Trust Fund - When Does The Interest Get Paid?

[Royce]

I know I need to see an attorney to get this put together, but I am looking for information from people who may be the recipients of a trust fund - if the fund generates income, say in the form or interest or proceeds from the sales of assets, does the fund pay taxes on that income, or do the recipients of the payments from the trust fund pay taxes on what they receive?Please, only answer if you actually know.

[Brighton]

The trust fund pays the taxes. The interest income goes back into the fund, unless you have it set up differently. Depending on what state you live in, you either get the whole trust fund money at 18 or 21 years old, but then again, it depends on how it is set up.I would recommend that you go to a trust officer at a bank and ask your Q's, if you don't have a conservator or someone handling the trust fund. I would need to know more about you & the trust to give a proper answer, but I know, for sure, that you DO NOT pay the taxes. Sorry that I can't be more helpful. The info. I give here is based on my minor son's trust fund and how it was handled!! Good luck!!

[Hank]

Trusts are legal entities. They have their own tax ID numbers. In general, the trust will pay taxes on the income earnings during the year and file a tax return. So for instance, if the fund is worth $1,000,000 and earns 6%, the trust would have income that year of $60,000. The trust would pay taxes on the full amount, assuming there were no expenses to offset the income. Note too - that the tax rates for a trust are higher than for individuals. There is no ramp up in rates. What are the exceptions? First, the trust could be a defective grantor trust. This means the taxes are paid by the grantor instead of the trust. So say Grandpa set this up for the grandkids, he decided to put assets into it that would earn dividends. Those dividends would be taxed to him but the income would remain in the trust. He could elect to pull money out of the trust to pay the tax or he could pay the taxes with other income. This is a great way to make a gift without having to worry about gift taxes. Another exception is if the trust calls specifically for the distribution of all income in the year earned. In that case, the income would be taxed to the beneficiary. So you have to read the trust and see how it is going to be administered to determine the exact tax treatment. But if it is an accumulation trust, where the distributions are held for future years or limited in the amounts distributed in a given year to the beneficiary, the trust will pay the tax.

[Manning]

You can assume that someone will pay the tax bill eventually. It is just a question of whom! First, I?ll tell you how the IRS describes the basic rules:   To understand fully the trust schemes offered today, it is important to focus on some basic trust taxation rules. A valid trust is a legal arrangement creating a separate legal entity. The duties, powers and responsibilities of the parties to this arrangement are determined by state statute and the trust agreement. To create a trust, legal title to property is conveyed to a trustee, who is then charged with the responsibility of using that property for the benefit of another person, called the beneficiary, who really has all the benefits of ownership, except for bare legal title. The IRS recognizes numerous types of legal trust arrangements, and they are commonly used for estate planning, charitable purposes, and holding of assets for beneficiaries. The trustee manages the trust, holds legal title to trust assets, and exercises independent control. All income a trust receives, whether from foreign or domestic sources, is taxable to the trust, to the beneficiary, or to the grantor of the trust unless specifically exempted by the Internal Revenue Code(IRC). Foreign trusts to which a U.S. taxpayer has transferred property are treated as grantor trusts as long as the trust has at least one U.S. beneficiary. The income the trust earns is taxable to the grantor under the grantor trust rules. Grantor trusts are not recognized as separate taxable entities, because under the terms of the trust, the grantor retains one or more powers and remains the owner of the trust income. In such a case, the trust income is taxed to the grantor, whether or not the income is distributed to another party. A legitimate trust is allowed to deduct distributions to beneficiaries from its taxable income, with a few modifications. Therefore, trusts can eliminate income by making distributions to other trusts or other entities as long as they are named as beneficiaries. This distribution of income is key to understanding the nature of the abusive schemes. In the abusive schemes, bogus expenses are charged against trust income at each trust layer. After the deduction of these expenses, the remaining income is distributed to another trust, and the process is repeated. The result of the distributions and deductions is to reduce the amount of income ultimately reported to the IRS. Filing requirements for legitimate trusts are discussed below: A domestic trust must file a Form 1041, U.S. Income Tax Return for Estates and Trusts, for each taxable year. If the trust is classified as a Domestic Grantor Trust, it is not generally required to file a Form 1041, provided that the individual taxpayer reports all items of income on his own Form 1040, U.S. Individual Income Tax Return. Thus, the individual pays the total tax liability upon the filing of his return for that taxable year. All income received by a trust, whether from foreign or domestic sources, is taxable to the trust, to the beneficiary, or to the grantor unless specifically exempted by the Internal Revenue Code.   Foreign trusts are subject to special filing requirements. If a trust has income that is effectively connected with a U.S. trade or business, it must file Form 1040NR, U.S. Nonresident Alien Income Tax Return. Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Foreign Gifts, must be filed on the creation of or transfer of property to certain foreign trusts. Form 3520-A, Annual Information Return of Foreign Trusts With U.S. Owner, must also be filed annually. Foreign trusts may be required to file other forms as well.   In addition to filing trust returns as just described, a taxpayer may be required to file U.S. Treasury Form TD F 90-22.1, Foreign Bank and Financial Accounts Report, if the taxpayer has an interest of over $10,000 in foreign bank accounts, securities, or other financial account. Also, a taxpayer may be required to acknowledge an interest in a foreign bank account, security account or foreign trust on Schedule B, Interest and Dividend Income, that is attached to Form 1040. http://www.irs.gov/businesses/small/article/0,,id=106538,00.html Now there are a lot of terms there that are very technical in their meaning. So let me try to give you a very quick, simple explanation without jargon.   If someone sets up a trust and funds the trust with income producing assets, assuming that the trust is not a grantor trust, a foreign trust, an abusive tax shelter or a revocable, living trust, the  income that accrues to the trust will be considered gross income to the trust. But, before any tax actually has to be paid, the trust is allowed to deduct from its gross income expenses and deductions. For both trusts and decedent?s estate, the trust or estate is allowed to deduct from its tax bill distributions--more or less--to the beneficiaries. So to the extent that the beneficiary receives income, the trust will be able to deduct that amount from its income.   CAVEAT: NOT EVERYTHING THAT IS CALLED A TRUST IS TAXED LIKE A TRUST! I say this because the term is used in business for lots of things that are not taxed like what the IRS described above. Before you get too far into planning, please sit down with a good lawyer and discuss why you want to set up a trust and whether that type of trust will yield the desired tax benefits. Maybe it won?t. Or maybe, even if it will, there might be a better--and cheaper way--of achieving your goals.   Good luck!     Sources: cited above   Snow_Leopard's Recommendations JK Lasser's New Rules for Estate and Tax Planning, Revised and Updated Amazon List Price: $16.95 Used from: $6.98 Average Customer Rating: 4.0 out of 5(based on 2 reviews) The American Bar Association Guide to Wills and Estates, Second Edition: Everything You Need to Know About Wills, Estates, Trusts, and Taxes(American Bar Association Guide to Wills & Estates) Amazon List Price: $16.95 Used from: $7.63 Average Customer Rating: 3.0 out of 5(based on 7 reviews) Federal Income Taxes of Decedents, Estates and Trusts(23rd Edition) Amazon List Price: $58.00 Used from: $53.58 Federal Income Taxation of Trusts & Estates: Cases, Problems, and Materials(Carolina Academic Press Law Casebook Series) Amazon List Price: $75.00 Used from: $54.25 Snow_Leopard 72 months ago Please sign in to give a compliment. 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[Lyulph]

LILYGAL said: 1 The trust fund pays the taxes. The interest income goes back into the fund, unless you have it set up differently. Depending on what state you live in, you either get the whole trust fund money at 18 or 21 years old, but then again, it depends on how it is set up.I would recommend that you go to a trust officer at a bank and ask your Q's, if you don't have a conservator or someone handling the trust fund. I would need to know more about you & the trust to give a proper answer, but I know, for sure, that you DO NOT pay the taxes. Sorry that I can't be more helpful. The info. I give here is based on my minor son's trust fund and how it was handled!! Good luck!! 72 months ago

[Meade]

First, I?ll tell you how the IRS describes the basic rules:   To understand fully the trust schemes offered today, it is important to focus on some basic trust taxation rules. A valid trust is a legal arrangement creating a separate legal entity. The duties, powers and responsibilities of the parties to this arrangement are determined by state statute and the trust agreement. To create a trust, legal title to property is conveyed to a trustee, who is then charged with the responsibility of using that property for the benefit of another person, called the beneficiary, who really has all the benefits of ownership, except for bare legal title. The IRS recognizes numerous types of legal trust arrangements, and they are commonly used for estate planning, charitable purposes, and holding of assets for beneficiaries. The trustee manages the trust, holds legal title to trust assets, and exercises independent control. All income a trust receives, whether from foreign or domestic sources, is taxable to the trust, to the beneficiary, or to the grantor of the trust unless specifically exempted by the Internal Revenue Code(IRC). Foreign trusts to which a U.S. taxpayer has transferred property are treated as grantor trusts as long as the trust has at least one U.S. beneficiary. The income the trust earns is taxable to the grantor under the grantor trust rules. Grantor trusts are not recognized as separate taxable entities, because under the terms of the trust, the grantor retains one or more powers and remains the owner of the trust income. In such a case, the trust income is taxed to the grantor, whether or not the income is distributed to another party. A legitimate trust is allowed to deduct distributions to beneficiaries from its taxable income, with a few modifications. Therefore, trusts can eliminate income by making distributions to other trusts or other entities as long as they are named as beneficiaries. This distribution of income is key to understanding the nature of the abusive schemes. In the abusive schemes, bogus expenses are charged against trust income at each trust layer. After the deduction of these expenses, the remaining income is distributed to another trust, and the process is repeated. The result of the distributions and deductions is to reduce the amount of income ultimately reported to the IRS. Filing requirements for legitimate trusts are discussed below: A domestic trust must file a Form 1041, U.S. Income Tax Return for Estates and Trusts, for each taxable year. If the trust is classified as a Domestic Grantor Trust, it is not generally required to file a Form 1041, provided that the individual taxpayer reports all items of income on his own Form 1040, U.S. Individual Income Tax Return. Thus, the individual pays the total tax liability upon the filing of his return for that taxable year. All income received by a trust, whether from foreign or domestic sources, is taxable to the trust, to the beneficiary, or to the grantor unless specifically exempted by the Internal Revenue Code.   Foreign trusts are subject to special filing requirements. If a trust has income that is effectively connected with a U.S. trade or business, it must file Form 1040NR, U.S. Nonresident Alien Income Tax Return. Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Foreign Gifts, must be filed on the creation of or transfer of property to certain foreign trusts. Form 3520-A, Annual Information Return of Foreign Trusts With U.S. Owner, must also be filed annually. Foreign trusts may be required to file other forms as well.   In addition to filing trust returns as just described, a taxpayer may be required to file U.S. Treasury Form TD F 90-22.1, Foreign Bank and Financial Accounts Report, if the taxpayer has an interest of over $10,000 in foreign bank accounts, securities, or other financial account. Also, a taxpayer may be required to acknowledge an interest in a foreign bank account, security account or foreign trust on Schedule B, Interest and Dividend Income, that is attached to Form 1040. http://www.irs.gov/businesses/small/article/0,,id=106538,00.html Now there are a lot of terms there that are very technical in their meaning. So let me try to give you a very quick, simple explanation without jargon.   If someone sets up a trust and funds the trust with income producing assets, assuming that the trust is not a grantor trust, a foreign trust, an abusive tax shelter or a revocable, living trust, the  income that accrues to the trust will be considered gross income to the trust. But, before any tax actually has to be paid, the trust is allowed to deduct from its gross income expenses and deductions. For both trusts and decedent?s estate, the trust or estate is allowed to deduct from its tax bill distributions--more or less--to the beneficiaries. So to the extent that the beneficiary receives income, the trust will be able to deduct that amount from its income.   CAVEAT: NOT EVERYTHING THAT IS CALLED A TRUST IS TAXED LIKE A TRUST! I say this because the term is used in business for lots of things that are not taxed like what the IRS described above. Before you get too far into planning, please sit down with a good lawyer and discuss why you want to set up a trust and whether that type of trust will yield the desired tax benefits. Maybe it won?t. Or maybe, even if it will, there might be a better--and cheaper way--of achieving your goals.   Good luck!    

[Aundray]

Taxes on trusts Trusts are legal entities. They have their own tax ID numbers. In general, the trust will pay taxes on the income earnings during the year and file a tax return. So for instance, if the fund is worth $1,000,000 and earns 6%, the trust would have income that year of $60,000. The trust would pay taxes on the full amount, assuming there were no expenses to offset the income. Note too - that the tax rates for a trust are higher than for individuals. There is no ramp up in rates. What are the exceptions? First, the trust could be a defective grantor trust. This means the taxes are paid by the grantor instead of the trust. So say Grandpa set this up for the grandkids, he decided to put assets into it that would earn dividends. Those dividends would be taxed to him but the income would remain in the trust. He could elect to pull money out of the trust to pay the tax or he could pay the taxes with other income. This is a great way to make a gift without having to worry about gift taxes. Another exception is if the trust calls specifically for the distribution of all income in the year earned. In that case, the income would be taxed to the beneficiary. So you have to read the trust and see how it is going to be administered to determine the exact tax treatment. But if it is an accumulation trust, where the distributions are held for future years or limited in the amounts distributed in a given year to the beneficiary, the trust will pay the tax. guybee 72 months ago Please sign in to give a compliment. Please verify your account to give a compliment. Please sign in to send a message. Please verify your account to send a message.