Trust and taxes

ron

Some of you may be a trustee of a trust and are aware of the tax issues. In 2013, "The maximum income tax rate for trusts with income over $11,950 increases to 39.6 percent. The 3.8 percent unearned Medicare surtax will also apply to trust income." Are there any thoughts or comments on how an irrevocable trust might be invested by a trustee or investment manager? My daughter and her husband have a trust with a sister as trustee and the account is at a brokerage. This is because the original insurance policy was cancelled and converted to cash.

msf

Like any other taxpayer, the trust can invest in stocks or tax-aware stock funds (that minimize capital gains and take care that all income dividends are qualified). It could also invest in muni bonds (or funds), though the trust would then be unable to deduct a portion of its expenses (in direct proportion to the fraction of gross income attributable to the tax-exempt income).

You may not be able to do this; it depends upon the terms of the trust. If, e.g. the trust were required to maximize current income for living expenses, then you might not be able to allocate investments this way. Or if the trust were obligated to manage the portfolio in a prudent manner (MPT), it might not be able to go all stock. For the latter, see:
http://www.law.cornell.edu/wex/modern_portfolio_theory
In that case, maybe VTMFX?

ron

I think a combination of tax free muny bonds/funds and equity ETF's which are tax efficient might be best way to go. Keeping income under the $11,950 amount is important.