Prior to tax reform, the rules governing the income taxation of trusts and estates were considered complex and intimidating by many.
However, if the terms of a trust require that none of the income be distributed until after the year of its receipt by the trust, the income of the trust is not required to be distributed currently and the trust is not a simple trust. Taxation of Trusts. Simple trusts are not required to consider actual distributions when determining the trust’s Income Distribution Deduction, as all accounting income is required to be distributed. When terminating a trust, you must be certain that all required income distributions have, in fact, been made to the income beneficiary before you can distribute the remaining trust principal to the person designated to receive it (the remainderman).Any income accumulated in the trust and/or due to the trust by the date of termination belongs to the income beneficiary. A trustee may be able to reduce income taxes by making a distribution of income from a trust to beneficiaries by March 6, 2017. ... A simple trust will be complex in its final year since any corpus remaining in the trust will be distributed in the trust's final year. Similarly, an estate that reports its income on the basis of a calendar year may be able to reduce income taxes by distributing income to one or more beneficiaries by March 6, 2017. Whereas simple trusts can deduct only the income required to be distributed currently, complex trusts may be able to deduct any income required to be distributed along with any principal distributed during the current year… The trust does not distribute amounts allocated to the corpus of the trust. The trust must pay taxes on any interest income it holds and does not distribute past year-end. While the same holds true after the enactment of the Tax Cuts and Jobs Act (TCJA), the income tax landscape has shifted due to the various changes under the TCJA. The trustee can still only distribute trust law income – it is just that trust law income now equals the same thing as the Tax Act defines as assessable net income. Exemption.
If they are not made, beneficiary is still taxed on the income (accounting income only). The trust does not distribute amounts allocated to the corpus of the trust. A simple trust that fails to distribute current income can be treated as a complex trust for tax purposes, and trusts can flip-flop back and forth between the two classifications if the trustee does not handle the income in an appropriate manner. A simple trust must distribute all current income; thus all income taxes apply at the beneficiary level, and it does not have any undistributed net investment income. The trust must distribute some or all of the principal to the beneficiaries. All of the siblings should demand an accounting. The trust income is therefore taxed at the grantor level. PRACTICAL NOTE: For practical purposes this means that trust distributions must always refer to trust law income – as defined in the trust deed. When a trust specifies that the trustee should distribute only income, it will also specify what the trustee should do with the trust's assets if the trust must dissolve. The trust must distribute some funds to charitable organizations. 1.651(a)-1). Is it a Grantor Type Trust? A complex trust is essentially the opposite of a simple trust. The trust must retain some of its income and not distribute all of it to beneficiaries. • The distribution deduction is limited to the lesser of trust income (IRC §651) or DNI for simple trusts, or the lesser of distributions or DNI for complex trusts (IRC §661) • DNI is the maximum amount of taxable income of the trust that is taxed to a beneficiary of a trust as the result of a distribution to the beneficiary as Trust Tentative Taxable Income. A simple trust must distribute all current income; thus all income taxes apply at the beneficiary level, and it does not have any undistributed net investment income.