A "Simple Trust" distributes all income to the beneficiary of the trust each year. I read however that capital gains are not considered income. Does this mean that the trust must file a separate tax return and pay capital gains at a trust capital gains rate?
I have a relative who is a foreign citizen who wants her US brokerage account to be titled in the name of a US Simple Trust for estate planning purposes. US Brokers who have accounts owned by a foreign citizen generally refuse to allow named beneficiaries for such accounts, which makes probate likely when that person dies. I am trying to find the simplest possible trust arrangement for her that avoids probate.
Because my relative is not a US citizen, she does not pay US capital gains tax currently. If her money is transferred into a brokerage account that is titled to a Simple Trust, is the capital gains in that trust subject to a different capital gains tax rate than if she invested the money in her name directly? If there is a type of trust that allows all types of income to pass through to her as an indvidual, that would be the simplest arrangement. Is that possible?
While I am licensed for securities work I limit that work to qualified monies for my tax clients. Accordingly, I do NOT do work for nonresident aliens and in reality do not have any accounts for anyone who is not a U. S. Citizen. I will NOT address what a foreign person may or may not do as that is not my area of expertise. I will (at least attempt to) address your first paragraph about capital gains not being considered income.
Trust taxation is a niche area and should not be attempted without either adequate experience or the ability to gain the necessary experience. From the very way in which you worded your first paragraph I can tell you have no experience with trust taxation (no offense meant) so I would suggest that you get real professional help before you do anything that you may regret later.
When you do trust work you MUST have a copy of the trust document. The law allows the grantor (person who set up the trust) to define or re-define certain things. For example, I could draft a trust that says capital gains ARE to be treated as income for the purposes of calculating the Distributable Net Income (DNI). This changes things. However, if my trust document is silent then LOCAL LAW prevails, so you'd also need to have a copy of your state's trust laws. Then you can read the trust document, see what it says and compare it to what local law says, then prepare the return properly.
You also said that "A "Simple Trust" distributes all income to the beneficiary of the trust each year." To which I'll say Yes, BUT!.
A trust that does indeed distribute all income to the beneficiaries annually gets treated as a simple trust for tax purposes, for that year. BUT if the trust document gives the trustee some discretion on whether to distribute income OR NOT, for any reason, AND the trustee elects NOT to distribute ALL income in any given year, that same trust will be considered a complex trust for that particular year. And it can change from year to year depending on what is counted as income and whether that income is distributed to the beneficiaries.
Next, what many don't understand is that when we talk about distributing income in this context we are talking about shifting the reportable income OFF the trust return and ON TO the beneficiaries returns. BUT we may or may not actually give those beneficiaries any cash. There is no automatic or direct correlation between DNI and cash disbursements. Frequently, the trustee will elect to have the beneficiaries pay tax on the trust's income because the beneficiaries' tax rates are lower than the trust rates. And just as frequently the trustee will NOT give them any cash to pay those taxes. Alternatively, it is also possible, and it happens frequently, where the trust does not report DNI BUT makes a cash distribution to the beneficiaries'. So they get money but no tax liability.
Remember, there is no correlation between Distributable Net Income and Cash Disbursed - you can pay tax on money you haven't received and you may get money you don't have to pay tax one. ONLY someone versed in trust taxation can tell you what's up for any particular year AND it can, and frequently does, shift from one year to the next.
God help the person who has a relative who is a non resident and non US citizen who wants to have some assets in the US in a trust. I looked for a year to find anyone who could help set up a small trust for such an individual, and all I got was disclaimers. Basically if you are rich, there are lots of Wall Street law firms to help you, and if you are not rich, then ordinary accountants, tax lawyers, and trust lawyers appear to not know where to begin.
We had a lawyer who specializes in trusts set up the trust. Unfortunately the problem is in the intersection of trust law, accounting, tax law, and the special requirements of non resident non US citizens. I'm simply trying to become conversant enough in the relevant concepts that I can ask the right questions to the right people.
This was all actually very clear and made sense. I think she has a simple grantor trust, and the intention was to distribute all income to her each year and have taxation be passthrough to her as an individual. The insight that distribution of income does not require actual withdrawal of funds from the trust was helpful, thanks.
Since she files a W-8BEN to the broker, that should mean she will have 30% witholding on dividends, and no withholding on capital gains and bond interest. And most likely the trust won't have a return to file since no income would be retained by the trust. Of course I'll have to verify that with someone qualified.
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