Question

On January 2, 1990, Hank Brady establishes the Judge Hank Brady Irrevocable Dynasty Trust with Tenleytown Trust Company as trustee. On January 10, 1990, Hank transfers 100 shares of Brady, Inc. stock to the trust worth $1 million. Hank Brady does not allocate any GST exemption to the trust either during the transfer or at any point after, and, therefore, the trust has an inclusion ratio of 1. The trustee has the discretion to distribute principal to the grantor's son, Mike, and Mike's sons, Greg, Peter and Bobby to provide for their welfare. Upon Mike's death, the remainder is distributed in equal shares to Mike's sons. On January 10, 2020, Mike dies. On January 10, 2020, the fair market value of the trust is $10 million. How much GST tax does the trust or its beneficiaries owe in 2020 and why? Who is responsible for paying the tax?

Answer 1

Explanations:

1. The Trust that is Judge Hank Brady Irrevocable Dynasty Trust is having inclusion ratio of 1. This means the Trust is Subject to GST.

2. The Highest GST Rate for the Trust is 37%.

3. Value of Trust as on 10-01-1990 is worth $ 1000000. (value of 100 shares) .

4. Trustee is Tenleytown Trust Company.

5. Beneficiary is MIKE and his sons (event death of MIKE) >> Greg, Peter, Bobby. (sharing equally)

6. Death of Mike on January 10, 2020

7. On January 10, 2020, the fair market value of the trust is $10 million.

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NOTE :

Beneficiaries of a TRUST typically pay taxes on the distributions they receive from the trust's income, rather than the trust itself paying the tax. However, such beneficiaries are not subject to taxes on distributions from the trust's principal.

When a trust makes a distribution, it deducts the income distributed on its own tax return and issues the beneficiary a tax form called a K-1. The K-1 indicates how much of the beneficiary's distribution is interest income versus principal and, thus, how much the beneficiary is required to claim as taxable income when filing taxes.

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In this case hence the GST would be paid by the TRUST that is Tenleytown Trust Company at the rate of 37% on the Fair Market value that is $10 mio = 37% of 10mio = $3.7mio(GST Amount)

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The beneficiaries would not be taxed on the Principal Amount