A. Situation A: The will of a resident
individual establishes a discretionary trust. During the lifetime of the wife
(W), income (except capital gains) may, in the discretion of the trustee, be
paid to W, the son (S), the daughter (D) or any issue of S or D, or the income
may be accumulated. On W's death, the principal is to be distributed in equal
shares to S and D or to the issue of either if S and/or D are not living at
that time. Thus, the trustee has a discretionary power to distribute
accumulated income or principal to W, S, D or to any issue of S or of D.
1. During the year all of the income except
capital gains is currently paid to W. The trust realizes $1,000 of long-term
capital gains and retains those gains.
a. WHAT
IF: W and S are Rhode Island residents and D resides in another state and is
not a Rhode Island individual?
b.
ANSWER: Since presumptively the principal will ultimately pass in equal parts
to S and D (one of whom is a resident individual and the other is not), the
capital gains are therefore being accumulated one-half for a resident and
one-half for a nonresident. Thus, one-half of the retained income (capital
gains) is subject to Rhode Island personal income tax and a RI-1041 Form is
required to be filed. The fact that W is a resident individual is immaterial
concerning the capital gains because the principal will eventually go to S and
D.
c. WHAT IF: W resides in another
state and is not a Rhode Island resident; S and D are both Rhode Island
resident individuals?
d. ANSWER:
Since all of the capital gains are being accumulated for future distribution to
persons who are Rhode Island resident individuals, the trust is therefore
considered a resident trust with respect to the capital gains and a RI-1041
Form is required to be filed as it pertains to the retained income (capital
gains).
2. During the
year the trust receives $10,000 of income and realizes $1,000 in long term
capital gains. The trustee pays $8,000 of income to W; accumulates the
remaining $2,000; and makes no principal distributions.
a. WHAT IF: S is a Rhode Island resident
individual and W and D both reside in another state and are not Rhode Island
resident individuals?
b. ANSWER:
Since one of the beneficiaries S (who, in the discretion of the trustee) may
receive the entire accumulated income, is a resident individual, the trust is
considered a resident trust with respect to the income retained. Because one of
the two remaindermen is a resident individual, one-half of the capital gains
retained are subject to Rhode Island personal income tax.
c. WHAT IF: W is a resident of another state
and S and D are both Rhode Island resident individuals?
d. ANSWER: The trust is a resident trust and
must report and pay Rhode Island taxes on all the retained income.
B. Situation B: The
will of a resident individual establishes a discretionary trust. During W's
lifetime, the trustee is authorized, but not required, to pay income (except
capital gains) and/or principal in its discretion among a group consisting of
W, S, D, the issue of S and the issue of D. On W's death, the trust divides
into two separate trusts with S receiving a life income from one with the
principal passing to his issue at his death; and D receiving a life income from
the other with the principal passing to her issue at her death.
1. WHAT IF: During the year the trustee
distributes all income and realizes $2,000 of long term capital gains. W is a
Rhode Island resident individual. S is a Rhode Island resident individual as
are his minor children. D resides in another state and has two children, a son
(GS) who is 22 and a Rhode Island resident individual and a daughter (GD) who
resides in the other state.
2.
ANSWER: Because capital gains are presumptively accumulated for future
distribution, the trust is therefore a resident trust with respect to 3/4 of
the capital gains. The reasoning behind this is that one half is being
accumulated for the benefit of S's issue (all of whom are Rhode Island
residents) and one quarter (one half of one half) are being accumulated for GS
who is also a Rhode Island resident.
