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!!