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income beneficiary; or 2) the governing instrument requires or permits trust principal to be withdrawn for another person's benefit without the consent of the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.