Taxation Issues - Corporate and Trust Income Tax


Corporate Income Taxes
Corporations get a tax break for investing in common and preferred stocks (of companies other than their own).

  • There is a dividend exclusion of 70% that applies to corporations that own less than 20% of the other company. (In order words, 70% of dividends received from another corporation are tax-free.)

  • If the company owns more than 20%, the dividend exclusion is 80%.

  • Since there is no corporate tax break on bond interest (for corporate or government bonds), there is no incentive for corporations to purchase these. However, there is an incentive for corporations to purchase stocks because of the dividend exclusion.

  • Of course, municipal bond interest is not taxable to the corporation (unless it is a private-purpose bond, which would be taxable to an individual as well).

Trust Income Taxes
The income tax rate that applies to a trust depends on what type of trust it is:

  • Revocable trusts - these trusts manage assets that the owner ("grantor") has placed in the trust during his or her own lifetime.

    • The grantor has the right to change or terminate the trust at any time and can serve as the trustee of the trust.

    • The trust becomes irrevocable upon the grantor's death.

    • Revocable trusts are taxed at the grantor's personal income tax rate - currently a maximum of 35%.

  • Irrevocable trusts - these trusts may be created during the grantor's lifetime or may be contained within a will and become active only upon their death.
    • Unlike revocable trusts, the grantor is unable to make changes without the permission of the beneficiary.

    • Irrevocable trusts are taxed at special trust income tax rates.

    • In 2007, the maximum rate is 35%, but since the income brackets are smaller, this rate is applied to a larger amount of income.

    • For example, a single individual will have a tax rate of 35% applied to taxable income in excess of $349,700 while the special trust tax rate of 35% is applied to taxable income in excess of $10,450. As a result, there is a distinct tax disadvantage to placing income-producing assets into an irrevocable trust.
Estate and Gift Taxes


Related Articles
  1. Retirement

    Estate Planning: Introduction To Trusts

    by Cathy Pareto, CFP®, AIF® (Contact Author | Biography) A trust is an agreement that describes how assets will be managed and held for the benefit of another person. There are many ...
  2. Your Clients

    When to Trust a Revocable Trust

    Unsure of how your assets will be dispersed once you're gone? Here's how setting up a revocable trust while you're here can be a big benefit.
  3. Products and Investments

    Irrevocable Trusts: New Trends You Need to Know

    Several improvements and additional provisions have been added to irrevocable trusts in recent years making them considerably more versatile than before.
  4. Professionals

    Revocable / Irrevocable Trusts

    Revocable / Irrevocable Trusts
  5. Professionals

    Types, Features And Taxation Of Trusts

    Types, Features And Taxation Of Trusts
  6. Retirement

    Understanding Revocable Trusts

    A revocable trust is a legal arrangement whereby a grantor transfers property to a trustee who holds the property in trust for the grantor’s benefit.
  7. Your Clients

    Advisors: Tips for When to Employ Living Trusts

    Revocable living trusts accomplish estate planning objectives that aren't possible with a will. Here are some of the cases that show when to use a trust.
  8. Professionals

    Trusts

    Trusts
  9. Professionals

    Grantor / Non-Grantor Trusts

    Grantor / Non-Grantor Trusts
  10. Professionals

    Trust Beneficiaries: Income and Remainder

    Trust Beneficiaries: Income and Remainder
RELATED TERMS
  1. Irrevocable Trust

    A trust that can't be modified or terminated without the permission ...
  2. Grantor Trust Rules

    Guidelines that state a trust is considered to be a grantor trust ...
  3. Revocable Trust

    A trust whereby provisions can be altered or canceled dependent ...
  4. Grantor Retained Annuity Trust ...

    An estate planning technique that minimizes the tax liability ...
  5. Irrevocable Income-Only Trust - ...

    A type of living trust often used for Medicaid planning. It protects ...
  6. Rabbi Trust

    A trust created for the purpose of supporting the non-qualified ...
RELATED FAQS
  1. What is the difference between a revocable trust and an irrevocable trust?

    Find out more about irrevocable trusts, revocable trusts and the main differences between them. Read Answer >>
  2. How does the trust maker transfer funds into a revocable trust?

    Learn how revocable living trusts are established, how the trust maker transfers funds into the trust, and the advantages ... Read Answer >>
  3. What is the difference between a revocable trust and a living trust?

    Learn how a revocable trust and living trust are two terms used to describe the same thing and what the key provisions are ... Read Answer >>
  4. What are the differences between a revocable trust and a will?

    Investigate the choice between a revocable trust and a traditional will and how their unique advantages can match asset management ... Read Answer >>
  5. How does a revocable trust become a split-interest trust?

    Learn how a revocable trust becomes a split-interest trust upon the death of the of the grantor when there are both charitable ... Read Answer >>
  6. What happens when a will and a revocable trust conflict?

    Learn why a revocable trust supersedes a will, but only for the assets held in the trust, when there is a conflict between ... Read Answer >>
Hot Definitions
  1. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  2. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  3. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  4. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
  5. DuPont Analysis

    A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are ...
  6. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
Trading Center