Grandmother Gert settled a trust with stocks and bonds of her own. She has named
ID: 2578184 • Letter: G
Question
Grandmother Gert settled a trust with stocks and bonds of her own. She has named a bank as trustee. She has retained the power to name a new trustee if the bank should cease to serve. The trustee is to use income and principal if necessary to pay for Gert’s 18 year-old granddaughter, Jennifer’s, education through college, including tuition, fees, books, laptop, miscellaneous supplies. Gert gave her son, Saul, Jennifer’s father, the remainder interest in the trust to be paid to him upon Jennifer’s college graduation or attainment of the age of 23 years, whichever comes first. Gert also gave her son, Saul, power to direct the trustee to make distributions of principal to him, Saul, in such amounts and at such times as Saul shall direct. Jennifer is a freshman at college. The trustee is paying from the trust for college expenses, exhausting income and, as needed, dipping into principal. The trustee has had to sell some stocks to get cash to pay college expenses.
Who has tax liability for the interest and dividend income of the trust? Who has the tax liability for capital gain income on sale of investments by the trust? In whose federal gross estate for estate tax purposes will the trust corpus be includable if he or she were to die now? Explain all answers.
Explanation / Answer
Trust is a seperate legal entity, so the tax liability for the interest and dividend income of the trust will be in the hands of trust only. Beneficiaries will be paid post tax income and it will not be taxable in their hands.
The tax liability for capital gain income on sale of investments by the trust will also be in the hands of trust only, though the income is not the trust income but it is trust taxable income.
Federal gross estate for estate tax purposes will the trust corpus be includable in the beneficiaries income.
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