Question

Estate Finance Family Tax Plan Question

Assume for the purposes of this question that the UPAIA dictates the calculation of fiduciary accounting income.

1. In 2001, Larry creates a trust with Tenleytown Trust Company as trustee. The trustee must distribute income to Susie, Jeff and Leon (the trust does not provide for distributions of principal). In 2002, the trust has $50,000 of interest from corporate bonds, $50,000 of interest from tax-exempt municipal bonds and $50,000 of dividends. The trust also sells Asset A that has a basis of $100,000 for $500,000. In 2012, trust pays trustee fees to Tenleytown Trust Company of $50,000 and attorney's fees of $50,000 to the law offices of Hiram Katz. What is the trust's fiduciary accounting income? Analyze how much of each receipt and disbursement should be allocated to income or principal.

Answer 1

Trust accounting requires a trustee to prepare an annual report of the cash receipts and disbursements made throughout the year. In preparing the trust, or fiduciary, accounting, the trustee is guided by the terms of the document as established by the settlor upon the trust's creation. The settlor may have delineated how the trustee allocates receipts and disbursements between income and principal or may have granted the trustee broad discretionary powers to be the ultimate decision-maker concerning those allocations.

For a simple trust, the terms of the document must state that "all of its income is required to be distributed currently," and the trust document cannot allow for any amount to "be paid, permanently set aside, or used" for charitable purposes (Sec. 651; Regs. Sec. 1.651(a)-1). If the trust document fulfills these requirements and does not make any distributions other than current income, then it is entitled to a deduction from taxable income equal to the amount of income that is required to be distributed annually (Sec. 651).