AICPA Representative Tasks (verbatim). 1. Remembering & Understanding: Recall and explain the characteristics of various types of trusts, including simple trusts, complex trusts and grantor trusts. 2. Remembering & Understanding: Recall and explain a trust as a pass-through entity and the roles of grantor, trustee, and beneficiaries and the concept of corpus. 3. Remembering & Understanding: Recall and explain the characteristics of revocable trusts.
A trust is a legal arrangement where one party (the trustee) holds and manages property for the benefit of another (the beneficiary). Understanding the four key participants is foundational:
- Grantor (Settlor/Trustor): The person who creates and funds the trust by transferring property into it
- Trustee: The legal owner who manages trust assets according to the trust document; owes fiduciary duties to beneficiaries
- Beneficiary: The person(s) entitled to receive income and/or principal from the trust
- Corpus (Principal): The property transferred to the trust (cash, securities, real estate, or other assets)
KEY: The grantor transfers legal title to the trustee, but the beneficiary holds the beneficial (equitable) interest. This separation of legal and beneficial ownership is the essence of trust law.
Common mistakes
- Treating all trusts as separate taxpayers. Grantor trusts are disregarded for income tax purposes, so the grantor reports all trust income. Trap: "The trust files Form 1041 and pays tax." Correct: Grantor trusts report income on the grantor's personal return.
- Assuming revocable trusts provide income tax benefits. During the grantor's lifetime, revocable trust income is taxed to the grantor. Trap: "The revocable trust reduces my income taxes." Correct: No income tax benefit until the trust becomes irrevocable.
- Including capital gains in DNI when allocated to corpus. Capital gains allocated to corpus under the trust document do not enter DNI. Trap: "All trust income is included in DNI." Correct: Capital gains allocated to corpus are excluded from DNI.
Bottom line
- Simple trusts must distribute all income currently, cannot make charitable contributions or distribute corpus; complex trusts can do any of these, and any deviation makes a trust complex
- A trust's simple or complex classification is determined annually based on that year's activity, so it can alternate between classifications
- Grantor trusts are disregarded for income tax under IRC §§671-679; the grantor reports all trust income on a personal return regardless of distributions
- Revocable trusts are grantor trusts during the grantor's lifetime because the power to revoke is a §676 retained power; they become separate taxpayers at the grantor's death
Exam shortcut
"SACC" test for simple trusts: Simple trusts have three requirements, no Accumulation, no Charitable contributions, no Corpus distributions. If any letter fails, the trust is complex for that year. Grantor trust = no separate return: When you identify grantor trust powers (revoke, substitute, control enjoyment, reversionary interest > 5%), stop calculating trust taxable income. The grantor reports everything, move directly to the grantor's Form 1040.
The full lesson (about 2,689 words, 18 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- II.D1
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