Taxation of Estates and Gifts

A grantor trust is a non-exclusive type of trust where the grantor retains or gives to his spouse one or more of the powers or interests in 26 U.S.C. §§ 673–678. These are basically "strings" of control over the property like having discretion over distributing income or having AART powers.

Fiduciary account income is largely determined by state law, but it includes both tax-exempt and normal income (including interest) and excludes capital gains and losses. 26 U.S.C. § 643(b).

• Capital gains and losses are just allocated as an increase in principal, not as actual income. UPIA § 404.
  • Some other expenses may be treated like this too, and some are half included. UPIA § 502.

The distributable net income is the taxable income of the trust (from 26 U.S.C. § 61, including capital gains and excluding tax-exempt interest at first) with some adjustments made. 26 U.S.C. § 643(a).

1. Subtract the "distributions deduction". 26 U.S.C. § 643(a)(1).
   • Distributions Deduction

     To calculate the distributions deduction:

     1. Take the lesser of:
        • All distributions minus the charitable deductions
        • Distributable Net Income
     2. Subtract the net tax-exempt income ($\mathrm{T<!---->EI}-\mathrm{Direct\; T<!---->EI\; Expenses}-\mathrm{Allocated\; Indirect\; Expenses}$)

     65-Day Rule

     26 U.S.C. § 663(b)(1)

     If within the first 65 days of any taxable year of an estate or a trust, an amount is properly paid or credited, such amount shall be considered paid or credited on the last day of the preceding taxable year.

     You must elect to do so though.

   • Basically, how much taxable income you've already distributed
2. Add back the personal exemption substitute deduction from 26 U.S.C. § 642(b). 26 U.S.C. § 643(a)(2).
   • I.e., it's not allowed.
3. Subtract net capital gains allocated to principal. 26 U.S.C. § 643(a)(3).
4. Add tax-exempt interest. 26 U.S.C. § 643(a)(5).

To calculate the distributions deduction:

1. Take the lesser of:
   • All distributions minus the charitable deductions
   • Distributable Net Income
2. Subtract the net tax-exempt income ($\mathrm{T<!---->EI}-\mathrm{Direct\; T<!---->EI\; Expenses}-\mathrm{Allocated\; Indirect\; Expenses}$)

A trust's taxable income is its gross income from 26 U.S.C. § 61 (including capital gains and excluding tax-exempt interest) minus its expenses and charitable deductions (allocable to non-tax-exempt income (26 U.S.C. § 265.)), distributions deduction, and the personal exemption substitute deduction.