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2. Trust Income
The terms of the governing instrument and applicable local
law determine whether trust income is required to be distributed
currently (i.e., whether the beneficiary has a present right to
receive income). See sec. 1.651(a)-2, Income Tax Regs. If trust
income is currently distributable, and no other distributions are
made in a taxable year, the trust is a simple trust. Tax
treatment of a simple trust is governed by sections 651 and 652.
Section 651(a) allows the trust a deduction for income “required
to be distributed currently”. Section 652(a) subjects the
beneficiary to taxation on amounts “required to be distributed,
whether distributed or not.”
A trust not governed by the simple trust provisions is
subject to the complex trust provisions. “A trust may be a
simple trust for one year and a complex trust for another year.”
Sec. 1.651(a)-1(b), Income Tax Regs. Pursuant to sections 661
and 662, only that part of the trust income which is paid or
credited to the beneficiary during the year may be deducted by
the trust and taxed to the beneficiary. The trustee of a complex
trust may have discretion to accumulate or distribute all, or
part, of the income to the beneficiary. Thus, the Code assures
that income distributions will “appear in the fiduciary’s return,
if they are still his; in the beneficiary’s, only in case he has
become presently entitled to them, or received them.”
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Last modified: May 25, 2011