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Liquidity, Powers of Appointment, and Trusts - Trust Beneficiaries: Income and Remainder

Trust Beneficiaries: Income and Remainder
To select the appropriate trust to set up, the creator must consider the following:
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Why am I considering a trust?
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Who is the ultimate beneficiary of the trust's assets?
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What happens to the income of the trust?
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Who will have control of the trust?

The creator (grantor) of the trust may want the income to go to their spouse for life and the trust's assets to the children. Another option might be to have half of the income go to each of the children and spouse equally, and the principal to charity. Whatever the case, it should be thought out with careful consideration, especially if the irrevocable trust is selected. Taxation may also play a role in the setup of the trust, so be aware of the following:

Taxation of Trust Income:

1) If passed to a beneficiary Income is taxed to the beneficiary at their ordinary income tax rates.
2) If remaining in a trust Income is taxed to the trust at trust income tax rates, which could be much higher than individual tax rates.

Trusts generally retain capital gains and losses since they are changes to the principal (corpus) of the trust. Therefore, they are not considered income for distribution purposes. The trust will report capital gains on its own tax return and pay the tax.

Rule Against Perpetuities / Estate and Gift Taxation
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