Co-Ownership, Estates and Trusts Taxability of Income of Trusts

Taxable to the “Trustee” if:

CO-OWNERSHIP -​ If the income is to be accumulated or held for future
-​ Article 484 provides that there is co-ownership distribution, whether ordinary income or gain from
whenever the ownership of an undivided thing or right sale of assets included in the corpus of the trust.
belongs to different persons. The portions belonging Imposition of the tax is not affected by the fact that
to co-owners in the co-ownership shall be presumed the ultimate beneficiary may be person exempt from
equal, unless the contrary is proved. tax. The income of a trust administered in a foreign
In taxation: country is taxable to the trustee.
-​ There is co-ownership when two or more heirs or
beneficiaries inherit an undivided property from a Taxable to the “Grantor/Trustor” if:
decedent, or when a donor makes a gift of an -​ Any part of the corpus or principal of the trust may be
undivided property in favor of two or more donees. revested to the grantor (Revocable Trust).
-​ Co-owners are taxed individually -​ Income of the trust may be held or distributed for the
-​ When inherited property remains undivided for more benefit of the grantor.
than 10 years and no attempt was ever made to
divide the same among co-heirs, nor was the Taxable to the beneficiaries if:
property under administration proceedings nor held in -​ If the income is to be distributed to the beneficiaries.
trust, the property should be considered owned by an Beneficiaries include in their return, their distributive
unregistered partnership, consequently taxable as share in the net income.
corporation.
CLASSIFICATION OF TRUSTS
INCOME TAX OF AN ESTATE 1.​ Ordinary Trusts- income and corpus of the trust do
-​ Refers to the tax on income received by the estate not revert to the grantor. Ordinary trust is any of the
during the period of administration or settlement. following trusts:
Estate- mass of all property, rights, and obligations of a ●​ Trust where the income is accumulated or
deceased person which are not extinguished by his death, held for future distribution under the terms of
including those which have accrued thereto since the opening a will trust.
of succession. ●​ Income is to be distributed to the beneficiary.
Judicial Settlement- pertains to settlement of an estate in a ●​ Where income is accumulated for the benefit
court proceeding. of unborn or unascertained person or
-​ Fiduciary/trustee files the ITR and pays the tax due persons.
thereon. ●​ Income collected by a guardian of an infant is
Extra-judicial Settlement- heirs or beneficiaries settle for held or distributed as the court may direct;
themselves the distribution of the estate or their inheritance. and
-​ Heirs/beneficiaries file the ITR of the estate and pay ●​ Trust where the income is at the discretion of
the tax due thereon. fiduciary may be either distributed to the
beneficiaries or accumulated.
Deductions from the Gross Income of an Estate and 2.​ Revocable trust- trust where at any time, the power
Trust to revest in the grantor, title of any part of the corpus
-​ Deductions from the gross income of an estate and of the trust vested.
trust are the items of deduction(business expenses) 3.​ Employees’ Trust- income tax shall not apply to
allowed for individual taxpayers. Special employee’s trust which forms part of pension, stock
deductions(Income distribution from a taxable estate bonus, or profit-sharing plan of an employer for the
or trust) is also deductible. But, taxable to benefit of some or all of his employees. Income of an
legatee/heir/beneficiary. employee's trust is exempt from the payment of final
taxes as well as income derived from the sale of real
Termination of Judicial/Extra-judicial Settlement property whose funds are sourced from the
-​ After termination of settlement and the heirs still do employees’ trust fund.
not divide the property but instead enter into a Requisites for exemption of Employee’s Trust:
partnership, they are liable to pay Corporate income ●​ Benefit for Employees: The trust must be part of the
tax. employer's pension, stock bonus, or profit-sharing
plan benefiting some or all employees.
TAXATION OF TRUSTs ●​ Contributions: Contributions to the trust are made
Trust- right on property, real or personal, held by one party by the employer, employees, or both.
for the benefit of another. It also refers to a legal instrument or ●​ Purpose: The contributions are intended to provide
device whereby a person called Trustor/Grantor delivers part employees with the accumulated earnings and
of all his properties to another person called Trustee/Fiduciary principal of the trust as outlined in the plan.
who administer and manage the properties for the benefit of ●​ Exclusive Use: The trust's corpus cannot be used for
beneficiaries. purposes other than the exclusive benefit of
-​ May be arranged inter-vivos or created by will under employees until all liabilities to them are fulfilled.
which title to a property is passed to another for
conservation or investment with the income therefrom CONSOLIDATED INCOME TAX RETURNS (Two or more
and ultimately the corpus(principal) to be distributed trusts)- Where two or more trusts is created by the same
in accordance with the directions of the creator as trustor and the beneficiary is the same person, rules shall
expressed in the governing instrument. apply:
-​ Subject matter of the trust must be clearly identified.
Parties to the trust 1.​ Tax on consolidated income is divided among trusts
1.​ Trustor/Grantor- who created/established the trust. based on their share of the total income.
2.​ Trustee- One in whom confidence is reposed as 2.​ Each trustee is responsible for paying a portion of the
regards property for the benefit of another person. tax, calculated based on the ratio of their trust's
Fiduciary- any person or corporation that holds in taxable income to the total consolidated income.
trust an estate of another person or persons.
3.​ Beneficiary-Person for whose benefit trust is created