Generally, the tax base for assets donated to a trust is the same as if the assets were in the hands of the donor, adjusted for all taxes on donations paid. This document was prepared by Broadridge Investor Communication Solutions, Inc. and does not necessarily represent the views of The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither appointed agents nor brokers/dealers provide tax or legal advice. It is believed that all information comes from reliable sources; however, we assume no responsibility for their completeness or accuracy. The Publisher is not engaged in the provision of legal, accounting or other professional services. If further expert assistance is required, the reader is advised to seek the services of a competent professional. Please contact your financial advisor for more information or call 800-900-5867. As you can see, distributable net income is an important concept because it ultimately affects each beneficiary`s tax burden and the distribution tax deductions a trust can make.

Therefore, it is an important concept to understand from a planning perspective. Depending on the objectives of a settlor, this concept can affect how a trust is designed, which investments are selected in an account, or when a beneficiary can request distributions from a trust. Gift tax may also apply to transfers of ownership to a trust or distributions to beneficiaries. Transfers of ownership to an irrevocable trust may be subject to gift tax, but for revocable trusts, gift tax only appears when the property is transferred to a beneficiary or when the trust becomes irrevocable. Estates and trusts are allowed to deduct net distributable income or the sum of escrow income to be distributed, whichever is lower. The nature of fiduciary income at the beneficiary level is determined on the basis of the actual amount of the distribution and the DNI, unless the fiduciary act or state law provides otherwise. Direct expenses must be allocated to the respective income (e.g.B. rental costs must be deducted from rental income). Indirect expenditures, such as . B fiduciary costs, must be divided between taxable income and tax-free income.

However, the tax law does not specify how indirect expenses are to be allocated among different elements of taxable income, allowing for flexibility. Caution: A trust cannot deduct a loss from the sale or exchange of property between related taxpayers (p.B. trustee and settlor, trustee and beneficiary). (6) Income of a foreign trust in the case of a foreign trust – When preparing a trust`s income tax return, the preparer should receive all relevant information (e.B. Forms 1099, Schedules K-1, expenses, distributions), including the trustee`s annual accounts. For a simple trust, the terms of the document must state that “all of its income must currently be distributed” and that the trust document cannot allow an amount to be “paid, permanently set aside or used” for charity (§ 651; Regs. Article 1.651(a)(1). If the fiduciary document meets these requirements and makes no distribution other than current income, it is entitled to a deduction from taxable income equal to the amount of income to be distributed annually (§ 651). The deduction for distribution is limited to the lower amount of the sequestration income to be distributed and the net distributable income (DNI) (§ 651 (b)). Typically, the NIL is calculated by modifying the trust`s taxable income as follows: increase in taxable income for tax-exempt interest received by the trust; do not reduce taxable income for the distribution deduction or personal exemption of the trust; exclude capital gains to the extent that they are allocated to the corpus; exclude extraordinary dividends and share dividends awarded to Corpus; and, in the case of foreign trusts, include foreign income (§ 643(a)).

Fiduciary accounting has been characterized as similar to government accounting in that it deals with a fund (the capital of the trust) and the income generated by the fund. Rule #4: A settling trust may be irrevocable for gift and estate tax purposes and cause the settlor to recognize taxable income, even if the settlor does not receive trust income. A settling trust uses the settlor`s tax identification number for the tax return. The trustee reports fiduciary income, deductions and credits to the settlor, who in turn reports these items in his or her personal return. A revocable trust is a settling trust as long as the settlor is alive, but it becomes a separate unit of control after the settlor`s death – even if the name of the trust remains the same. Practice point. Since estate and trust tax rates are likely to be higher than each beneficiary`s tax rates, it is advisable (if possible) to withhold tax-free income and distribute only taxable income. Recent health care laws affect not only individuals and businesses, but also income from trusts and estates. .