To Distribute or not to Distribute?

My wife is trustee to an irrevocable education trust for her niece (who is now 8 years old.) Periodic gifts have been made to the trust from the child's great-grandmother. This trust has typically distributed income on an annual basis and tax has been paid on this distribution.

The trust document does not mandate distribution at least annually, but it does allow it if deemed appropriate by the Trustee. The financial firm does issue 1099's for interest and dividends. Do we have any other choice than to distribute the income? (I suspect it's better to pay taxes on it now anyway.)

thanks

Without reading the exact terms of the trust, I can not say for sure, but in most cases, it would be more in the spirit of an education trust to leave the income in the trust to accumulate for the purpose of the trust—education. In most cases, the Trustee can allow distributions for the health and welfare of the beneficiary.


If you do leave the income to accumulate, the trust will pay tax on the income each year—if it is more than the standard exemption for trusts and the expenses of the trust. If you take distributions of the income, you will have to pay the tax on the income.

loku said:

Without reading the exact terms of the trust, I can not say for sure, but in most cases, it would be more in the spirit of an education trust to leave the income in the trust to accumulate for the purpose of the trust—education. In most cases, the Trustee can allow distributions for the health and welfare of the beneficiary.


If you do leave the income to accumulate, the trust will pay tax on the income each year—if it is more than the standard exemption for trusts and the expenses of the trust. If you take distributions of the income, you will have to pay the tax on the income.

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Hmmm. So as long as someone pays the tax on the income each year, it doesn't really matter what happens to the income? Maybe it'll be cheaper to have the trust pay than the parents. I guess we'll have to look at it both ways.

You are correct; however, before you decide on how to handle this, I suggest you do read the terms of the trust. It is a breach of duty to handle the funds differently than under the terms of the trust.

loku said:

You are correct; however, before you decide on how to handle this, I suggest you do read the terms of the trust. It is a breach of duty to handle the funds differently than under the terms of the trust.

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I agree. The trust allows for use of the money for educational purposes and requires that "any net income not so paid or applied shall be accumulated and added to the principal...". We were just trying to figure out the best way to handle the taxes. Thanks loku.