Trusts

Lesson

This lesson will discuss the tax considerations for trusts, which are legal entities that hold and manage assets to benefit beneficiaries. Trusts can be used for various purposes, such as estate planning, asset protection, and tax planning.

Practice Question #1

Which of the following is NOT a type of trust?

A) Revocable Trust

B) Irrevocable Trust

C) Simple Trust

D) Limited Liability Trust

Select an option above to see an explanation here.

A) Revocable Trust is a type of trust that can be changed or terminated by the grantor during their lifetime. B) Irrevocable Trust is a type of trust that cannot be changed or terminated by the grantor once it is established. C) Simple Trust is a trust required to distribute all its income to beneficiaries yearly. D) Limited Liability Trust is not a type of trust but a combination of terms from limited liability companies and trusts.

Terms

Trust:: A legal entity that holds and manages assets for the benefit of beneficiaries.
Grantor:: The person who creates and funds the trust.
Trustee:: The person or institution responsible for managing the trust and its assets.
Beneficiary:: The person or entity who benefits from the trust.
Revocable Trust:: A trust that the grantor can change or terminate during their lifetime.
Irrevocable Trust:: A trust that the grantor cannot change or remove once it is established.
Simple Trust:: A trust that must distribute all its income to beneficiaries yearly.
Complex Trust:: A trust that is unnecessary to distribute all of its income to beneficiaries each year and may accumulate income or distribute principal.
Income Tax:: The tax on the income generated by the trust's assets.
Estate Tax:: The tax imposed on the transfer of assets from a deceased person to their beneficiaries.

Practice Question #2

What is the primary difference between a simple trust and a complex trust?

A) The number of beneficiaries

B) The types of assets held by the trust

C) The distribution requirements for trust income

D) The tax rates applied to trust income

Select an option above to see an explanation here.

A) The number of beneficiaries does not determine whether a trust is simple or complex. B) The types of assets the trust holds do not determine whether a trust is simple or complex. C) The primary difference between a simple and complex trust is the distribution requirements for trust income. Simple trusts must distribute their income to beneficiaries each year, while complex trusts do not. D) The tax rates applied to trust income do not determine whether a trust is simple or complex.

Historical Example

In the early 20th century, wealthy individuals often used trusts to avoid paying income taxes. This led to the passage of the Revenue Act of 1935, which introduced the concept of "grantor trusts" and required the grantor to pay income taxes on trust income in certain situations.

Practice Question #3

Who is responsible for managing the trust and its assets?

A) Grantor

B) Trustee

C) Beneficiary

D) Executor

Select an option above to see an explanation here.

A) The grantor is the person who creates and funds the trust, but they are not responsible for managing the trust and its assets. B) The trustee is the person or institution responsible for managing the trust and its assets. C) The beneficiary is the person or entity who receives the benefits from the trust, but they are not responsible for managing the trust and its assets. D) The executor is responsible for administering a deceased person's estate, not managing a trust and its assets.

Real-World Example

A wealthy individual establishes an irrevocable trust for their children, with the trust owning and managing a portfolio of stocks and bonds. The trust generates income from dividends and interest, distributed to the children yearly. The trust is responsible for paying income taxes on the revenue generated by its assets.