QTIP question

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Anonymous

Posted 10/17/2007 11:19:41 PM

Are capital gains normally applied to the Marital Trust, or the Residue Trust in a QTIP type trust?

Post #471

Mary Kay Foss

Posted 10/21/2007 2:52:47 PM

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I'm not sure if I fully undestand your question. If you're talking about the ongoing operations of a QTIP trust, normally capital gains are treated as allocable to the trust corpus and not income. The surviving spouse must receive all of the income of the QTIP trust but normally would NOT receive any capital gains.

The trust agreement can define *income* for purposes of the trust. For instance, it could define capital gain dividends as income. Most trust agreements are silent as to what is income distributable to the beneficiary and what is not.

Mary Kay Foss

Post #477

Anonymous

Posted 10/22/2007 4:32:56 PM

I fully agree with Mary's statement. The only exception is when you have short term capital gains dividends from a mutual fund or REIT. These short term distributions are added to dividend income and the total is reported under total dividends on Form 1099. The IRS has ruled that these ST capital gains distributions are part of DNI.

The QTIP trust always requires that all net income be distributed annually. This wording must be in the trust document, or you cannot make the QTIP election, and you may not take the marital deduction for the QTIP election. This wording also makes the QTIP trust a "simple" trust whereby income must be distributed annually or more frequently.

The Bypass trust does not necessarily have to be a "simple" trust and does not necessarily have to distribute its income on an annual basis, but most of them usually are.

Post #478

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