In: Accounting
How many parties are needed to create an estate? A trust? Identify the titles and responsibilities traditionally given to each party. What are the steps in determining the accounting and taxable income of a trust and an estate and the related taxable income of beneficiaries?
A trust / estate can be created by one person or many person
Titles and responsibility given to parties
1) Settlor
Owner of property
The settlor has the responsibility of determining who will benefit from the assets
settlor choose a specifically mentioned person or group of people for benefit of income arising from trust
2) Trustee
I) The trustee is a person specifically named by the settlor to care for and expand the assets of the trust
Ii) The trustee has the right to do whatever is necessary with the assets to grow the trust.
iii) The trustee must act prudently with the trust funds. If the trustee does not act prudently and money is lost, it is the trustee who must pay the trust back
3)Beneficiaries
I) They receive payments from the trust and make necessary tax adjustments resulting from the payments.
Ii) The beneficiaries audit the trust annually to verify that the trustee is being responsible with the funds
Steps to determine accounting and taxable income of trust and beneficiary
1) Find out gross income of trust ( income derived from all heads of income)
2) Deduct the genuine and allowable expense from such income
3) it will give taxable income before deduction
4) Deduction allowable
5) it will give taxable income
6) Calculate tax as per applicable tax rate
7) it will give total tax liability
In hands of beneficiary
1) calculate capital gain on distribution of asset made by trust
2) calculate income distributed by trust which is taxable in hands of beneficiary
3) calculate tax asper appicable rate..