Natiro and Others

[Snaggletooth]

...not sure whether this affects the ongoing discussion about trusts, so I've started a separate thread.

I hate to admit to those knowledgeable people just how ignorant I am sometimes. I've got a handful of trusts (as a matter of fact I am trustee for one of them), but I have not yet had one with an "accumulation distribution." I don't know how to handle it, and in two years, one of my client trusts is going to liquidate to the beneficiaries.

I've read in publications, I've also looked at the schedule J (or whatever) which shows an apparent infinite look-back period of former years of taxation. I believe the ultimate beneficiaries are to receive some sort of tax break by calculating a separate tax on their distribution at a favorable rate.

I'm having difficulty following the language, plus my BIGGEST question: The basis of the trust corpus should have been increased every year by its amount of taxable income, and the corpus distribution is never taxable to the recipient, then how can ANYONE pay ANYTHING on an accumulation other than the current year?

At the risk of revealing how stupid I am, I'm going to throw this out for comment. Jainen, I'm fair game even for you...

[Matt Sova]

Ignorant?

Don't feel bad Snag. Have you seen how thick the tax code is? I am willing to bet 1 milllllllion dollars that there isn't one person in then entire US that knows everything there is to know in relation to the tax code. Not even me!!! Hopefully Natiro can answer your question.

Matt

[Bees Knees]

...I'm having difficulty following the language, plus my BIGGEST question: The basis of the trust corpus should have been increased every year by its amount of taxable income, and the corpus distribution is never taxable to the recipient, then how can ANYONE pay ANYTHING on an accumulation other than the current year?

The taxable income that remains with corpus (capital gains) is taxed at the trust level. So tax has already been paid on that.

Schedule J deals with complex trusts that have the ability to retain income and pay tax at the trust level, as opposed to passing the income through to the beneficiaries on the K-1. Years ago, trusts were taxed at lower rates than individuals, so the idea was to let the income build up inside the trust and take advantage of those lower rates. Schedule J would then compare the tax paid by the trust with the tax that would have been paid by the beneficiary at the time had the income been passed through to the beneficiary. If the trust paid a lower tax, the beneficiary must pay the difference in the end.

However, since trusts now pay tax at the same rates as individuals, plus the higher tax brackets kick in at a much lower income level, it would be rare that the trust would pay less tax than passing the income through to the individual, so I would venture to guess it would be rare for the need to use Schedule J in most cases.

[natiro]

Accumulated distribution

Snag, if it makes you feel any better, I never answer anything without looking it up first. . .even simple things that I should know off the top of my head! And especially when it comes to trusts and estates.

Before you worry about how to prepare Schedule J, you should determine whether the throw back rules even apply. They only apply to a foreign trust, a US trust that ever was a foreign trust, and a trust created before 3/1/84 that would be treated as a multiple trust under IRC 643(f) (I did not look up this section so can't tell you what that's all about.) I believe these rules may have changed in the last several years, because I remember having to fill out Schedule J (what a nightmare) for several trusts and then all the sudden we didn't have to do that any more.

If any of your trusts qualify, I'll post some more information.

I agree with Bees about the purpose of the throwback rules.

[Snaggletooth]

What a Relief!

...that I won't have to be computing Schedule J, as none of my trusts are that old.

And thanks for the reassuring words that maybe I'm not a total idiot after all. Of course, Jainen missed his golden opportunity to score a "gotcha." Musta been asleep at the wheel...

I guess the "accumulation distribution" turned out to be one of those things that if you live long enough, you won't have it around to worry about.

Thanks folks...