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Trusts

Trusts. Why establish a trust? Avoid probate Manage assets if incapacitated Manage assets for children Protection from creditors; charming-exs Not to reduce income taxes Marginal tax rate 35% for income over $10,700 in 2009 MFJ income > $349,700 taxed at 35% in 2009

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Trusts

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  1. Trusts • Why establish a trust? • Avoid probate • Manage assets if incapacitated • Manage assets for children • Protection from creditors; charming-exs • Not to reduce income taxes • Marginal tax rate 35% for income over $10,700 in 2009 • MFJ income > $349,700 taxed at 35% in 2009 • Aggregate trusts with same grantors and beneficiaries

  2. Trusts • Grantor trusts • Retain control over trust • Either income or assets or both • Consequently, income is taxed to grantor • Trust is ignored • IDIT • Irrevocable, so normally would remove assets from estate • Also, income taxed to trust • But retain power so income taxed to grantor

  3. Trusts • Living trust: transfer farm to living trust • Removes assets from probate estate • But ignored for income tax purposes

  4. Trusts • Income taxed to • Beneficiaries if distributed • Income retains character • Simple trusts: must distribute all income • Trust if retained • Complex trusts: can accumulate income, make charitable contributions and distribute principal

  5. Trusts • Deduction for distributions • Limited to DNI • Basically trust income including capital gains • States adopting prudent investor standards considering total return • Are capital gains allocated to corpus or distributed? • Can make distributions from complex trust up to 65 days after end of year

  6. Estates • Probate estate • Doesn’t include assets passing outside estate • Retirement plans; life insurance; jros assets • Taxed like a complex trust • Not required to use a calendar year • IRD • Retirement plan distributions, for example • Pay income tax and estate tax on assets • Gift to charity instead

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