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A hypothetical person has an irrevocable trust fund set up for him when his/her parents die. The adult child is the sole beneficiary of the trust and the sole trustee. He has a general power of appointment over the money in the trust. He/she has the right to take money out of the trust or leave it in there to accumulate. In one year the trust has $30,000 of dividend income and $20,000 of tax free interest income.

Can the adult child distribute $29,000 (and only that amount) from the trust, claim that the money is all dividends and then the trust will pay no taxes?

The way I see it, the trust will have $1000 of taxable income which will result in no tax due.

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  • Have you looked over 1041 to get a quick estimate of the tax situation for the trust?
    – Jon Custer
    Jun 22 at 16:13
  • @JonCuster I have. I posted here to check to see if my understanding of taxes related to trusts is right.
    – Bob
    Jun 22 at 17:53
  • I do not see how those numbers square with the calculation of DNI on Schedule B. Even supposing there was no tax-exempt interest, I don't see where the $1000 difference comes from.
    – Jon Custer
    Jun 22 at 18:22
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    Check the instructions for Line 21 for the exemption - without knowing exactly how the trust is set up I can't say which number to use. But in no case is there a $1000 exemption. Also check Schedule B. I would suggest a visit to a tax professional.
    – Jon Custer
    Jun 22 at 18:48
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    Yes, yes I do. If line 23 on the 1041 is more than zero, you owe tax (starting at a 10% rate). Furthermore, you need to establish what the Distributable Net Income requirements of the trust are.
    – Jon Custer
    Jun 22 at 19:40

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