Arthur Rich, a widower, is considering setting up an irrevocable trust (or trusts) with a bank as trustee for his three minor children. He will fund the trust at $900,000 (or $300,000 each in the case of three trusts). A friend suggested that he might want to consider a January 31 year-end for the trusts. The friend also suggested that Arthur might want to make each trust a complex discretionary trust. Arthur is a little apprehensive about the idea of a trust that would be complex. The friend warned that trust income should not be spent on support of the children.
Required: Prepare a memorandum to the tax partner of your firm concerning the above client matter. As part of your analysis, consider the following:
a. What tax reasons, if any, can you think of for having three trusts instead of one?
b. Why do you think the friend suggested a January 31 year-end?
c. What is your reaction to the friend’s suggestion about the year-end?
d. Which taxpayer, the beneficiary, the grantor, or the trust, is taxed on the income from a discretionary trust?
e. To what extent do trusts serve as income-shifting arrangements?
f. What can you advise Arthur concerning his apprehension about a complex trust?
g. Why did the friend warn against spending trust income for the children’s support?