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I'd like to know the tax liability of having a trust fund on…

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I'd like to know the tax liability of having a trust fund on my name?

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A family member who is not a US citizen is doing an investment on a product with a Chinese colleague of his. They would like to have a trust funds where the earnings can be put and divided between them. Since they need a US citizen to own the trust fund, I was asked to assist. I'd like to know if having a trust fund on my name will have tax liability and I'll need to report about it and the amounts of money in it. I'm not going to get money from it.

Submitted: 6 months ago.Category: Tax
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8/10/2017
Tax Professional: Lev, Tax Advisor replied 6 months ago
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 31,206
Experience: Taxes, Immigration, Labor Relations
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It looks as you plan to have a business entity = correct?
In this case you might better to have an LLC or a corporation - and not the trust.

You will need to decide if you will be only one owner or there will be nonresident alien co-owners?

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Customer reply replied 6 months ago
Hi,I don't plan to have a business entity.
The whole purpose of the account is for the gains from the product will be placed there and divided between non-US citizens.
I'll be the sole owner of the account as I'm the only US citizen but I'm not involved in the project.
Am I liable for the funds in the trust?
Tax Professional: Lev, Tax Advisor replied 6 months ago

You may not have a bank account for the entity that doesn't exist...
So - that will be your personal account - and all income deposited to that account will be considered YOUR income - and you will be personally liable for the full income.

You are not taxed on funds in trust - but the owner is responsible.
In this case - the payer should make payments to the actual owner - and you would act on behalf of that owner by managing the money.
However - based on your information - the payer will pay directly to you and most likely will not be aware that you are not the seller. That will create your liability as the party in this transaction.

If you are acting on behalf of another person or entity - you will need clear identify that entity and the payer will pay to that entity and not to you.

This way - you personally would be only liable for your compensation.

Please verify to whom checks are payable.

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Customer reply replied 6 months ago
Just to make sure we're referring to the same thing.
If I'm the grantor of a trust fund (probably spendthrift trust but I'm not sure) and another person is the trustee who manages the trust and providing funds from the trust to its beneficiaries (which don't include me), will I need to submit/file any tax reports as the grantor?
Tax Professional: Lev, Tax Advisor replied 6 months ago

We are confusing "funds in trust" when one person gives the money to another person to manage,

and the trust as a separate entity which has a grantor - a person who creates and funds the entity and the trustee - the person you manages the trust.
If your situation - it is not clear if you will have any entity - sounds as not.

And it is not clear who will own these funds which you are given.

If you want to create the grantor trust - and manage it as a trustee - that means you will be both - the grantor and the trustee.

In this case - the trust is a separate entity - it will have separate tax account.

The trust may have different types of income - including investment income, rental income, business income, etc.

Grantor's trust is ignored for income tax purposes - and doesn't file any income tax return. Instead - income received by the grantor's trust is reported on grantor's individual tax return.

However - if that is irrevocable trust - that trust files its own tax return - and taxable income is either passed to beneficiaries OR is taxed for the trust itself.

PLease elaborate if needed.

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Customer reply replied 6 months ago
Hi,
I got some clarifications.
This is a kickstarter campaign where people invest in innovative products. Since kickstarter only work with US accounts, the partners ( Israeli & Chinese) need an account in the US to get the funds. I will own the account and it will be used just to transfer the funds to another account in Israel. I'm supposed to present a trust contract of some sort to the bank to declare the purpose of the account. I live in California so I'd like to know if I'll be liable for the deposited funds as income. I'm told that usually the account owner is not liable but each state may have different rules. I hope that helps.
Tax Professional: Lev, Tax Advisor replied 6 months ago

Based on your last update - that is business enterprise.
You will have a partnership where you are a partner with nonresident aliens.

That is not the trust where you are a grantor...
Let be honest - that is a partnership - and the simple way to form is legally - to create the LLC having you as a manager with signature authority.

So - you would have a bank account for that LLC, tax ID, etc.
That LLC will file the partnership tax return, but taxable income would be passed to each partner.

That is my view on situation you described.

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Customer reply replied 6 months ago
It's not a partnership.
It will be a bank trust account with me as the trustee and I'll just transfer the funds to another account.
Is an owner of a bank trust account has tax liability in CA?
Tax Professional: Lev, Tax Advisor replied 6 months ago

If that is not a partnership - as you stated - there are no partners.

If there is no trust as a separate entity - there is no trust's account.

IN this case - who will receive the money and who will earn income?

In absence of any other entity - you as a physical person will earn income and liable for taxes on that income.

That how the IRS will view the situation - income is deposited into YOUR account - therefore - you are the one who receives income and liable to report it on your tax return.

Regardless what you will do with funds after that.

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Tax Professional: Lev, Tax Advisor replied 6 months ago

I appreciate if you take a moment to rate the answer.
Experts are ONLY credited when answers are rated positively.
If you still have any doubts, need clarification - please be sure to ask.
I am here to help you with all Social Security / Tax related issues.

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Customer reply replied 6 months ago
Hi,
If the account in question is an escrow account. Will that matter from tax liability stand point?
Tax Professional: Lev, Tax Advisor replied 6 months ago

Escrow generally refers to money held by a third-party on behalf of transacting parties.
In this case we always should consider the actual recipient/ owner of funds.

The Owner will have full tax liability on that income even if the money are in the escrow account and there are some restrictions for the use.

Just an illustration example...

For instance the broker establishes escrow account for purchase transaction.
The buyer puts some funds into that account to secure transaction - while held by the broker - the money still belongs to the buyer.

When transaction is completed - the ownership is transferred to the seller - so regardless funds are still in the same escrow account - they belong to the seller as soon as the sale transaction and all paperwork are completed.

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