Income Taxation of Trusts

Income Taxation of Trusts - Income Taxation of Trusts,...

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Income Taxation of Trusts, Estates, and Their Beneficiaries Trusts, estates, and their beneficiaries are taxed under Subchapter J of Chapter 1 of the Code (Code Sec. 641 et seq.). A "trust" is a legal entity created by a person (the "grantor") for the benefit of one or more persons (the "beneficiaries"). A trust may be created during an individual's lifetime (such a trust is referred to as an "inter vivos" trust) or at the time of an individual's death pursuant to the individual's will (such a trust is referred to as a "testamentary" trust). Property is transferred to a trustee, who takes title to the property and agrees to manage and distribute the property as directed by a trust agreement executed by the grantor of the trust. An "estate" is a legal entity that comes into existence automatically at an individual's death. An "estate" consists of all of the property in which a person had an interest at his or her death and all of the decedent's liabilities. The person in charge of administering the assets and liabilities of a decedent's estate is referred to as the "personal representative." If the personal representative was appointed by the decedent in a will, the personal representative is referred to as an "executor" ("executrix" if the person is female) of the decedent's estate. If the personal representative was appointed by a court, the person is referred to as the "administrator" ("administratrix" if the person is female) of the decedent's estate. Trusts (other than grantor trusts) and estates are separate legal entities for federal tax purposes. Special tax rules are applied to a trust depending on whether the trust is a grantor or non-grantor trust, a simple or complex non-grantor trust, or a qualified revocable trust for which an election has been made to tax the trust as part of the related estate. A "grantor trust" is a trust treated as owned in whole or in part by the grantor of the trust or another individual under the rules of Code Sec. 671 et seq. because of certain powers or rights that the grantor or other individual has regarding trust assets. A "nongrantor trust" is a trust other than a grantor trust. A trust may be a grantor trust at one or more points in its existence and a non-grantor trust at other times during its existence. The grantor of a trust will be treated as the owner of any portion of a trust in which the grantor (or the grantor's spouse) has a reversionary interest, the power to control beneficial enjoyment, certain administrative powers, a power to revoke, or the right to benefit from trust income. A person other than the grantor will be treated as the owner of any portion of a trust with respect to which the person has a power exercisable solely by himself or herself to vest trust income or principal in himself or herself. However, this rule does not apply with respect to a power over income, as originally granted or thereafter modified, if the grantor is treated as the owner of the income. The Code distinguishes between simple and complex trusts. A trust is a "simple trust" if the trustee is required by the trust
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This note was uploaded on 01/14/2012 for the course ACCT 101 taught by Professor Smith during the Spring '11 term at UT Arlington.

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Income Taxation of Trusts - Income Taxation of Trusts,...

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