saving taxes on trust

If you properly distribute the income to trust beneficiaries, the beneficiaries pay the tax and the trust gets a deduction. Stu

Well, the trust deducts from its income the net income that is distributed or distributable to the beneficiaries. It all depends on the terms of the trust. It sounds as though you need professional help to determine the trust's DNI (distributable net income), which is taxed at the beneficiary level. Katie in San Diego

You need to follow the terms of the trust, does it allow for distribution of all income? I see for 06, the rate is 25% over $2050 of taxable income. You may want to see if you can distribute all but that amount to the beneficiaries, but either way, the trust docs should spell out what you must do, and what flexibility you have. JOE

what are the terms of the trust?

How did you distribute the income to your sister? You should have used a 1041 K-1. Distribute your income to you, then the trust isn't taxed on it, you are. If you didn't know how to do this get professional help NOW.

ed

The trust states: My sister shall receive $2,000 per month of the rental income. I shall receive the rest of the rental income, a portion or all of which may be considered compensation for my services as trustee. what confuses me is what the trust says under trustee compensation. It states: the trustee shall be entitled to pay himself reasonable compensation from time to time without court order, and for reimbursement for any expenses of the trust which trustee has paid. Trustee's compensation shall not exceed three-fourths of the percent (. 75) of the average net value of the principal of the trust estate during each calendar year for all ordinary services rendered and reasonable additional compensation for any extraordinary services. Could I file a K-1 to myself for the rest of the income and leave about $2,000 in the trust so the trust will pay no tax? Or am I able to give myself a 1099-misc for the income I receive as compensation for my services as trustee?

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Would have to read the actual detailed description as written to be able to interpret the terms of the Trust as to whether you would be within its terms to take all the remaining income after that distributed to the other beneficiary. It's clear from what you provided that for an "ordinary" year w/ no unusual circumstances that compensation can't exceed the 0.75% of the principal so then how much you are allowed to distribute depends on the size of the Trust's assets. (Of course, that presumes there aren't other terms/conditions or caveats that would alter this restriction elsewhere in the Trust.) So, this then raises the question of how to ascertain that value since apparently from your description the primary assets aren't stocks and bonds with a fixed daily trading value which is unequivocable. You need to get professional help here -- the organization who drafted the trust would probably be a good place to start as well as or in addition too a qualified accounting/tax professional. Who is named as a succesor Trustee or other terms of succession or transfer trusteeship in case of incapcitation or other circumstances? That person or firm if a professional entity not just another relative would also be a possible place to turn for advice/consultation. For the relatively minor point, as far as I know, any distributions paid from the Trust, considered compensation or not, are documented by a K-1, not a 1099.

The trust is a simple trust in that all the income must be distributed, however, that just means that the trust exemption is $300 instead of $100 fora complex Trust. However since all the income will be distributed there's nothing left to apply the exemptions to. If you don't distribute all the income it isn't a simple trust. Personaly I would NOT pay myself the allowed Trustee Fee as it appears to be voluntary and is coming out of your income distibution and shifts passive income to self employed income which requires paynent of SE taxes. If you do pay yourself a fee, you don't need a 1099. Just write a check. You should use form 1041 and distribute the income on K-1s to your sister ($2,000), and the remainder to yourself. You can play games with the Exemption and retaining the $2,100 ( or whatever amount) of income in the trust that's in a lower bracket than you are but if you don't distribute all the income you only get the $100 exemption. You'll only save about $200 (10% of $2,100) and you won't get the $2,100. ed

thank you for everyone's replies. I am starting to understand this trust alot more now. I will seek professional help.