Law Offices of Shannon P. McNulty LLC
Shannon P. McNulty is an estate planning attorney in New York City and the founder of www.savvy-parents.com, on online resource that helps parents with young children make smart legal and financial decisions for their families.
Drawing on her legal, tax, and financial planning background, Ms. McNulty's law practice focuses on providing a holistic approach to estate planning. She works closely with clients to provide a comprehensive plan to design a legacy that protects their children, transfers wealth to future generations, and minimizes intergenerational taxes. A significant portion of her practice is dedicated to assisting individuals and families with international estate planning issues.
Ms. McNulty regularly serves as a consultant to other law firms on complex tax and international planning issues. She has appeared on MSNBC as a legal commentator about celebrity estates.
Before opening her own practice, Ms. McNulty practiced law at the New York-based law firms of Curtis, Mallet-Prevost, Colt & Mosle and Skadden, Arps, Slate, Meagher & Flom and completed a judicial clerkship for a U.S. District Court Judge of the Southern District of New York.
Ms. McNulty received her LL.M. in Taxation from New York University School of Law and graduated cum laude from Georgetown University Law Center, where she served as an Articles Editor for the Georgetown Law Journal. She has also earned the CERTIFIED FINANCIAL PLANNER™ designation from the Certified Financial Planner Board of Standards.
Ms. McNulty is a member of the Tax Law and Trusts and Estates Sections of the New York State Bar Association.
LL.M., Taxation, New York University School of Law
J.D., Georgetown University Law Center
B.S., International Studies, University of Scranton
The information provided by Shannon McNulty on this website is for informational and advertisement purposes only, and should not be construed as legal advice. Further, any viewing or transmission of data, correspondence, or use of the contact form does not constitute an attorney-client relationship with Shannon McNulty.
If you are a U.S. citizen or a U.S. resident, you must report foreign source income on your U.S. income tax return. Foreign income is reported in the same way as other income, e.g., wages, interest, dividends, etc., on a 1040. You may avoid U.S. income tax on foreign source income if you qualify for the foreign earned income exclusion or the foreign tax credit. You must file IRS Form 2555 to qualify for the foreign earned income exclusion and Form 1116 to claim the foreign tax credit.
Unfortunately, trust income taxation is one of the more complicated aspects of the U.S. tax code. To know whether you have to pay tax on income generated from assets held in trust, you first need to know what type of trust it is for income tax purposes. The lawyer who drafted the trust should be able to tell you what type of trust it is.
There are two primary types of trusts for income tax purposes: grantor trusts and non-grantor trusts.
Income earned by assets held by a grantor trust is generally taxed to the "grantor" (i.e., the person who created the trust). In rare cases, a beneficiary may be treated as the grantor for income tax purposes. In a grantor trust, all income generated by trust assets is taxed to the grantor as if the trust assets had been owned directly by him or her.
In non-grantor trusts, income earned by trust assets is taxed either to the trust itself or to the beneficiaries of the trust. If no distributions have been made to the beneficiaries, the income is taxed to the trust itself. If distributions from the trust have been made to beneficiaries in a particular year, generally the income is "passed through" to the beneficiaries (who receive a K-1), and each beneficiary must pay tax on trust income based on the beneficiary's distribution.
These are the general rules governing taxation of trust income; however, there are many nuances and exceptions to the rules outlined above. In any event, as a beneficiary, you should not be taxed on phantom income from a trust (unless it is a beneficiary-deemed owner trust, which is very rare). Phantom income can arise out of a partnership interest, but this concept does not apply to trust income taxation.
The first thing you should do is contact the accountant who prepared the K-1, find out what kind of trust it is, and ask why you are receiving a K-1 indicating that you owe tax on trust income when you did not receive any distributions from the trust for that year. Because trust income taxation is a complicated area of the tax code and because mistakes are common in reporting trust income taxation, you should probably retain either an estate planning attorney or an accountant with experience in trust income taxation to advise you on this issue.
The allocation is generally specified in the will. If it is not specified in the will, state law generally provides default rules that apportion the liability among the heirs. Unless the will explicitly provides the executor with discretion to allocate the taxes, the executor generally has no authority to do so.
If it is a simple revocable living trust that simply disperses the money to you in lieu of it going through his estate, then it shouldn't matter whether the money goes into the trust or into his estate. There are a number of complex tax and legal issues involved here, including a potential installment sale, trust taxation issues, and the details of the buy-sell agreement. I would recommend that you consult an attorney to figure out exactly what the estate owes you and to discuss a potential claim against the estate before the time limit for creditor claims runs out. These issues are too complex to figure out on your own.
It really depends on what you're trying to accomplish with the trust. The easiest and most affordable way to give to charity is simply to make direct contributions, either while you are living or through your will. Lifetime donations are tax-deductible, and donations made through your will or revocable living trust are not subject to estate tax.
With a charitable remainder trust (CRT), you transfer assets to a trust, which pays you an income stream/annuity during your life. The assets left in the trust at your death are distributed to a designated charity. The benefit of a charitable remainder trust is that it allows you to receive an income tax deduction at the time you transfer the assets to the trust, while delaying the donation until after your death. CRTs are most often used to sell highly-appreciated assets, since assets transferred to the trust can be sold free of capital gains tax. Charitable remainder trusts are fairly expensive to set up and maintain.
An alternative option to consider is a Donor Advised Fund (DAF). A donor advised fund allows you to transfer assets to the fund during your life or upon your death and provide guidance to the administrator of the fund with respect to how you want the funds donated. DAFs have become increasingly common because they provide a simple, cost-effective way to make deferred donations to charity while providing guidance on how the funds are distributed. Here is a link to a Forbes article about DAFs.