FAQs Page 9
FREQUENTLY ASKED QUESTIONS
If I have multiple trusts with same beneficiaries, can any one of those beneficiaries receive maximum yearly gift allowed by law without taxation from each trust?
Trusts cannot give gifts. Any funds given to a Trustee or Beneficiary are taxable income. The Trustee gets a Form 1099 and a beneficiary gets a K-1.
Can I move money out of the Trust tax free?
NO. It is taxable income regardless of whomever you are giving the money to.
How do I get a taxable 1041 Trust return “untaxed”?
Passive Income in the Beneficial Trust is Tax Deferred under IRC 643B. Thus, after the Trust Expenses are deducted from the Trust Income, the balance is prorated between Passive Income and Non-Passive (Business or Farming) Income and the Passive portion is declared Extraordinary Dividends by the Discretion of the Trustee and moved to the Trust Corpus (Equity) per IRC 643B. These Extraordinary Dividends are held in the Corpus until distributed if the Trust is Active. Upon dissolution of the Trust these Dividends must then be distributed.
How does the setup of a Beneficial Trust affect IRS reporting?
The Beneficial Trust has its own reporting on a Form 1041. All income being reported by the Trust must legally belong to the Trust. That means all investment accounts must have the ownership changed to the Trust so the reporting entity will report the investment income in the name and EIN of the Trust. Property receiving rental income must be legally sold to the Trust using a Bill of Sale and Deed in the name of the Trust.
Can I take draws from my Demand Note for Food, Fun and Fashion?
Yes, but draws from the Demand Note must be Accrued Taxable Interest first, then tax free principal. For example, a couple has a $24,000 exemption on their personal tax return for 2019. If their taxable income falls below the $24,400.50 for 2019 and there was no refund due them, they would not be required to file and tax return for 2019. If a refund is due though, (i.e. income taxes withheld on a W-2 or 1099-R) and their taxable income is below $24,400.50 they will need to file a return to receive the refund.
Is purchase of a boat or car considered a trust expense?
The trust purchases any asset at cost and that is what is recorded in the books at capital asset value. There is no expense for the purchase, it is simply an Asset Purchase. All expenses for that asset are expenses of the trust.
Do we still take depreciation on the properties since it’s already tax deferred?
No, because the trust does not take depreciation on its property.
My wife is a beneficiary of my trust, and we will be vacationing in an area that we will be looking at property to invest in. My question is – what expenses can I run through my trust?
Such as transportation, lodging, meals and clothes. Your Trust can pay for any and all expenses associated with the management, maintenance and operation of the Trust. The Trust can buy, sell and invest in property, equipment and other investments. So, if you can justify the travel for any of the above reasons, then associated expenses are authorized expenses of the Trust. Food and entertainment would be personal expenses, unless in conjunction with a trust business meeting -a real business meeting. Clothing would be personal expenses unless it is safety clothing used when working on a Trust Asset. Clothing with the Trust LOGO could be considered trust clothing. The Trust must maintain receipts for travel and entertainment with the WHO, WHAT, WHERE and WHY written on the back of the receipt. You must also have proof of the travel for Trust Business – photos, newspaper adds, real estate agent business cards, investment brochures, etc.
If you are going to purchase a new vehicle, is it better to pay for it in full or take out a loan and let the trust make the payments?
The Trust can purchase the vehicle or can execute a note on the vehicle. The lender may not allow the Trust to be on the Note since they cannot demand payment from a Spendthrift Trust. The Trustee/beneficiary may have to personally Guarantee the Note.
Can a leased car be put into a trust if it’s the car that the beneficiary drives?
The Trust must be on the Lease and then the expenses to operate that vehicle used by a beneficiary are Trust expenses. If a Trustee uses the vehicle then the Trustee must pay rent for the portion of the vehicle used for personal use. Keep a mileage log. The Lessor may require a personal guarantor on the lease.
Can I buy a car for myself as Trustee, to drive without having to keep detailed record?
The Trust must own the vehicle and then all Trust uses of the vehicle are Trust expenses. The Trustee must pay rent/lease for the non- trust (personal) use of the vehicle. A mileage log of personal mileage will help to calculate this rent/lease. Trustees cannot benefit from the Trust or its assets.
How do I buy a truck for another person’s Trust?
Your Trust CAN NOT buy any asset FOR another person or trust. You can pay a “distribution” (K-1 income) to that trust and then they can buy the asset. All funds leaving your Trust must be for (1) buying an asset for your Trust, (2) paying an authorized expense of your Trust, (3) making a “taxable K-1 distribution” to a beneficiary or (4) making a “taxable 1099 payment” to a Trustee or other person not a beneficiary. Your trust can not make gifts or donations that are not to a 501c3 organization.
My car is paid for, but can I deed it to Trust and have maintenance paid for by the Trust?
Vehicles are transferred into the Trust at basis or cost through a notarized “Vehicle Transfer” Form. As Trustee you must pay the Trust for the Personal Use of the vehicle. Use the IRS mileage rates to reimburse the Trust for the Personal Mileage.
What is the purpose of valuation on motor vehicles?
All Assets must be sold to the Trust at their Cost Basis (original purchase price plus improvements and other costs) or Book Value (purchase plus improvement and other costs less depreciation taken). The exception would be your home. Your home should be sold at close to Fair Market Value. This Sale will generate a Demand Note for payment of the purchased asset or the trust can pay cash for the purchase. There must be an exchange of value for a sale to be legal as well as a Notarized Bill of Sale. Real Property (buildings and land) must also have a Notarized Quit Claim Deed or Recorded Warranty Deed with a Title Policy.
What can’t the Trust pay for?
The Trust CAN NOT pay for personal expenses.