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Frequently Asked Questions: Trust II
The
following is an abbreviated summary of certain federal tax matters. Individual
tax results may vary. Consult a tax advisor for specific implications of
your participation in the trust. This summary is not intended to provide individual tax advice
and is subject to the terms of the Master Trust Document and Joinder
Agreement. If the individual trust account does not contain any of the
beneficiary’s own funds, refer to Tax Questions for Trust I (Third
Party Trusts).
What are the tax
implications for a person who establishes an individual trust account?
Income Tax: Because the beneficiary is the donor of a self-settled trust, the
beneficiary will be required to pay federal income tax on earnings
generated by the individual trust account.
Gift Tax: Because the beneficiary is the donor of a self-settled trust, the beneficiary will not be subject to gift tax on contributions to the beneficiary’s individual trust account.
Tax Deductions: A contribution to an individual trust account is not deductible as a charitable contribution because the funds directly benefit a specific individual.
Who prepares the tax forms and pays federal income tax owed?
If required, the beneficiary will be responsible for preparing and filing a federal income tax return. The Developmental Disabilities Endowment Fund (dba Life Opportunities Trust) will prepare an IRS Form 1041 for the individual trust account and send it to the primary representative. (The primary representative may be the beneficiary.) This form will document all of the investment earnings that may be required to report on the beneficiary’s federal income tax return. Upon request, the Trust Manager will make a disbursement from the individual trust account to pay for taxes attributable to the account. Once income tax has been paid on the earnings, tax does not have to be paid when funds are used on behalf of the beneficiary.Is the
beneficiary’s individual trust account subject to federal income tax?
What is the beneficiary’s responsibility for paying tax related to the individual trust account?
Income Tax: If the beneficiary owes income tax, he or she will be required to prepare and file an income tax return, as well as pay any income tax due. The Developmental Disabilities Endowment Fund (dba Life Opportunities Trust) will provide the primary representative with a completed IRS Schedule K-1 (Form 1041) showing the investment earnings to be included in the beneficiary’s income tax calculation. Upon request, the Trust Manager will make a disbursement from the individual trust account to pay for taxes attributable to the account. Gift Tax: The beneficiary will not owe gift tax on contributions place in an individual trust account.Will the
beneficiary owe income taxes on state matching contributions?
A beneficiary should not
have to pay income tax on the matching contributions. Made by the state.
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