Question

Michelle’s trust is subject to 3.8% surtax on the lesser of the trust’s net investment income or the excess of the trust’s adjusted gross income over the $12,400 threshold (the highest trust tax rate). Explain how the trust can avoid this tax. What are the tax obligations of nonexempt charitable trusts?​

Answer 1

Michelle’s trust is subject to 3.8% surtax on the lesser of the trust’s net investment income or the excess of the trust’s adjusted gross income over the $12,400. There are several ways for a trust to minimize Net investment income are:

• First, trust could invest in tax-exempt income.
• The trustee could allocate indirect expenses to undistributed net investment income. For example, if trustee fees allocated to capital gain that is not distributed by the trust, which result in reduction in undistributed investment income.
• Trustee can make distribution of net investment income to the beneficiary, as that would not cause the adjusted gross income to exceed the much higher individual threshold and reduce or eliminate the net investment income for the trust.

The charitable trust that are not exempt from tax have same requirements and restrictions that apply to private foundations, if the trust have an unexpired interests devoted to one or more charitable purposes for which a charitable deduction was allowed. The aim is to prevent a trust of this nature from being used to avoid the requirements and restrictions that apply to private foundations.