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What is Rule 643b and how does it affect you?

Maintaining, growing and distributing income is an important topic for anyone associated with trust. A trust is a legal instrument where one party, the trustor, gives another party, the trustee or trustees, the right to hold title to certain property or other financial assets. Trust is normally set up so that the trustor has certain legal protections, and simultaneously to pre-plan for the distribution of assets once the trustor passes. Although trusts are common for attorneys to draft, it is vitally important that all parties to the trust follow IRS rules, and that the trust is set up with the utmost of care. The drafter should allow flexible conditions for changing a trust in the future as well, as trusts are often created, decades in advance of a trustors death.

Reasons for creating a trust

There are a number of reasons for creating a trust:

  1. Avoiding probate disputes after a trustee dies.
  2. Creating a revocable living trust in advance of mental incapacity or long term hospitalization of the trustor.
  3. Control by the trustor. Many elderly parents for example, wary of their children’s tendency to spend money quickly and irresponsibly, or concerned about the age and maturity of the trustee set up the trust so they can have control later over how the money or assets are spent.
  4. Creditor protection
  5. Tax and estate planning.

Distribution of assets

Because trust is, in essence, a pre-will as well as a way of managing and distributing assets prior to a trustors death, the IRS pays particular attention to how and when assets are distributed to trustees prior to their death. There are many rules, but one of the most critical is understanding IRS rule 643b.

Because a trust may simultaneously generate income as well as to distribute assets from the principal, it is important that a trustee consider carefully if the beneficiary of a distribution of assets will be considered a distribution of taxable income, or whether such a distribution will be considered a tax free distribution of principal. IRS rule 643b clarifies the distribution of assets as well as their taxability.

DNI (Distributable Net Income)

Distributable net income is the maximum amount received by a beneficiary that is taxable. Beyond that, the remaining income is tax-free. The timing of the distribution is also important. IRS rule 643b determines taxable income as well, defines certain distribution policies, and defines exemptions for estate, marital and gift tax.

Form 1041

The primary trustee to a trust must complete form 1041 and forward it to the IRS every year. This is how to government keeps a trust honest and avoids trusts for purposes of tax avoidance. The trustee has a fiduciary responsibility to all the beneficiaries, as well as to himself to complete Form 1041 accurately and completely.

Who to turn to in creating a trust

Once the decision is made to create trust, most people rush to an attorney, and there are many boilerplate trusts out there in the legal world. But is a boilerplate good for your particular situation? Is there a possibility in the future that one more beneficiary may go to court to protest the decisions of the trust? Is the trust set up to provide the maximum, tax-free assets allowed under the law? These are the reason to turn to asset and trust specialists like the folks at EconomicStrategist.com. Professionals who are exceptional at helping you protect assets. If you need help with trust, give them a call at 888- 514- TRUST.

Author Bio:

Aditya has been working as a digital marketing expert and consultant for over 10 years. He has seen the world of internet marketing evolve from its infancy and has a strong grip on techniques and concepts that help him provide the strongest solutions that provide measurable results. He lives & breathes marketing and likes to research and stay up to date on the latest developments and techniques which makes him one of the best marketers around. Besides marketing, Adi likes to travel and spend quality time with friends and families and participates actively in adventure sports.

 

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