Trust Me, Part I

Trust Me, Part II
February 10, 2016
Canadian Snowbirds, Part II
February 16, 2016
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Trust Me, Part I

Q. I am the beneficiary of a trust and in year 2016 and thereafter, I will be receiving a yearly amount of income from it. Is this income taxable to me or to the trust? That is, do I have to pay income tax on what is distributed to me or does the trust have to pay it?

A. Oooh! This is a difficult question to answer in a column such as this because the law governing the income taxation of trusts is very complicated. So, I am going to give you a very oversimplified answer to your question and even then I do so with trepidation. You must rely solely on your tax advisor to give you the specifics that are related to your particular situation. With that warning, here is my oversimplified response. If a trust earns income, then someone or some entity has to pay the income tax on that income. Once again, as an over-simplification: if the trust requires that income be distributed, then the income will more than likely be taxable to the beneficiary. If the trustee has the discretion to distribute income, then the first money distributed is considered income. Example: if the trust provides that it is within the discretion of the trustee to distribute income, AND if the trust earns, say $10,000 AND if the trustee distributes, say $5,000 to beneficiary X and distributes $3,000 to beneficiary Y, then X has taxable income of $5,000 and Y has taxable income of $3,000 and the trust is taxed on the remaining $2,000. There are also capital gains issues and because they are even more complicated I am not about to get into a discussion of those, except to say that as a general statement—also over-simplified—capital gains are usually taxed to the trust estate. However, there are exceptions to that, also.

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