united-states trusts-and-estates income-tax
How would this non-grantor trust be taxed?
<p>Paul sets up a irrevocable non-grantor trust for his adult daughter Sue. He funds the trust for $200,000. In the first year, the trust earns $15,000 from investments. The trust does not distribute any money to Sue.</p>
<p>It is my belief that the trust will be taxed on the $15,000. That is Paul cannot pay the tax. Sue cannot pay the tax. Am I right about that?</p>

<p>You are correct.</p>
<p>A grantor trust would be taxed to the settlor (Paul).</p>
<p>A non-grantor trust would be taxed to either the trust, the beneficiaries, or both, depending, in part, on whether it is classified for tax purposes as a &quot;simple trust&quot; or a &quot;complex trust&quot;. In a simple trust, all income is taxed to the beneficiaries. In a complex trust, distributed income is taxed to the beneficiaries and undistributed income is taxed to the trust.</p>
<p>A simple trust must pass all three criteria in a taxable year in order to be considered as a simple trust: (a) it must distribute all income to the beneficiaries; (b) it cannot distribute principal; and (c) it cannot make distributions to charity. Treasury Regulation § 1.651(a)-1.</p>
<p>While this trust cannot make distributions to charity, because Sue is the sole beneficiary, it is still not a simple trust because it is not required to distribute all of its income to Sue at least annually, and because it can distribute principal to Sue.</p>
<p>Therefore, since no distributions are made to Sue, this complex trust is taxed on the entire $15,000 of income at the tax rates applicable to trusts.</p>
