Estate Finance Family Tax Plan Question

In 2001, Larry creates a trust with Tenleytown Trust Company as trustee. The trustee must distribute income to Susie, Jeff and Leon (the trust does not permit distributions of principal). On January 1, 2002, the trust is worth $10 million. In 2002, the trust receives $10,000 of dividends and $10,000 of interest. The trust also receives $500,000 from the sale of stock that has a basis of $100,000.

Larry is concerned that the trust is not creating adequate fiduciary accounting income, and, as a result, the income beneficiaries are not being treated properly. Assuming 2003 is likely to yield a similar amount of interest, dividends and capital gains, discuss:

• What potential options the trustee might have to create more income so it can make larger distributions to the income beneficiaries?
• What would you advise the trustee to do and why?
• What factors might you consider in making the decision?
• What are the tax consequences of creating more income?