Does this clause in a irrevocable trust I am trustee to allow me the legal right to make distributions of commercial rental income the trust produces to beneficiaries to avoid the trust paying high estate taxes on that income?

[fordescort12]

Does this clause in a irrevocable trust I am trustee to allow me the legal right to make distributions of commercial rental income the trust produces to beneficiaries to avoid the trust paying high estate taxes on that income? 

("POWER OF TRUSTEE: To make allocations, divisions and distributions of trust property in cash or kind, to allocate different kinds of disproportionate shares of property or undivided interests in property among the beneficiaries or separate trusts , without liability for or obligation to make compensating adjustments by reason of disproportionate allocations of unrealized gain for federal income tax purposes and determine the value of any property so allocated, divided or distributed")

[M-MTax]

That may cover it but it's talking about trust principal not income. Ask the atty who drafter the trust or someone who can look at the whole doc.

[fordescort12]

Thanks for your thoughts.

Can I ask why you belief the clause is referring to just trust principal?

I am not sure thus my posting this question and seeking thoughts from others like yourself,  but  my reading of the clause is that considering the clause states  ("the trustee can make distributions of trust property") which is rather broad and makes  no distinction between principal or income, it likely means the trustee can distribute income also the trust  produces, including rental income?

[M-MTax]

Because there's a separate clause in many trusts that addresses only income, like

After payment of all expenses of administering the Trust and maintaining the Trust Assets, any part or all of the net income of the Trust may, in the absolute discretion of the Trustees, be retained or paid to or applied for the benefit of the Beneficiary to be used in furtherance of the Purpose, at such intervals and in such amounts as the Trustees from time to time deem requisite or desirable and/or to comply with any applicable legal requirements. Any net income not paid or applied shall be added to and become a part of the principal of the Trust.

[fordescort12]

I appreciate your additional input.

In reply,  the trust document does not as you mention some clauses do, a seperete clause that addresses , but it does have a clause that addresses both principal and income, which is provided below.

(" THE TRUSTEE: Shall determine what shall belong and be chargeable to principle and what shall belong and be chargeable to income and in making that determination , the trustee may employ a accountant on his/ her opinion to amortize or refrain from amortizing bond premiums" )

With the above said, I have 1 final question,

I am not sure if the above clause, may have something to do with what you were mentioning in your previous response, but regardless would this additional  trust clause I provided along with the original trust clause I provided, give you more information to provide a more definite answer regarding  my initial question (since you were not 100% sure) which again  is do I have the right as trustee to make distributions of trust rental income to beneficiary's?

Thanks for your time and thoughts on the matter.

[fordescort12]

Sorry meant to say above in the 1st paragraph above,

" The trust document does not as you mention some trusts do, a clause that addresses just income, but it does have a clause that addresses both income and principal".

[M-MTax]

I'd say you're more than covered between the two. The last clause gives you discretion to decide what is income and what is principal so you can allocate accordingly and also distribute accordingly.

[jtax]

You should be careful here and I would strongly suggest seeking the advice of a trust attorney. This is a legal question and you may have liability as a trustee if you get it wrong.

While you may have to power to adjust (between income and principal), you have various fiduciary duties to the beneficiaries, such as being impartial. There are current and remainder interests that are usually in tension. If you adjust you will by definition be favoring one over the other. You may have that discretion. But you might not.

Also before you go adjusting income/principal, you probably need to understand what the state law governing the trust has a default allocation. This is usually covered in a state "Principal and Interest Act"

Usually you will find somewhere a clause saying what income or principal the trustee may (or must) distribute. That is the clause to look for.  As @M-MTax suggested. It would be very usual for there to be no such clause. It might even be legal malpractice to omit it. That would again be an issue of state law.

[fordescort12]

I appreciate  your thoughts.

When you state " Usually you will find somewhere a clause saying what income or principal the trustee may (or must) distribute. That is the clause to look for"

There is another clause in the trust document stating the following:

"THE TRUSTEE: Shall determine what shall belong and be chargeable to principle and what shall belong and be chargeable to income and in making that determination , the trustee may employ a accountant on his/ her opinion to amortize or refrain from amortizing bond premiums"

With the above said

1) Is this language , possibly language in the trust you meant I should look for?

2) If so and regardless,  does this  additional trust clause  in your opinion,  help better confirm  my initial question,  again being do I as trustee have the right to make distributions of commercial rental income the trust produces to beneficiaries to avoid the trust paying high estate taxes on that income (which FYI would be in equal  amounts to all beneficiaries)?

Please let me know.

Thank you

[jtax]

Sorry but that is boilerplate that does not help answer your original question. 

A critical concept is that trust accounting "income" has NOTHING to do with tax income. They are different things (with overlap).

What all the clauses you are quoting are about is trust principal and income accounting. In the old days most trusts had "current" or "income" beneficiaries and "remainder" beneficiaries. The current benes got things like interest and dividends, while the remaindermen got capital gains and whatever principal was left at the end (usually when the current benes died, but could also be a term of years or until a bene reached a certain age or whatever).

A ton of rules when into determining whether each and every item of income or expense was income or principal. Why? Because the benes would be different and the determination was critical to got what. 

Those rules still exist and you may have to deal with them when you (or your professional) does your annual trust accounting to the beneficiaries.  However most modern trusts work differently in part because modern portfolio theory (and company practice) lowers dividend payments in favor of appreciation. 

There are many ways to deal with that. There are "unitrusts" that distribute a certain % of trust assets to the current benes. Doesn't matter if there is income or not. Then there are discretionary trusts where the trustee has discretion to distribute or not. There also are ascertainable standard trusts where the trustee may (or must) make distributions for beneficiary's health, education, maintenance, and/or support (typically at the level of spending the bene was used to before the trust). They are ascertainable because a judge can review the distributions and the bene's financial records and determine if the distributions were too much or too little.

So you are looking for a clause that isn't in the general boilerplate trustee powers section. They could be something like this:

Section 5: Distributions during Joe's lifetime:

The Trustees may in their uncontrolled discretion at any time or times and for any reason pay any part or all of the net income and/or principal of the trust to any one or more of Joe, his wife, or his issue, whenever born, payments to more than one person to be made in such proportions among them as the Trustees see fit. 

or 

The Trustees shall pay all of the net income of trust trust to Hank.

Income might be defined. If not you look to the state act to tell you what income is. If you don't like that you have the power (you quoted) to adjusted as long as you are exercising your discretion with your fiduciary duty to all of the beneficiaries (current, remainder, contingent, unborn, etc.)

You are looking for something that allows (or requires) you as trustee to take money out of the trust and give it to benes. It is a bit complicated but to oversimplify if such distributions are not one or two time things (or charitable donations) but are recurring, for income tax purposes they will be considered to "carry out" trust taxable income to the benes. That is what you, quite reasonably, are trying to do. The trust gets a deduction on its 1041 for the income distributed  ("DNI") and the benes gets a k-1 showing the income, which they report on their 1040s.

[jtax]

Here's an idea. You could try posting the table of contents or the section/article headings (without any names). With that info we might be able to point you at a particular section.

[fordescort12]

In reply the trust has no such clauses or language that you mention  or any pertaining more specifically to income . 

With this said I do have 1  final question if I may :

I personally asked a tax consultant & attorney  if the clause in my trust ( posted below again ) gives me the legal right to make distributions of commercial rental income the trust produces to beneficiaries to avoid  the trust paying high estate taxes on that income, and they  told me (as I  assumed and  M-MTax above believes ) that considering the clause states ("the trustee can make distributions of trust property") which is rather broad and makes no distinction between principal or income, but  includes both since both are forms of trust property, it means I as  trustee can make distributions of income the trust produces, like rental income.

Can you clarify ( because you may be right and they may be wrong) and I want to try to understand this as best possible, why you do not believe the above trust language  gives me the right to make  rental income distributions as others reading and interpreting the language believe  it does ?

Thanks for your time and thoughts .

"POWER OF TRUSTEE: To make allocations, divisions and distributions of trust property in cash or kind, to allocate different kinds of disproportionate shares of property or undivided interests in property among the beneficiaries or separate trusts , without liability for or obligation to make compensating adjustments by reason of disproportionate allocations of unrealized gain for federal income tax purposes and determine the value of any property so allocated, divided or distributed")

[jtax]

I'm not saying that the adjustment clause you cite doesn't give you that power. Just that it is very unusual to rely on that alone for regular ordinary distributions.  Also we have not seen the whole document. What you quote is a boilerplate provision including in almost all trusts (and even if not included expressly, likely is a power you have under the trust's governing state law -- might not be the law of the state the trustee lives in). If there is a more specific clause describing what to do about regular distributions it would likely take precedence over a generic power to adjust clause. Especially were the "material purpose" of the trust to be favor the remaindermen. IMHO the original drafting attorney should have made this crystal clear. Not doing so is a disservice to the client.

All that being said, if you have legal advice from an attorney who regularly practices trust law in the appropriate state and knows the detailed facts of your case, go with that. Especially if you have friendly remaindermen.

[M-MTax]

Did you post this? https://answers.justia.com/question/2024/03/01/does-this-clause-in-a-irrevocable-trust-1004215

Agree with jtax that you should get legal advice from a local attorney and also agree with the answer given on that web site. The clause gives you VERY broad discretion that is not boilerplate in all trusts.......most limit the trustees' powers to something less than the authority as to what and how much to allocate and to which beneficiaries to make those allocations. If there are no overriding clauses that are more specific then that clause controls......rule of construction is specific clauses take precedence over general clauses.

[fordescort12]

Thanks for the link, but yes saw it already as that was my post to get a thoughts to my question from a attorney on that web site as I seeked on this forum and when I personally spoke to a tax consultant attorney.

With the above said can I ask:

1) When you say the said clause "is boiler plate" and  it contains  non specific language about  income, but nevertheless states ("the trustee can make distributions of trust property") which is rather broad and makes no distinction between principal or income, but includes both, since both are forms of trust property, and apparently means I as trustee can make distributions of income the trust produces, like rental income) I should be nevertheless  be assured this vague but broad clause gives me the right to make such distributions nevertheless?

2) When you say: "If there are no overriding clauses that are more specific then that clause controls......rule of construction is specific clauses take precedence over general clauses" WHICH MY TRUST DOES NOT CONTAIN in regards to trust income, distributions etc  ,

can I ask is my trust language abnormal since it does not contain more specific clauses in regards to trust income, distributions etc  , or in your opinion or is it normal to see such boiler plate, vague but broad trust clauses, dictate if such distributions are allowed as apparently is the case in my trust ?

Thanks for your thoughts