I'd like to verify my understanding of a new tax situation. My sister and I are trustees (and the only beneficiaries) of an irrevocable trust that contains photo negatives and holds their copyright. The trust serves as sole member of a single-member Michigan LLC. The LLC enters into business relationships with art galleries, authorizing them to print, promote, and sell photos made from the negatives, which the LLC provides. The gallery returns our share of the proceeds back to us via check written to the LLC. The income is then passed through to the trust and immediately on to the two beneficiaries.
I THINK the LLC is considered a disregarded entity from both the Federal and Michigan points of view, meaning that no tax returns need be filed by the LLC. I also believe the payments to us can be classified as royalties and furthermore that they represent passive income because neither my sister or I participate in the generation of the income "on a regular, continuous, and substantial basis." Only the gallery does that.
Is my thinking correct, or am I way off base? Thanks.