Trusts taxes distributions

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SWSL
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Trusts taxes distributions

Post by SWSL »

Hi. First post, will probably have some other questions that are more related to investment later.

For now, I'm the trustee for two testamentary trusts established in my father's will. I'm also the executor of the estate. The two beneficiaries of the trusts are young, older one is 21, younger is 16. The trusts are to cover college expenses and any other important needs up to age 25 when it becomes theirs.

I understand that the tax rates on these trusts are very high, designed to make distribution of income the best option.
The trusts' assets will include a promissory note that pays each trust about 16K per year. I understand that all of that will be considered income to the trust if not distributed.

But it's not appropriate to distribute anything to the minor until he goes to college and I prefer to only distribute about half of that 16K income to the older one for now.

But if I keep the income in the trusts, I understand that it will be taxed heavily.

So I'm looking into other forms of distributing it or taking it off of trust income without actually putting it in the kid's hands right now. A 529 plan came up as an idea for the younger one.

Does anybody know if payments made into a 529 plan with same beneficiary as trust beneficiary would be considered distributions or in any case, not be taxed as trust income?

Does anybody know of any other method to distribute or avoid counting this 16k per year as trust income which would, again, forgo the high tax burden without having to put it in the hands of beneficiary before the time is right?

Thanks, appreciate any help !

Steve
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Re: Trusts taxes distributions

Post by Alex Frakt »

bump following delayed moderator approval
Gill
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Re: Trusts taxes distributions

Post by Gill »

What you're trying to do is tax the income to the beneficiaries. In order to do so, you must distribute the income to them or for their benefit. Any distribution otherwise would not be a proper distribution from the trust. You can't deviate from the terms of the trust in order to save income taxes. I'm not clear why this post was delayed as your question seems perfectly legitimate.
Gill
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asset_chaos
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Re: Trusts taxes distributions

Post by asset_chaos »

It's not exactly that tax rates are high. Tax rates for trusts are the same as for individuals. The difficulty is that the tax brackets are highly condensed, with a tax free threshold of only $600 and the top tax rate kicking in at around $12,000 of income. Distribution will get the money taxed at the beneficiaries' marginal rate, which is probably lower than the trust's; although the 16 year old could be subject to the special tax rules on passive income to a minor.

I don't think you'll be able to distribute the income directly to a 529 plan without paying tax on it. I would think the income would first have to be distributed to a beneficiary and get taxed at the beneficiary's rate. The beneficiary could then choose to put the money in a 529, but I don't think you'd be able to oblige them to. You may want to fill out simulated tax returns for the beneficiaries and the trust with various levels of distributions and see what balance of distribution and retention minimizes tax. On the other hand, if as trustee, you have definite reasons that not putting the money in the hands of the beneficiaries now is in their best long term interests, then you may just have to pay the tax to retain the income within the trust.

Disclaimer: I am not a qualified tax advisor, but I am trustee to a trust with minor beneficiaries.
Regards, | | Guy
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Re: Trusts taxes distributions

Post by Gill »

As for the younger beneficiary, many trust instruments permit distributions to be made to a custodian UGMA. You might also consider distributing assets in kind which would carry out income for tax purposes but be in the form where the beneficiary was not likely to spend it.
Gill
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KeepinItPositive
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Re: Trusts taxes distributions

Post by KeepinItPositive »

I know this is an older thread but I have questions along the same lines and hoping for a little help

I just signed initial estate documents that state that a testamentary trust is to be set up for each of our minor children if both my wife and I pass while they are under 23. Income or principal is to be distributed at discretion of trustee for education or maintainance of children. Trust terminates at age 23.

I'd like to avoid the trust taxed on any leftover income because the rates get high very quickly.

It would be fine with me if the income were zeroed out annually by distributing it all to beneficiary via a utma/utma account for their benefit. Should I just have the documents edited to explicitly state that so that income doesn't get held over in the trust?

A related question is if it is generally acceptance for social security survivor benefits to be deposited into the trust (as principal) and then withdraw distributions from income.

If anyone knows of any good books/resources on managing taxes for "orphan trusts"
I'd very much appreciate links to those.

I hope none of those is ever needed but I'd hate for years to eat up a larger chunk of the funds than necessary.

Thanks!
afan
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Re: Trusts taxes distributions

Post by afan »

Although I am all for minimizing taxes, it would seem the problem in the OP could be avoided for the minor if the guardian is on board with not wasting the money. The distributions, I assume, would be under the control of the guardian and could be invested responsibly.

In writing the trust it would seem a much better idea to have it continue for a longer time, or forever. That would keep the advantages of a trust for asset protection. Depending on the circumstances the beneficiary could be a trustee or cotrustee when old enough.

By investing in a combination of muni bonds and total stock market one might have a very low amount of taxable income. A $1 million trust, 60/40 total stock and munis would generate about $12,000 in taxable income. One could distribute this to, or for the benefit of, the beneficiary as seems appropriate or keep some or all of it in the trust. Tax optimization might require distributing the amount that would be taxed at a higher rate in trust rather than if taxed to the beneficiary. But in this example there are not that many dollars at risk.

The tax effect gets stronger for much larger trusts, but people have expenses and a guardian for a minor child can use trust income for the minor's support and have the distributions taxed at the child's rate.

For small trusts the tax effects should be small anyway.
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Re: Trusts taxes distributions

Post by bsteiner »

afan wrote:... In writing the trust it would seem a much better idea to have it continue for a longer time, or forever. That would keep the advantages of a trust for asset protection. Depending on the circumstances the beneficiary could be a trustee or cotrustee when old enough.

By investing in a combination of muni bonds and total stock market one might have a very low amount of taxable income. A $1 million trust, 60/40 total stock and munis would generate about $12,000 in taxable income. One could distribute this to, or for the benefit of, the beneficiary as seems appropriate or keep some or all of it in the trust. ...
Correct. The trustees can consider income taxes and any other relevant factors in deciding on distributions
KeepinItPositive wrote:... I just signed initial estate documents that state that a testamentary trust is to be set up for each of our minor children if both my wife and I pass while they are under 23. Income or principal is to be distributed at discretion of trustee for education or maintenance of children. Trust terminates at age 23.
...
It would be fine with me if the income were zeroed out annually by distributing it all to beneficiary via a utma/utma account for their benefit. Should I just have the documents edited to explicitly state that so that income doesn't get held over in the trust? ...
See above. Since you're still living, you can sign a new Will to let your children control their trusts at 23 rather than mandating that the trusts end at 23. Why mandate that the income be distributed. What if something happens that makes it unwise to distribute all the income? Why limit principal distributions? What if something happens that makes it wise to make a principal distribution for a reason other than education or maintenance?
SWSL wrote:... I'm the trustee for two testamentary trusts established in my father's will. ... The two beneficiaries of the trusts are young, older one is 21, younger is 16. The trusts are to cover college expenses and any other important needs up to age 25 when it becomes theirs. ...
You might check to see if you can decant (fix) the trusts so as not to mandate distribution at 25, but instead to permit each beneficiary to control his/her trust at 25. In that way, the trust assets won't be included in the beneficiaries' estates, and will be protected against their creditors and spouses.
samsmith
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Re: Trusts taxes distributions

Post by samsmith »

I have a somewhat related question on trust income. Again assume a testamentary trust with compressed tax brackets. If the trust has income and makes a cash distribution to a beneficiary - I believe the (in most cases) the distribution carries out the income to the beneficiary and the beneficiary gets a K1 and pays taxes on this income at their tax rate.

I believe the trust could also distribute appreciated assets (like stock) to the beneficiary, the cost basis of the stock would stay unchanged and the beneficiary would pay the tax on the capital gains only when he/she sold the asset? Does anyone know if this "in-kind" distribution would be accounted for on the trusts tax return? I am thinking this would NOT go on the tax return because the distribution was not a taxable event. The taxable event would only occur when the assets are subsequently sold by the beneficiary? Do I have this correct?
WannabeAgAlum
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Re: Trusts taxes distributions

Post by WannabeAgAlum »

100% what bsteiner said (I know, shocking). Age-based mandatory distributions very rarely make sense for a beneficiary unless the person setting them up can see the future for the beneficiary at the magic age.

Sam, "income" means different things in different states, and the IRS defers to state law. In short, research "distributable net income" thoroughly, especially if you have never heard the term. This will lead to state law research. If you don't understand, and you're in good company if you don't, hire a competent attorney or CPA to guide you. There are instances where a distribution of in kind property causes recognition of gain.

Wannabe
afan
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Re: Trusts taxes distributions

Post by afan »

I definitely don't know the answer to samsmith's question, but I am curious as to why one would want to distribute trust assets in this way? The only thing's I could come up with are letting the beneficiary sell the asset and pay capital gains tax at a lower rate or getting a stepped basis on the beneficiary's death. Is there another reason?
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Re: Trusts taxes distributions

Post by Gill »

samsmith wrote:I have a somewhat related question on trust income. Again assume a testamentary trust with compressed tax brackets. If the trust has income and makes a cash distribution to a beneficiary - I believe the (in most cases) the distribution carries out the income to the beneficiary and the beneficiary gets a K1 and pays taxes on this income at their tax rate.

I believe the trust could also distribute appreciated assets (like stock) to the beneficiary, the cost basis of the stock would stay unchanged and the beneficiary would pay the tax on the capital gains only when he/she sold the asset? Does anyone know if this "in-kind" distribution would be accounted for on the trusts tax return? I am thinking this would NOT go on the tax return because the distribution was not a taxable event. The taxable event would only occur when the assets are subsequently sold by the beneficiary? Do I have this correct?
No, the distribution would carry out income and the stock would acquire a new basis equal to FMV on date of distribution. Your assumption would be a huge loophole which would enable the beneficiary to receive distributions tax free.

Gill
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Re: Trusts taxes distributions

Post by bsteiner »

samsmith wrote:... I believe the trust could also distribute appreciated assets (like stock) to the beneficiary, the cost basis of the stock would stay unchanged and the beneficiary would pay the tax on the capital gains only when he/she sold the asset? Does anyone know if this "in-kind" distribution would be accounted for on the trusts tax return? I am thinking this would NOT go on the tax return because the distribution was not a taxable event. The taxable event would only occur when the assets are subsequently sold by the beneficiary? Do I have this correct?
It depends.

The general rule is that if the trust distributes an appreciated asset (for example, a stock with a basis of $1,000 and a fair market value of $2,000), it's treated as if the trust distributed $1,000 of cash. The beneficiary takes over the trust's basis of $1,000 (a carryover basis).

There are two exceptions:

1. If the distribution is in satisfaction of an amount due to the beneficiary (for example, the trust says to distribute $2,000 to the beneficiary on her birthday, or the beneficiary is entitled to all of the income of the trust and the distribution in in satisfaction of $2,000 of the income), then it's as if the trust sold the asset to the beneficiary for $2,000 and distributed $2,000 in cash. The trust would have gain of $1,000, and the beneficiary would have a $2,000 cost basis as if she had purchased the stock.

2 The trust can elect under Section 643(e)(3) to treat all distributions in kind during the year as if the trust sold the assets to the recipient and distributed the cash.
afan wrote:... I am curious as to why one would want to distribute trust assets in this way? The only thing's I could come up with are letting the beneficiary sell the asset and pay capital gains tax at a lower rate or getting a stepped basis on the beneficiary's death. Is there another reason?
Those are the most common reasons for making distributions in kind. A beneficiary often pays a lower tax rate on capital gains than the trust.

Also, when a trust ends, the trustees might distribute the assets in kind, especially if they have appreciated in value substantially, so as to give the recipients the choice of selling them or holding them and deferring the gain.
KeepinItPositive
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Re: Trusts taxes distributions

Post by KeepinItPositive »

Thanks all for the replies. Gave me plenty of new things to think about.

When we first drafted estate docs I was primarily interested in nominating guardians for our kids, since they are not family. A secondary concern was to make sure that they were provided for if we can't.

I initially selected 23 as the trust termination age without considering asset protection implications.

After some of the helpful comments here, I don't believe my current plan is the best one. For me terminating the trust seemed reasonable to avoid additional complexity in their lives by having to file two tax returns and maintaining the trust indefinitely. I'm also concerned about the taxability of assets inside the trust since I'd like the resources to stretch out as long as possible.


It sounds like if we were to set up the trust so it was a lifetime trust for each of our kids, we could make them trustees at a specified age. Are there specific things that need to be documented to ensure that the assets are protected from creditors/divorce? Can this language be included in will as part of setting up a testamentary trust?


What would happen to the cost basis of assets as their death? Would there be another step up?
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Re: Trusts taxes distributions

Post by bsteiner »

KeepinItPositive wrote:... It sounds like if we were to set up the trust so it was a lifetime trust for each of our kids, we could make them trustees at a specified age. ...
Most people provide that the child has (among other things) the right to become a trustee at the age when the trust would otherwise have ended.
KeepinItPositive wrote:... Are there specific things that need to be documented to ensure that the assets are protected from creditors/divorce? Can this language be included in will as part of setting up a testamentary trust? ...
As long as the child can't compel a distribution, the assets should be protected.
KeepinItPositive wrote:... What would happen to the cost basis of assets as their death? Would there be another step up?
Generally not. However, there are a few ways to get the trust assets included in the beneficiary's estate so as to get a basis step-up.

1. At the point when the trustees are confident that the child won't have a taxable estate, and protection against the child's creditors and spouses (both the current spouse and any possible future spouses) is no longer a concern, the trustees could distribute the trust assets (or just the appreciated assets) to the child.

2. The trustees could decant the trust by transferring the trust assets to another trust in which the child has a general testamentary power of appointment.

3. Similar to #2, your Will could give the trustees the power to give the child a general power of appointment over the trust assets.
afan
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Re: Trusts taxes distributions

Post by afan »

bsteiner wrote: 2. The trustees could decant the trust by transferring the trust assets to another trust in which the child has a general testamentary power of appointment.

3. Similar to #2, your Will could give the trustees the power to give the child a general power of appointment over the trust assets.
Why would one write it such that the trustees could give the child a testamentary power of appointment as opposed to simply giving the child that power in the trust?
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bsteiner
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Re: Trusts taxes distributions

Post by bsteiner »

afan wrote:
bsteiner wrote: 2. The trustees could decant the trust by transferring the trust assets to another trust in which the child has a general testamentary power of appointment.

3. Similar to #2, your Will could give the trustees the power to give the child a general power of appointment over the trust assets.
Why would one write it such that the trustees could give the child a testamentary power of appointment as opposed to simply giving the child that power in the trust?
The reason is that the child might have a taxable estate of his/her own.

Until fairly recently, the estate tax exclusion amount was much lower (it was $675,000 in 2001, and under the 2001 Act it was scheduled to revert to $1 million in 2011 and most people thought Congress would make it permanent at around $2 million). So for a long time most clients expected their children to have taxable estates of their own, especially if their inheritances (including the income and growth thereon during the children's lifetimes) were included in their estates.

Even now, many clients' children would have taxable estates if their inheritances (including the income and growth thereon during the children's lifetimes) were included in their estates.
KeepinItPositive
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Re: Trusts taxes distributions

Post by KeepinItPositive »

Are there any standard ways to specify via beneficiary designations that retirement accounts ought to go to a testamentary trust for there benefit of each of the children in equal parts? Reading the IRS agreements it looks like each custodian handles designations to minors differently with some transferring via utma with the adult custodian being the guardian, some to the estate, etc. I'd like to stretch these out as long as possible. I'm assuming that any rmds would be counted as taxable income to the trust (assuming an offset in amount was not disbursed to beneficiaries)?


Thanks again for all the helpful suggestions and feedback. When I revise the docs it'll be a big help.
bsteiner
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Re: Trusts taxes distributions

Post by bsteiner »

KeepinItPositive wrote:Are there any standard ways to specify via beneficiary designations that retirement accounts ought to go to a testamentary trust for there benefit of each of the children in equal parts? Reading the IRS agreements it looks like each custodian handles designations to minors differently with some transferring via utma with the adult custodian being the guardian, some to the estate, etc. I'd like to stretch these out as long as possible. I'm assuming that any rmds would be counted as taxable income to the trust (assuming an offset in amount was not disbursed to beneficiaries)?
...
The IRA custodian doesn't pick. The custodian follows what the IRA owner says in the beneficiary designation. The IRA owner can (on the beneficiary designation) leave the IRA to his/her children (with a custodian under the UTMA for any minors, if desired), or can leave his/her IRA to trusts for his/her children, or can leave the IRA to his/her estate, or can leave the IRA to anyone else he/she wants.
KeepinItPositive
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Re: Trusts taxes distributions

Post by KeepinItPositive »

bsteiner wrote:
KeepinItPositive wrote:Are there any standard ways to specify via beneficiary designations that retirement accounts ought to go to a testamentary trust for there benefit of each of the children in equal parts? Reading the IRS agreements it looks like each custodian handles designations to minors differently with some transferring via utma with the adult custodian being the guardian, some to the estate, etc. I'd like to stretch these out as long as possible. I'm assuming that any rmds would be counted as taxable income to the trust (assuming an offset in amount was not disbursed to beneficiaries)?
...
The IRA custodian doesn't pick. The custodian follows what the IRA owner says in the beneficiary designation. The IRA owner can (on the beneficiary designation) leave the IRA to his/her children (with a custodian under the UTMA for any minors, if desired), or can leave his/her IRA to trusts for his/her children, or can leave the IRA to his/her estate, or can leave the IRA to anyone else he/she wants.

What I should have said is that with the providers I have for my 401K and for my IRAs/retirement accounts there is are meaningful differences in how much specificity is allowed with the designations. To be specific, after talking with Fidelity, they will allow me to name a minor beneficiary but those funds would then pass to the guardian via UTMA (appeared to be the guardian of person based on my reading of the plandocs). In our case we have chosen a different guardian for our minor children than the trustee for their trusts. I asked if we could specify a UTMA custodian and was told 'no, the plan summary docs would govern' if we directly denote a minor beneficiary. I can, however, name a testamentary trust as a beneficiary with Fidelity (with terms outlined in our wills, but without having actually established the trust). Contrast that to WF IRAs that allow you to be more specific with beneficiary designations. For even more variety, my current life insurance company will not allow me to specify a custodian for the funds if I name a minor as beneficiary, they have discretion to pay out to a whole host of folks ("we may make payment due to the minor beneficiary to a parent, or any relative by blood or connection by marriage of the Insured, or to any other person who appears to have some responsibility for the minor Beneficiary")--the lack of specificity really concerns me so I currently have proceeds going to my estate so that the will can govern.

I was investigating the various options since I may want to go the UTMA route for our retirement accounts (simpler to ensure that stretch out can occur, but with the downsides (known by me) of no asset protection and assets turn over at a slightly younger age than I'd like. In our case, the assets we would pass to them would currently be 80% life insurance/house equity, and 20% retirement, but those ratios will change as we get further in our careers.

In another estate planning thread, there were some discussions of setting up two types of trusts for minor beneficiaries, one that would hold only retirement accounts (like IRAs and Roth IRAs) and one that would hold everything else (in my case dominated by life insurance proceeds). If anyone has any thoughts on that, I'd very much appreciate it.

Thanks again for all the helpful replies and if anyone knows of good resources for young families trying to identify the major issues to consider when drafting documents/plans for the protection of their kids Id love to hear of them.
samsmith
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Re: Trusts taxes distributions

Post by samsmith »

bsteiner wrote:
samsmith wrote:... I believe the trust could also distribute appreciated assets (like stock) to the beneficiary, the cost basis of the stock would stay unchanged and the beneficiary would pay the tax on the capital gains only when he/she sold the asset? Does anyone know if this "in-kind" distribution would be accounted for on the trusts tax return? I am thinking this would NOT go on the tax return because the distribution was not a taxable event. The taxable event would only occur when the assets are subsequently sold by the beneficiary? Do I have this correct?
It depends.

The general rule is that if the trust distributes an appreciated asset (for example, a stock with a basis of $1,000 and a fair market value of $2,000), it's treated as if the trust distributed $1,000 of cash. The beneficiary takes over the trust's basis of $1,000 (a carryover basis).

There are two exceptions:

1. If the distribution is in satisfaction of an amount due to the beneficiary (for example, the trust says to distribute $2,000 to the beneficiary on her birthday, or the beneficiary is entitled to all of the income of the trust and the distribution in in satisfaction of $2,000 of the income), then it's as if the trust sold the asset to the beneficiary for $2,000 and distributed $2,000 in cash. The trust would have gain of $1,000, and the beneficiary would have a $2,000 cost basis as if she had purchased the stock.

2 The trust can elect under Section 643(e)(3) to treat all distributions in kind during the year as if the trust sold the assets to the recipient and distributed the cash.
Thanks. That makes perfect sense. Maybe a better (and simpler) way to ask is:

1. Assume a "non-grantor" trust has zero DNI and makes a purely discretionary distribution of $10,000 cash to a beneficiary. I assume that is not a taxable event and does not get listed on the tax return?

2. Again assume a $10,000 cash purely discretionary distribution. But (in this example) the trust has $1,000 of DNI. I assume the trust tax return lists $1,000 as DNI, and the trust gives a K1 to the beneficiary with that $1,000 noted on the K1 - so the beneficiary pays tax on the $1,000. Does the other $9,000 even get listed on the trust tax return? I assume not since it is not taxable?
bsteiner
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Re: Trusts taxes distributions

Post by bsteiner »

KeepinItPositive wrote:
bsteiner wrote:
KeepinItPositive wrote:Are there any standard ways to specify via beneficiary designations that retirement accounts ought to go to a testamentary trust for there benefit of each of the children in equal parts? Reading the IRS agreements it looks like each custodian handles designations to minors differently with some transferring via utma with the adult custodian being the guardian, some to the estate, etc. I'd like to stretch these out as long as possible. I'm assuming that any rmds would be counted as taxable income to the trust (assuming an offset in amount was not disbursed to beneficiaries)?
...
The IRA custodian doesn't pick. The custodian follows what the IRA owner says in the beneficiary designation. The IRA owner can (on the beneficiary designation) leave the IRA to his/her children (with a custodian under the UTMA for any minors, if desired), or can leave his/her IRA to trusts for his/her children, or can leave the IRA to his/her estate, or can leave the IRA to anyone else he/she wants.

What I should have said is that with the providers I have for my 401K and for my IRAs/retirement accounts there is are meaningful differences in how much specificity is allowed with the designations. To be specific, after talking with Fidelity, they will allow me to name a minor beneficiary but those funds would then pass to the guardian via UTMA (appeared to be the guardian of person based on my reading of the plandocs). In our case we have chosen a different guardian for our minor children than the trustee for their trusts. I asked if we could specify a UTMA custodian and was told 'no, the plan summary docs would govern' if we directly denote a minor beneficiary. I can, however, name a testamentary trust as a beneficiary with Fidelity (with terms outlined in our wills, but without having actually established the trust). Contrast that to WF IRAs that allow you to be more specific with beneficiary designations. For even more variety, my current life insurance company will not allow me to specify a custodian for the funds if I name a minor as beneficiary, they have discretion to pay out to a whole host of folks ("we may make payment due to the minor beneficiary to a parent, or any relative by blood or connection by marriage of the Insured, or to any other person who appears to have some responsibility for the minor Beneficiary")--the lack of specificity really concerns me so I currently have proceeds going to my estate so that the will can govern.

I was investigating the various options since I may want to go the UTMA route for our retirement accounts (simpler to ensure that stretch out can occur, but with the downsides (known by me) of no asset protection and assets turn over at a slightly younger age than I'd like. In our case, the assets we would pass to them would currently be 80% life insurance/house equity, and 20% retirement, but those ratios will change as we get further in our careers.

In another estate planning thread, there were some discussions of setting up two types of trusts for minor beneficiaries, one that would hold only retirement accounts (like IRAs and Roth IRAs) and one that would hold everything else (in my case dominated by life insurance proceeds). If anyone has any thoughts on that, I'd very much appreciate it.

Thanks again for all the helpful replies and if anyone knows of good resources for young families trying to identify the major issues to consider when drafting documents/plans for the protection of their kids Id love to hear of them.
You might name your children's trusts under your Will.

You are correct that each child will have two trusts, one for his/her share of the retirement benefits and one for his/her share of your other assets. That's because there are some special rules for trusts that receive retirement benefits. In particular, nothing can ever go to anyone older than the person whose life expectancy you want to use to determine the required distributions, or to anyone other than an individual or another trust subject to the same restrictions.

If you leave your life insurance to your estate, that will expose the proceeds to your creditors.
MarkNYC
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Re: Trusts taxes distributions

Post by MarkNYC »

samsmith wrote:
1. Assume a "non-grantor" trust has zero DNI and makes a purely discretionary distribution of $10,000 cash to a beneficiary. I assume that is not a taxable event and does not get listed on the tax return?

2. Again assume a $10,000 cash purely discretionary distribution. But (in this example) the trust has $1,000 of DNI. I assume the trust tax return lists $1,000 as DNI, and the trust gives a K1 to the beneficiary with that $1,000 noted on the K1 - so the beneficiary pays tax on the $1,000. Does the other $9,000 even get listed on the trust tax return? I assume not since it is not taxable?
In both cases, the entire $10,000 discretionary distribution should be listed on the tax return, on page 2 on lines 10 and 11 of Schedule B. The $10,000 distribution would be taxable to the beneficiary to the extent of DNI: zero taxable in example 1; and $1,000 taxable in example 2.
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