Granting an independent trustee the power to withhold and accumulate income, or to make discretionary distributions of income and principal for other purposes will not cause the income to be taxable to the donor. One exception, however, is that trust distributions may not be used to discharge the donor’s legal obligations. To the extent the trust income is used for such purposes, such income will be taxable to the donor. A properly drafted irrevocable trust will shift the liability for income taxes on the income earned by the Trust assets to the Trust itself, or if the income is distributed, to the beneficiary. NOTE: With the current high tax income rates to trusts, it is usually advisable to distribute all trust income to the beneficiaries, at least annually, to have the income taxed at the beneficiary’s lower tax rate. Be aware, however, that the income of a beneficiary under the age of 14 may be subject to taxation at the beneficiary’s parents’ tax rates. |