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Capital Gains for Simple Trusts

 
 
W
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      03-20-2011, 01:21 AM
A "Simple Trust" distributes all income to the beneficiary of the trust each
year. I read however that capital gains are not considered income. Does
this mean that the trust must file a separate tax return and pay capital
gains at a trust capital gains rate?

I have a relative who is a foreign citizen who wants her US brokerage
account to be titled in the name of a US Simple Trust for estate planning
purposes. US Brokers who have accounts owned by a foreign citizen
generally refuse to allow named beneficiaries for such accounts, which makes
probate likely when that person dies. I am trying to find the simplest
possible trust arrangement for her that avoids probate.

Because my relative is not a US citizen, she does not pay US capital gains
tax currently. If her money is transferred into a brokerage account that
is titled to a Simple Trust, is the capital gains in that trust subject to a
different capital gains tax rate than if she invested the money in her name
directly? If there is a type of trust that allows all types of income to
pass through to her as an indvidual, that would be the simplest arrangement.
Is that possible?

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W

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Gene E. Utterback, EA, RFC, ABA
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      03-21-2011, 06:26 PM

"W" <(E-Mail Removed)> wrote in message
news:(E-Mail Removed) ...
>A "Simple Trust" distributes all income to the beneficiary of the trust
>each
> year. I read however that capital gains are not considered income.
> Does
> this mean that the trust must file a separate tax return and pay capital
> gains at a trust capital gains rate?
>
> I have a relative who is a foreign citizen who wants her US brokerage
> account to be titled in the name of a US Simple Trust for estate planning
> purposes. US Brokers who have accounts owned by a foreign citizen
> generally refuse to allow named beneficiaries for such accounts, which
> makes
> probate likely when that person dies. I am trying to find the simplest
> possible trust arrangement for her that avoids probate.
>
> Because my relative is not a US citizen, she does not pay US capital gains
> tax currently. If her money is transferred into a brokerage account that
> is titled to a Simple Trust, is the capital gains in that trust subject to
> a
> different capital gains tax rate than if she invested the money in her
> name
> directly? If there is a type of trust that allows all types of income to
> pass through to her as an indvidual, that would be the simplest
> arrangement.
> Is that possible?


While I am licensed for securities work I limit that work to qualified
monies for my tax clients. Accordingly, I do NOT do work for nonresident
aliens and in reality do not have any accounts for anyone who is not a U. S.
Citizen. I will NOT address what a foreign person may or may not do as that
is not my area of expertise. I will (at least attempt to) address your
first paragraph about capital gains not being considered income.

Trust taxation is a niche area and should not be attempted without either
adequate experience or the ability to gain the necessary experience. From
the very way in which you worded your first paragraph I can tell you have no
experience with trust taxation (no offense meant) so I would suggest that
you get real professional help before you do anything that you may regret
later.

When you do trust work you MUST have a copy of the trust document. The law
allows the grantor (person who set up the trust) to define or re-define
certain things. For example, I could draft a trust that says capital gains
ARE to be treated as income for the purposes of calculating the
Distributable Net Income (DNI). This changes things. However, if my trust
document is silent then LOCAL LAW prevails, so you'd also need to have a
copy of your state's trust laws. Then you can read the trust document, see
what it says and compare it to what local law says, then prepare the return
properly.

You also said that "A "Simple Trust" distributes all income to the
beneficiary of the trust each year." To which I'll say Yes, BUT!.

A trust that does indeed distribute all income to the beneficiaries annually
gets treated as a simple trust for tax purposes, for that year. BUT if the
trust document gives the trustee some discretion on whether to distribute
income OR NOT, for any reason, AND the trustee elects NOT to distribute ALL
income in any given year, that same trust will be considered a complex trust
for that particular year. And it can change from year to year depending on
what is counted as income and whether that income is distributed to the
beneficiaries.

Next, what many don't understand is that when we talk about distributing
income in this context we are talking about shifting the reportable income
OFF the trust return and ON TO the beneficiaries returns. BUT we may or may
not actually give those beneficiaries any cash. There is no automatic or
direct correlation between DNI and cash disbursements. Frequently, the
trustee will elect to have the beneficiaries pay tax on the trust's income
because the beneficiaries' tax rates are lower than the trust rates. And
just as frequently the trustee will NOT give them any cash to pay those
taxes. Alternatively, it is also possible, and it happens frequently, where
the trust does not report DNI BUT makes a cash distribution to the
beneficiaries'. So they get money but no tax liability.

Remember, there is no correlation between Distributable Net Income and Cash
Disbursed - you can pay tax on money you haven't received and you may get
money you don't have to pay tax one. ONLY someone versed in trust taxation
can tell you what's up for any particular year AND it can, and frequently
does, shift from one year to the next.

Good luck,
Gene E. Utterback, EA, RFC, ABA

--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2011) - All rights reserved. >>
<< ------------------------------------------------------- >>
 
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W
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Posts: n/a
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      03-22-2011, 04:22 AM
"Gene E. Utterback, EA, RFC, ABA" <(E-Mail Removed)> wrote in message
news:im8591$odo$(E-Mail Removed)-september.org...
>
> "W" <(E-Mail Removed)> wrote in message
> news:(E-Mail Removed) ...
>>A "Simple Trust" distributes all income to the beneficiary of the trust
>>each
>> year. I read however that capital gains are not considered income. Does
>> this mean that the trust must file a separate tax return and pay capital
>> gains at a trust capital gains rate?
>>
>> I have a relative who is a foreign citizen who wants her US brokerage
>> account to be titled in the name of a US Simple Trust for estate planning
>> purposes. US Brokers who have accounts owned by a foreign citizen
>> generally refuse to allow named beneficiaries for such accounts, which
>> makes
>> probate likely when that person dies. I am trying to find the simplest
>> possible trust arrangement for her that avoids probate.
>>
>> Because my relative is not a US citizen, she does not pay US capital
>> gains
>> tax currently. If her money is transferred into a brokerage account
>> that
>> is titled to a Simple Trust, is the capital gains in that trust subject
>> to a
>> different capital gains tax rate than if she invested the money in her
>> name
>> directly? If there is a type of trust that allows all types of income
>> to
>> pass through to her as an indvidual, that would be the simplest
>> arrangement.
>> Is that possible?

>
> While I am licensed for securities work I limit that work to qualified
> monies for my tax clients. Accordingly, I do NOT do work for nonresident
> aliens and in reality do not have any accounts for anyone who is not a U.
> S. Citizen. I will NOT address what a foreign person may or may not do as
> that is not my area of expertise. I will (at least attempt to) address
> your first paragraph about capital gains not being considered income.


God help the person who has a relative who is a non resident and non US
citizen who wants to have some assets in the US in a trust. I looked for
a year to find anyone who could help set up a small trust for such an
individual, and all I got was disclaimers. Basically if you are rich,
there are lots of Wall Street law firms to help you, and if you are not
rich, then ordinary accountants, tax lawyers, and trust lawyers appear to
not know where to begin.


> Trust taxation is a niche area and should not be attempted without either
> adequate experience or the ability to gain the necessary experience. From
> the very way in which you worded your first paragraph I can tell you have
> no experience with trust taxation (no offense meant) so I would suggest
> that you get real professional help before you do anything that you may
> regret later.


We had a lawyer who specializes in trusts set up the trust. Unfortunately
the problem is in the intersection of trust law, accounting, tax law, and
the special requirements of non resident non US citizens. I'm simply
trying to become conversant enough in the relevant concepts that I can ask
the right questions to the right people.


> When you do trust work you MUST have a copy of the trust document. The
> law allows the grantor (person who set up the trust) to define or
> re-define certain things. For example, I could draft a trust that says
> capital gains ARE to be treated as income for the purposes of calculating
> the Distributable Net Income (DNI). This changes things. However, if my
> trust document is silent then LOCAL LAW prevails, so you'd also need to
> have a copy of your state's trust laws. Then you can read the trust
> document, see what it says and compare it to what local law says, then
> prepare the return properly.
>
> You also said that "A "Simple Trust" distributes all income to the
> beneficiary of the trust each year." To which I'll say Yes, BUT!.
>
> A trust that does indeed distribute all income to the beneficiaries
> annually gets treated as a simple trust for tax purposes, for that year.
> BUT if the trust document gives the trustee some discretion on whether to
> distribute income OR NOT, for any reason, AND the trustee elects NOT to
> distribute ALL income in any given year, that same trust will be
> considered a complex trust for that particular year. And it can change
> from year to year depending on what is counted as income and whether that
> income is distributed to the beneficiaries.
>
> Next, what many don't understand is that when we talk about distributing
> income in this context we are talking about shifting the reportable income
> OFF the trust return and ON TO the beneficiaries returns. BUT we may or
> may not actually give those beneficiaries any cash. There is no automatic
> or direct correlation between DNI and cash disbursements. Frequently, the
> trustee will elect to have the beneficiaries pay tax on the trust's income
> because the beneficiaries' tax rates are lower than the trust rates. And
> just as frequently the trustee will NOT give them any cash to pay those
> taxes. Alternatively, it is also possible, and it happens frequently,
> where the trust does not report DNI BUT makes a cash distribution to the
> beneficiaries'. So they get money but no tax liability.
>
> Remember, there is no correlation between Distributable Net Income and
> Cash Disbursed - you can pay tax on money you haven't received and you may
> get money you don't have to pay tax one. ONLY someone versed in trust
> taxation can tell you what's up for any particular year AND it can, and
> frequently does, shift from one year to the next.


This was all actually very clear and made sense. I think she has a simple
grantor trust, and the intention was to distribute all income to her each
year and have taxation be passthrough to her as an individual. The
insight that distribution of income does not require actual withdrawal of
funds from the trust was helpful, thanks.

Since she files a W-8BEN to the broker, that should mean she will have 30%
witholding on dividends, and no withholding on capital gains and bond
interest. And most likely the trust won't have a return to file since no
income would be retained by the trust. Of course I'll have to verify that
with someone qualified.

--
W

--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2011) - All rights reserved. >>
<< ------------------------------------------------------- >>
 
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