Question

Michelle’s trust made charitable contributions amounting to $4,800 in 2016. Is this likely a simple or complex trust? Explain your answer.

In relation to charitable contributions and distribution of income, explain two features that distinguish a simple trust from a complex trust.

What purpose is served by the distributable net income (DNI) of a trust?

Explain how the net investment income surtax is calculated for a trust.

Answer 1

Michelle’s trust made charitable contributions amounting to $4,800 in 2016. Is this likely a simple or complex trust? Explain your answer.

Michelle's Trust is a complex trust. Because simple trusts ar not allowed to make contributions, only complex trusts are allowed to make contributions under special circumstances, here Michelle's Trust has made a charitable contribution of $4,800 in 2016. Hence it is a complex trust.

In relation to charitable contributions and distribution of income, explain two features that distinguish a simple trust from a complex trust.

1.)As stated above, the simple trusts by name are not allowed to make charitablee contributions, all the income generated by simple trusts are being channelised or being distributed to the trust's beneficiaries.

Complex trusts are allowed to make charitablee contributions, under specific circumstances mentioned in its governing instruments.

2. Simple trusts which do not distributue capital gains cannot include capital gains in the calculation of indirect expenses to tax exempt interest.

What purpose is served by the distributable net income (DNI) of a trust?

Distributable Net Income (DNI) of a trust is used to describe the calculation of distribution of income from trust between its beneficiaries and the trust. It is used to allocate the income between the trust and its beneficiaries.

Explain how the net investment income surtax is calculated for a trust.

Net investment income tax is applicable to the trusts who have an adjusted gross income for the year exceeds the dollar amount, at which highest tax bracket begins. Net Investment Inccome Surtax is calculated as 3.8% of the net income of the trust.