definition grantor trusts. An "irrevocable trust" can be treated as a grantor trust if any of the grantor trust definitions contained in Internal Code §§ 671, 673, 674, 675, 676, or 677 are met. If a trust is a grantor trust, then the grantor is treated as the owner of the assets, the trust is disregarded as a separate tax entity, and all income is taxed to the grantor.


Q: What are irrevocable/revocable trusts?


A: An irrevocable trust is a trust, which, by its terms, cannot be modified, amended, or revoked. For tax purposes an irrevocable trust can be treated as a simple, complex, or grantor trust, depending on the powers listed in the trust instrument. A revocable trust may be revoked and is considered a grantor trust (IRC § 676). State law and the trust instrument establish whether a trust is revocable or irrevocable. If the trust instrument is silent on revocability, then most states consider the trust revocable.


Q: What are testamentary and Inter Vivos trusts?


A: A testamentary trust is created by a will, which begins its existence upon the death of the person making the will, when property is transferred from the decedent's estate. Testamentary trusts are generally simple or complex trusts. A testamentary trust is irrevocable by definition, as it comes into being at the death of the grantor. A living person creates an Inter Vivos trust during that person's lifetime. An Inter Vivos trust can be established as revocable or irrevocable. An Inter Vivos trust can be a simple, complex, or grantor trust depending on the trust instrument.


Trust Taxation Questions


Q: IRS instructions for Form 1041 and Schedules A, B, D, G, I, J and K-1 provide general tax information and guidance for completing Form 1041. What law controls trust taxation?


A: Taxation of trusts can be found in subchapter J (Estates, Trusts, Beneficiaries, and Decedents - Sections 641 through 692) of the Internal Revenue Code. State law generally governs the legal standing of a trust and is important in some definitions included in the Internal Revenue Code.


Q: Do trusts have a requirement to file federal income tax returns?


A: Trusts must file a Form 1041, U.S. Income Tax Return for Estates and Trusts, for each taxable year where the trust has $600 in income or the trust has a non-resident alien as a beneficiary. However, if the trust is classified as a grantor trust, it is not required to file a Form 1041, provided that the individual grantor reports all items of income and allowable expenses on his own Form 1040, U.S. Individual Income Tax Return. Thus, the grantor/individual would pay the total tax liability upon the filing of his return for that taxable year.

Customer:

SORRY meant only to paste this portion


Do trusts have a requirement to file federal income tax returns?


A: Trusts must file a Form 1041, U.S. Income Tax Return for Estates and Trusts, for each taxable year where the trust has $600 in income or the trust has a non-resident alien as a beneficiary. However, if the trust is classified as a grantor trust, it is not required to file a Form 1041, provided that the individual grantor reports all items of income and allowable expenses on his own Form 1040, U.S. Individual Income Tax Return. Thus, the grantor/individual would pay the total tax liability upon the filing of his return for that taxable year

Customer :

OK, that explains how tax is collected on the income when there is no 1041 filed

Customer:

SO sorry didn't mean to paste in the whole thing

Customer:

yep

Customer :

Thank you for solving this mystery. It just wasn't making sense to me. I think you have it covered. Correct?

Customer:

Yes, you have it . here's the link itslf to the IRS guidance

Customer :

Thank you for digging into this. You have been extremely helpful. Now I can knock out that return and be done.

Customer:

that's great ... get some of the evening back!

Customer:

Have a good one!

Customer :

and some sleep. Thank you.

Customer:

and again you can bookmark this for future reference

Customer:

YW

Customer :

Done.

Customer:

:-)

Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 4197
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and other Tax Specialists are ready to help you
Expert:  Lane replied 1 year ago.


Thanks for the feedback


To ask for me again, just go here:

And enter your question in the question box

Thanks again,

Lane

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