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queens business
Elder Law Minute TM
Taxation of Trusts
BY RONALD A. FATOULLAH, ESQ.
AND DEBBY ROSENFELD, ESQ.
As we have mentioned in many previous
articles, trusts are wonderful and useful
vehicles for all diff erent types of estate
and elder law planning. A trust can be
utilized to protect one’s assets in the context
of planning for long term health care.
A trust can also be employed to minimize
estate and gift taxes. Further, trusts can
enable people to control the disposition
of their assets aft er they pass away. For
example, if parents are concerned about
a child who cannot handle his fi nances,
they can create a trust in their estate planning
documents so that the child does
not inherit any money directly upon their
demise. Th e funds allocated to such child
are held in a trust that is managed by a
third party (the “trustee”). Th e parents
can customize the trust so that funds are
dispensed over the course of their child’s
life in accordance with their wishes.
Regardless of the type of trust created,
there are oft en many questions regarding
its taxation. Because a trust is a separate
entity, it is important to know the
tax ramifi cations when a trust is created.
Ultimately, the taxation of trusts depends
on what type of trust is created. For purposes
of taxation, trusts can be classifi ed
ELDER LAW
as either grantor or non-grantor trusts.
Th e Internal Revenue Service generally
defi nes a grantor trust as any trust «over
which the grantor or other owner
retains the power to control or direct
the trust’s income or assets.” If an individual
creates a trust but still holds onto
some elements of control over the assets
in the trust, such trust will be treated as
a grantor trust. Th e Internal Revenue
Code Sections 671 through 679 cover the
specifi c rules governing grantor trusts.
A classic example of a grantor trust is a
revocable trust. According to the terms
of a revocable trust, the grantor (i.e., the
person who creates the trust) can remove
assets from the trust and has complete
unmitigated access to all the assets held
by the trust. When a revocable trust is
created, the grantor can use his/her individual
Social Security number for all trust
accounts. What this means is that even
though the trust is a separate entity, all
the taxes pass through to the Grantor in
his/her individual capacity. Th ere is no
need for a separate tax return to be fi led
and the tax rates that are imposed are
those of the individual grantor.
Unlike a revocable trust, an irrevocable
trust generally cannot be modifi ed,
amended or terminated without the permission
of the grantor’s named benefi ciary
or benefi ciaries. Th e grantor, having
transferred assets into the trust, eff ectively
removes all of his/her rights of ownership
to the assets and the trust. It is vital
to note that an irrevocable trust can still
be treated as a grantor trust for tax purposes.
If the irrevocable trusts includes
certain provisions, such as the grantor
retaining the power to substitute assets
or the ability to change trustees, it will
still be treated as a grantor trust for tax
purposes. Th is is extremely signifi cant
in the context of asset protection trusts.
Th e trust must be irrevocable in order to
pass muster for Medicaid planning purposes,
but the grantor can still be taxed
on the income of the trust provided certain
provisions are included in the trust
document.
A non-grantor trust is treated as a separate
entity for tax purposes. In such
a trust, none of the above-described
provisions are present. Th e trustee of a
non-grantor trust must procure a taxpayer
identifi cation number for the trust and
must fi le a separate tax return. If the trustee
makes distributions from the trust, the
individual recipient reports such income
in his/her own tax return. Any income
remaining in the trust is taxed at the trust
tax rate, which may be signifi cantly higher
than the individual income tax rate.
Ultimately, what type of trust an individual
needs should be determined by
an attorney who specializes in estate and
elder law planning. As practitioners,
we oft en recommend that a client work
in conjunction with a qualifi ed accountant
who has familiarity with the taxation
of trusts.
Ronald A. Fatoullah, Esq. is the founder
of Ronald Fatoullah & Associates,
a law fi rm that concentrates in elder
law, estate planning, Medicaid planning,
guardianships, estate administration,
trusts, wills, and real estate. Debby
Rosenfeld, Esq. is a senior staff attorney
at the fi rm. Th e law fi rm can be
reached at 718-261-1700, 516-466-4422,
or toll free at 1-877-ELDER-LAW or
1-877-ESTATES. Mr. Fatoullah is also
a partner with Advice Period, a wealth
management fi rm that provides a continuum
of fi nancial and investment advice
for individuals and businesses, and he
can be reached at 424-256-7273.
RONALD FATOULLAH
ESQ, CELA*
editorial
5 Ways to Network for Success
Q. Dear Mindy, I am
looking for a job and I have
been told that it is important
to network. I have no
idea where to start, and I
am worried that I won’t
know what to say. Looking
for help
A. Dear Looking,
Networking is not just
for people who are looking
for jobs, and it’s not
just for extroverts. The skills
you need to network effectively
are skills that will be
used throughout your life.
Networking opportunities
can happen every day, whether you
are in a room full of people or simply
having lunch with friends. The ability
to network effectively and make
professional connections is one of the
keys to success. Follow these tips to
form great networking relationships:
1. Create personal connections.
Look for networking groups where
you will find people who share common
interests with you. If
you are interested in photography,
look for groups
that would likely attract
other photographers in
your area. If you would
like to meet local business
owners, look for meetings
sponsored by your local
chamber of commerce. A
simple Google search will
help you find networking
opportunities that appeal to
your special interests.
2. It’s not what you
know, but who you know.
Knowing how to approach
people is imperative to developing a
good first impression. Maintain eye
contact, actively listen to the other
person so that you can respond
appropriately, show a sincere interest
in the other person’s conversation
and don’t appear needy or overbearing.
The goal is not to meet as many
people as possible, but to form lasting
relationships with those you do meet.
3. Prepare in advance. If you are
new to networking or feel anxious
about talking to a group of strangers,
it will be helpful to prepare a few
topics you can easily talk about to
break the ice. Great ice breaker topics
include sports (Did you see the game
last night?), weather (Did you hear
that we are expecting another storm?),
the venue (This restaurant really has
great food. Have you tried the lasagna?).
Once you begin the conversation
it will be easier to build upon
it to find common interests or learn
important information.
4. Build relationships.
Relationships don’t magically happen
after one meeting. The need to
be nurtured to develop over time.
Don’t be shy about asking someone
to join you for coffee or lunch.
Actively look for people to connect
with via LinkedIn or Facebook. Make
sure to distribute your business card
when you first meet and then follow
up with an email or phone call. You
never know when that relationship
will open doors for you months, or
even years later.
5. Offer help. Be generous with
your time. When you offer guidance
and support to help another person
you reinforce your credibility
and the value of your expertise. You
want people to view you as a valuable
resource who they feel comfortable
recommending to others. People are
more likely to recommend individuals
with whom they have relationships.
The sooner you begin to grow
your network, the more effective your
network will be.
Mindy Stern, SPHR, ACC is a career
coach, author, speaker and trusted
advisor. She founded AIM Resource
Group Inc. to encourage the growth
and success of individuals and organizations.
Visit the website at www.
aimresourcegroup.com or call 718-
217-1074 to learn more. Do you want
your questions answered in this column?
Send requests to mstern@aimresourcegroup.
com .
EMPLOYMENT
MATTERS
MINDY STERN
SPHR, SHRM-SCP,
link
/www.aimresourcegroup.com
/www.aimresourcegroup.com
link
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