Welcome. We're hear today to deal with income taxation, which is taxation on your... [[receipt of gifts]] [[earned income]]Are you being serious? Income tax is on [[earned income]] Yes, income tax is on earned income (and windfalls, but that's another course). Specifically, we're going to deal with trust income tax. What is special about trust income tax that makes it dangerous to have too much trust income? [[The highest income tax rates for trusts is higher than the highest income tax rates for individuals.]] [[trust income tax brackets are much smaller and raise much faster than individual income tax brackets]] [[trust income does not get the benefit of the charitable deduction]] No. The highest rates are the same. [[try again|earned income]]Very good. The top income tax brackets for trusts kick in at under $13,000 of income. [[continue|income1]]Incorrect. It does. [[try again|earned income]]Trust A is required to give all of its income to be split equally between Bob and Brenda. The trust... [[is a simple trust]] [[is a complex trust]] [[does not need to file a trust income tax return]]Correct! It's a simple trust because it must distribute all of its income. So, why does it need to file an income tax return? [[because it still has to pay its own income tax]] [[to give information to the IRS]] [[to give information to the beneficiaries]]No, it's not - It [[is a simple trust]]It does need to file. [[try again|income1]]No. A simply trust does not pay its own income tax. [[try again|is a simple trust]] Yes! It's an informational return. [[continue|income2]]Correct! The trust will also tell the beneficiaries how much income to report. [[continue|income2]]Trust ABC distributed $100,000 in 2016; $25,000 to each of 4 beneficiaries. Which of the followng is correct? [[each beneficary must report $25,000 of income on his or her Form 1040]] [[the trust must allocate any income it made to the distributions]] [[the trust notifies the beneficiaries of how much into to report by sending them a schedule K-1]] Not necessarily. [[Ah. I see why]] [[I don't understand]]Incorrect! The trustee can determine how to allocate distributions. [[try again|income2]]Correct! [[continue|income3]]Okay, time to draft a trust. A grantor trust means a... [[revocable trust]] [[trust whose assets are considered the grantor's for income tax purposes]] [[trust whose assets are considered the grantor's for gift and estate tax purposes]]Excellent. You realized that she trustee can determine how much of trust distributions to allocate to principal and how much of a distribution to allocate to income. In fact, the trust can even distribute only principal and keep the income (in a complex trust) and pay its own income tax if it so chooses. [[continue|income3]]The trustee can determine how much of trust distributions to allocate to principal and how much of a distribution to allocate to income. In fact, the trust can even distribute only principal and keep the income (in a complex trust) and pay its own income tax if it so chooses. [[continue|income3]]That's one type of grantor trust, but not the only type. [[try again|income3]]Correct!! [[continue|income4]]Sorry, that is incorrect. [[try again|income3]]Okay, do you want to discuss first a [[grantor trust]] or a [[non-grantor trust]]Why would we want to establish a grantor trust? [[it saves on income tax]] [[to allow the grantor to offset income with losses from other businesses]] [[there's no capital gainst tax applicable to a grantor trust]] [[all of the above]]A non-grantor trust can be an excellent choice when... [[we don't want the income to appear on the grantor's Form 1040]] [[the grantor is retired and so has a low income]] [[the trust holds life insurance on the grantor's life]]Not necessarily. [[try again|grantor trust]]Correct! [[continue|grantor trust2]]That's not the case. [[try again|grantor trust]]Nope. Only one of these is correct. [[try again|grantor trust]]Which is the easiest way to make sure we have a grantor trust without ruining potential creditor and estate tax benefits of the trust? [[give the grantor power to reacquire trust property by substituting equivalent property.]] [[make it revocable]] [[let the grantor have a testamentary power of appointment over the assets]]Yes, this is a pretty safe way to do it. [[continue|grantor trust3]]This would have disastrous effects on credit protection and other issues. [[try again|grantor trust2]]Nope. Under Section 674(b)(5), a testamentary power of appointment does not make a trust into a grantor trust. [[try again|grantor trust2]]Very good. If you haven't worked on the [[non-grantor trust]], please go there now. If you have, [[continue|comb]]Yes. This would be a good reason to create a non-grantor trust. [[continue|non1]]No! This would be a reason to make it a grantor trust to take advantage of the grantor's low income tax bracket! [[try again|non-grantor trust]]Incorrect. Under Section 677, a life insurance trust is generally a grantor trust. [[try again|non-grantor trust]]If we did want the grantor to be able to distribute income to the beneficiaries at his discretion, is there any way we could still maintain the status as a non grantor trust? [[no way]] [[sure; just require the consent of an adverse party before making a distribution]] [[sure; just require the consent of a neutral third party before making a distribution]]Yes way. [[try again|non1]]Excellent! [[continue|non2]]This doesn't always work. There's a better answer. [[try again|non1]]Micah funds a trust with Jim as the trustee and Jane and Tony as potential beneficiaries. Bob is Micah's financial advisor. Regarding a distribution to Tony, who would be considered an "adverse party"? [[Micah]] [[Jim]] [[Jane]] [[Bob]]Sorry, that is incorrect. [[try again|non2]]Sorry, that is incorrect. [[try again|non2]]Correct! Any distribution to Tony decreases Jane's eventual share. So, she is an adverse party. [[continue|non3]]Sorry, that is incorrect. [[try again|non2]]Very good. If you haven't worked on the [[grantor trust]], please go there now. If you have, [[continue|comb]]Debbie funds a trust for the benefit of her 12 year old son, Doug. In 2016, the trust distributes to Doug income of $50,000. Which is correct? [[most of that will be taxed at Debbie's highest marginal rate]] [[all of that will be taxed at Debbie's highest marginal rate]] [[the income will be taxed at Doug's income tax rates]] [[none of it will be taxed]] [[all of it is subject to an IRS penalty for Debbie's trying to avoid taxes on that income.]]Yes! The "kiddie tax" means that most of it will be taxed at the parent's highest marginal rate. [[continue|comb2]]Sorry, that is incorrect. Until the kiddie tax kicks in, it's still taxed at Doug's rates. [[try again|comb]]Nope. You forgot about the "kiddie tax." [[try again|comb]]Huh? Seriously? Wouldn't that be nice? [[try again|comb]]No; the kiddie tax is not a penalty. [[try again|comb]]You've reached the end of the Chapter 5 exercise. Congratulations! We'll see you next chapter. The code word for the weekly interaction is: superfluous