The termination date can be set at the death of the income beneficiary
or beneficiaries or for a period up to 20 years.
Their decisions could affect the income allocated to the income beneficiary
and the assets ultimately going to the remainder beneficiaries.
Myth: Remarriage of the income beneficiary
of a qualified terminal interest property trust (QTIP) ends the obligation to such beneficiary.
There was inevitable conflict between the income beneficiary
who wanted trust assets invested to produce the highest possible income and remainder beneficiaries who wanted trust assets invested for growth.
Morton chooses to simplify the management of the trust he creates by requiring that traditional income items, such as interest and ordinary dividends, be allocated to the income beneficiary
and traditional principal items, such as capital gains, be allocated to the principal beneficiary.
In addition the income beneficiary
and remainderman in the QSST must be unrelated.
The beneficiary of a QSST is treated as the owner of that portion of the trust that consists of stock in an S corporation--i.e., the current income beneficiary
of a QSST is directly taxed as if he or she is the grantor of that portion of the trust.
If an income interest in a trust ends with the death of the income beneficiary
, the income is allocated to the income beneficiary
until the date of death, and the remainder afterward.
In Private Letter Ruling (PLR) 7928014, the IRS approved an inter vivos charitable remainder unitrust that was funded with a $50,000 permanent life insurance policy, named the trust as owner and the donor's wife as sole income beneficiary
, and contained a net income provision that would pay the spouse the lesser of trust income or 5% of the trust assets.
The regulations specifically provide that the [Section]7520 rate may not be used to value a life income interest in a trust if 1) the trust, will, or other governing instrument requires or permits the beneficiary's income or other enjoyment to be withheld, diverted, or accumulated for another person's benefit without the consent of the income beneficiary
; or 2) the governing instrument requires or permits trust principal to be withdrawn for another person's benefit without the consent of the income beneficiary
during the income beneficiary
's term of enjoyment and without accountability to the income beneficiary
for such diversion.
(3) A qualified trust could have only one current income beneficiary
and any distributions of corpus had to be made to that beneficiary; thus, a trustee could not have the power to distribute income and trust corpus among beneficiaries.
The problem arises because partnership distributions not in liquidation are "trust income" payable to the income beneficiary
. Yet if the trustee pays the income beneficiary
the full amount of the partnership distribution, the trust may not have sufficient cash to pay the trust's own tax liability.