Trust Income Taxation Legal System

Transfers of property and income occur frequently in a trust. Income tax should be imposed during these processes. Both capital and profits gain from it are taxable income of the trust. From the aspect of substantial imposing, income tax law emphasizes on substantial ownership rather than formal ownership. Thus normal trust, grantor trust, and fiduciary trust are the most important classification of trusts in designing rules of income taxation of trusts. The principle of income taxation of trusts includes: formal transfers have not taxable income; substantial beneficiaries pay the tax; levy tax when income is produced; charitable purpose trust and business trust should be entitled to tax credits. Rules of income taxation of trusts should be designed for every trust link. When a trust sets up, the substantial beneficiaries should pay income taxes for the properties they obtain through the trust. During the operating of the trust, in a normal trust the substantial beneficiaries should pay income taxes for the profits the trust gains adopting flow-through treatment, while in a fiduciary trust should be treated as a substantial beneficiary and pay the income tax, and a grantor trust shouldn't treated as a trust when collecting income tax. At the end of the article debates how to prevent the taxpayers from using trust as a tool of tax avoiding, most of the time, in a grantor trust or a fiduciary trust. The principle of substantial imposing is the most important principle in this part.