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Subject:  Re: Taxes for Family Trust Date:  5/13/2017  9:08 PM
Author:  Wradical Number:  125919 of 132868

IP: Our kids could use this money and now rather than when DH dies. We won't be able to qualify for distribution to pay Youngest's college expenses, but if the trust can skip our generation he would meet the need test, and in that way it would benefit us because we would then not have to pay his college expenses! Eldest hopes to start his own company in 5 years. This trust could support him in his needs for "health, maintenance and support" during the lean years when he is pouring the income from his company back into his business. Let them deal with it and benefit from it.
Often, the terminology used is "health, education, maintenance, and support," or HEMS in legal shorthand. These are magic words, also referred to as an "ascertainable standard" in the estate tax law.

Essentially, this means that the beneficiary can be entitled to receive income distributions up to the total amount of expenses incurred or required for those purposes, and the trust will not be includible in his/her estate at his/her death.

In many cases the beneficiary is entitled to all the income annually, AND principal as needed for HEMS. This is usually desirable for income tax purposes, as most beneficiaries will be in a lower tax bracket than a trust of any size, unless the trust is completely invested in stocks paying qualifying dividends. Even then the trust's Medicare tax on investment income kicks in at taxable income of $12,500, along with the 39.6% bracket on income other than qualified dividends and capital gains.

At the opposite extreme, if the beneficiary can help himself to distributions of principal and/or income without limit, then the trust is his/hers in every sense of the word, and it will be included in his/her estate.

This is why that language gets put into trusts. In many cases it is a LIMIT on the distributable AMOUNT, but it doesn't require a proof of NEED to get it. In other words, most lawyers would say that in the absence of additional requirements, you could use the trust income to pay all your living expenses -i.e., maintenance and support - and your other income available would be completely irrelevant.

And if the trustee is one of the beneficiaries, I would expect him/her to be (ahem) very flexible about the nature of documentation required of the beneficiaries.

This is another thing to talk about with the lawyers.

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