Question

The Polozzi Trust will incur the following items in the next tax year, it's first year of existence:

Interest Income $25,000

Rent Income $100,000

Cost Recovery Deductions for the rental activity $35,000

Capital gain income $40,000

Fiduciary and tax preparation fees $7,000

Betty the grantor of the trust is working with you on the language in the trust instrument relative to the derivation of annual accounting income for the entity. She will name Shirley as the sole income beneficiary and Benny as the remainder beneficiary.

a. Suggest language to Betty that will maximize the annual income distribution to Shirley.

b. Suggest language to Betty that will minimize the annual distribution to Shirley and maximize the accumulation on Benny's behalf.

Answer 1

Answer:

Firstly we need to undertand the question on what it is actually based. The Polozzi Trust indicate that it is based on Taxation of Trust & Their Beneficiaries therefore we need to understand the Trust Accounting Income.

If the trust document does not specify the allocation, then state law applies. Most states have adopted all or part of the Uniform Principal and Income Act (UPIA). The UPIA allocates:

• to accounting income:
  1. operating income,
  2. operating expenses,
  3. depreciation of trust assets,
  4. interest, dividends, rents, and royalties,
  5. taxes on accounting income.
• to principal:
  1. capital gains and losses,
  2. casualty gains and losses and insurance recoveries,
  3. extraordinary repairs and capital improvements on trust property,
  4. taxes on trust principal.

When a trust earns income or pays expenses, the income or expenses are allocated either to principal or to income. In most cases, the trust document specifies which income or expenses are allocated to the principal or to income.

Where Benny as remainder beneficiery will receive $42000, which is in the form of ($35000 Cost Recovery + $7000 Fiduciary Fees).