Section 11.20 Federal Income Taxes

• Library: Trusts and Powers 2013 Supp

C. (§11.20) Federal Income Taxes

Income received from the custodial property is vested in the minor regardless of whether the custodian distributes the income to the minor. Section 404.007(6), RSMo 2000. Custodial bank accounts and brokerage accounts should carry the minor’s tax identification number. The income should be reported on the minor’s federal Form 1040, U.S. Individual Income Tax Return, available at www.irs.gov/pub/irs-pdf/f1040.pdf. Federal Form 1041, U.S. Income Tax Return for Estates and Trusts, available at www.irs.gov/pub/irs-pdf/f1041.pdf, fiduciary return is not required nor is one appropriate. If part of the income from custodial property is distributed to the minor’s spouse or child, the income from the custodial property is nevertheless included in the gross income of the minor because it was the minor’s income under § 404.007(6) when received by the custodian. Under analogous trust rules, if part of the custodial income is used to satisfy a legal obligation of the minor, the income is treated as belonging to the minor although distributed to another person. For example, if a trustee uses trust income to make child support payments to the beneficiary’s divorced spouse, the income under I.R.C. § 662 and Treas. Reg. § 1.662(a)-4 is included in the gross income of the trust beneficiary and not in the gross income of the divorced spouse.

If the donor creating the custodianship is the beneficiary’s parent, any use of the custodial property by the custodian to furnish the minor with support that the donor/parent is legally obligated to provide will result in an attribution of income to the donor/parent even if the decision to furnish support is made by an independent custodian. Rev. Rul. 56-484, 1956-2 C.B. 23; Rev. Rul. 59-357, 1959-2 C.B. 212; I.R.C. § 677(b). The MTML tries to avoid adverse tax consequences by making it clear that any expenditure by the custodian for the minor is not in satisfaction of the parent’s obligation of...