Series 66

Analyzing Your Client's Financial Profile - 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.

  • 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.

  • 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.

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

    • In 2005, the maximum is 35%, but the brackets are smaller, so 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 $326,451, while the special trust tax rate of 35% is applied to taxable income in excess of $9,750. As a result, there is a distinct tax disadvantage to placing income-producing assets into an irrevocable trust.

Next: Estate and Gift Taxes »


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