Question

Max has interest income of $5,000 annually from a trust fund set up per his grandfather Ed’s will.

Will Max’s income be taxed? If so, how? Is there a way to shift income from the parents to the child and would it be a good idea in this case? Why or why not

Answer 1

In the present case Max is earning interest income of $5000 annually from a Trust Fund set up by his grandfather's will. This will attract the tax implications on such interest income if such distribution has been made from a taxable income in the hands of Trust. Accordingly, this distribution of $5000 will attract tax implications on the hands of Trust and tax shall be deducted at the time of distribution. Also, there can not be double taxation in the hands of trust or its beneficiaries. Hence, if trust deducts the tax while distribution there would be no tax implications in the hands of Max.

Income can be shifted to the child by forming a trust under a will. In this case income of Max being a child would be clubbed in the income of either of parents whose income is higher than other, so ultimately income would be combined in the income of parents as there is no special skill use by the child for earning the interest income which can be a justification of the earnings of $5000 in the hands of Max. Accordingly, it is not beneficial to shift the income in the hands of child when there is no use of specific skill by the child for earning the income.