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Big Data About How Trusts are Used Today
Cengage
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Contributing Author: William A. Raabe

We associate the trust device with high-income and high-wealth individuals who put aside financial assets and shift income to children, such as to provide for a college education, or to other relatives, such as to provide for expenses related to living with a long-term illness, or to others who are designated to live a “rich person’s” lifestyle.  The “trust fund baby” or “living off of Mom or Dad’s trust” are the basis of many characters in soap operas and romantic novels and movies.  Without offending anyone in your class, you might inquire whether anyone knows of someone who is living off of an income provided by a trust, and how that condition seemingly affects life choices that the beneficiary may make.

I don’t live in the fast lane, and I don’t think I’ve known an acquaintance or had a student who was living off the income or corpus of a fiduciary entity, even over many years.  So I wondered whether the clichés found in many Hallmark and Lifetime movies, and in the typical airport bookstore novel, actually existed. 

My initial impressions followed the assumptions above, although most of the talk among financial advisors today involves funding an education plan for children and grandchildren with tax-favored devices such as trusts for minors and §529 plans.  Similarly, retirement and succession planning discussions today seem to revolve more around the use of QTIP trusts, revocable trusts, and split-interest trusts involving charities as co-beneficiaries.  Especially in the case of multiple marriages and children from more than one marriage, family partnerships and contractual joint ownership devices seem to be favored more than might be a traditional trust.  Are our impressions about the number of trust devices and who uses them still accurate?

Some current data summarized at the Tax Stats pages of irs.gov might lend some light on these questions.  Ask your students to find this dataset[1] as the basis for a discussion that relates to the text chapter about Subchapter J tax matters.  Most of the data relate to 2014 Forms 1040 that include income from Schedules E for individual beneficiaries.  Data there also relates to income that is generated from estates, but those tax entities are a small subset of the Schedule E reporting and do not skew the discussion.  Start with a basic review of the data in the realm of “how to read this table,” and do not assume that your students will do a good job of this the first time or two in assessing what they have found.

Have your students verify the following statements and observations.  Then moderate a discussion of how these data compare with the impressions that the students may have held before doing the research, and how the research results might be used as a practice development device by a tax professional who maintains a practice that includes individuals of some wealth.  With a bit of luck, you might bring into class as a guest speaker an alum who works in wealth planning or serves a clientele of high net worth individuals and can comment on experiences and trends in the use of fiduciary entities.

  • About 625,000 Forms 1040 report income or loss from fiduciary entities. Is this number higher or lower than you thought it would be, given a universe of 150 million Forms 1040 being filed?
  • About ninety percent of those Forms 1040 report gain/income, not loss. Does the history of the stock market for this period support this result?
  • Net fiduciary income that passes through to individual beneficiaries totals about $30 billion, with a resulting tax likely of about $10 billion. Are these amounts higher or lower than you thought they would be?  If they are lower than expected, might this be due to effective tax planning by individuals?  Or some other reasons?  Like what?
  • Income/loss from fiduciary entities is highly correlated with income levels. Recall that capital gain income similarly is correlated with income levels, and even more so than is demonstrated here; most individuals are “in the stock market,” but at lower- and middle-income levels this is accomplished by using retirement vehicles such as qualified pensions and §401(k) plans that do not generate current gross income for the individual.
  • Income/loss from fiduciary entities is not correlated with income levels on a straight line; the relationship looks more like a normal distribution, with fiduciary income falling after AGI reaches $200,000. Why does this happen? Does “the one percent” use other devices to hold assets and distribute/shift income therefrom?  Like what?  Probably proprietorships and partnerships, hedge funds, and other direct equity investments.

[1] Chiefly Table 1.4 of Publication 1304, Individual Income Tax Returns, Complete Report.

 

SWFT Chapters             

Corporations, Chapter 20

Comprehensive, Chapter 28

 

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William A. Raabe, Ph.D., CPA, was the Wisconsin Distinguished Professor of Taxation. He taught at Ohio State, Arizona State, the Capital University (OH) Law School, and the Universities of Wisconsin – Milwaukee and Whitewater. A graduate of Carroll University (Wisconsin) and the University of Illinois, Dr. Raabe’s teaching and research interests include international and multistate taxation, technology in tax education, personal financial planning, and the economic impact of sports teams and fine arts groups. Dr. Raabe also writes the PricewaterhouseCoopers Tax Case Studies. He has written extensively about book-tax differences in financial reporting. Dr. Raabe has been a visiting tax faculty member for a number of public accounting firms, bar associations, and CPA societies. He has received numerous teaching awards, including the Accounting Educator of the Year award from the Wisconsin Institute of CPAs. He has been the faculty adviser for student teams in the Deloitte Tax Case Competition (national finalists at three different schools) and the PricewaterhouseCoopers Extreme Tax policy competition (national finalist). For more information about Dr. Raabe, visit BillRaabeTax. com and BillRaabeTax on YouTube and Twitter.