- Mark as New
- Bookmark
- Subscribe
- Subscribe to RSS Feed
- Permalink
- Report Inappropriate Content
Business & farm
Again, thank you for your knowledgeable reply!
So, just to make sure I understand correctly, let's use an example
that is likely to be roughly what we will actually do with my WDT:
ASSUMPTIONS IN BOTH SCENARIOS:
Let's say my brother invests my WDT half in stock index and half in corporate bonds.
The stocks earn 8% return one year which is $10,000 unrealized capital gains.
The bonds earn 5% return one year which is $6,250 in INCOME (because interest on bonds is income, not capital gains).
SCENARIO 1 - GROWTH PHASE:
My brother distributes nothing to me that year, as we want the WDT to grow.
The $10,000 unrealized gains are not taxed.
The $6,250 interest is considered INCOME earned by the trust. Since it is not distributed, the trust
pays 10% tax on the first $3,100 and 24% on the $3,101 to $6,250 portion, for a total of $1,066 tax.
Is that right?
--->If I understood that right, then what if we invested in tax-free municipal bonds, would the trust still
pay tax on the interest from those type of bonds?
SCENARIO 2 - DISTRIBUTION PHASE:
My brother distributes $12,000 to me one year.
The distribution is made up of all the $6,250 bond interest income (makes most sense)
and then also $5,750 of the $10,000 unrealized capital gains are sold and realized.
Since 100% of the income of the trust has been distributed this year, the trust pays no tax.
I pay personal tax on the distribution on my 1040 return, declaring $6,250 of bond interest income.
Since corporate bond interest is treated the same as income, I pay $0 tax on the $6,250 interest income as it
is below the standard deduction of $14,600 for 2024.
I also pay $0 tax on the $5,750 capital gains, as it's under the $47,025 limit (below which you pay 0% capital gains tax).
Did I do that right?
THANK YOU so much!!