0:02 Today on Trust and Estates Weekly, my guest is going to be Kuang Lee, and we're going to be talking about the difference between trust accounting and tax accounting. Stay tuned.
0:16 >> Who are you and where are you going? What do you want? Hello and welcome to Trust and Estates Weekly. I'm your host, Kevin Bemmel, and I'm here every Monday at 10:00 a.m. Pacific time to talk about estate planning and trust and probate administration. Both from the standpoint of people like my guest, Guang, and me who do this professionally. this is what we do for a living. But also for those of you who
0:53 maybe you were appointed the trust trustee of your parents' trust and and now or you were appointed I should say the uh successor trustee and now you're having to step into that role. This is not what you do and you're trying to figure out how do I you know properly discharge my my responsibilities. So hopefully this will give you some information so you can better handle things and and speak to your uh your advisors in a more cogent fashion. So today I'm happy to introduce Kang Lee.
1:29 Uh Kang and I met at the STEP LA conference back in in the summer and uh we we struck up a a friendship and and a professional uh relationship. Um and um you know talking to him about some of the you know concepts with which he deals I said hey got to have you come on the show and talk about these things. We get lots of lawyers on Trust and Estates Weekly. uh fewer accountants, you know, um and so this this will, I think, be a particularly good show for you to watch
2:04 to to get a handle on some of these especially some of the more complex uh accounting issues. So, so Kang, thank you so much for uh being my guest today on Trust and Estates Weekly.
2:18 >> Oh, hi Kevin and everybody. Uh thanks so much for having me today.
2:23 >> Yeah.
2:23 >> Yeah. So start out if you will just tell us at least a little bit about yourself so people can get to know you.
2:31 >> Sure. Yeah. My name is Kung and I'm the owner and founder of Lee CPA Inc. We are a strategic tax and advisory firm focusing on business owner, entrepreneur, uh high network individual and startup accounting and we provide proactive tax planning to manage the wealth and for multi-state uh planning organization to preserve wealth for the family and for the generation to come and we deal with trust and estate on a basis too. Yeah,
3:02 >> absolutely. And you're based in Florida if I recall, right?
3:07 >> Correct. I'm in Bocaraton, Florida.
3:09 >> Okay. Um, and your your practice is centered on Florida. It's national. Talk to us about that if you would if you wouldn't mind.
3:17 >> Right. So, my firm is a hybrid firm. We have a headquarter in Bocaraton, but we serve the client nationwide and we also have international client as well.
3:27 >> Okay. Very good. So, so let's kind of get down to this this core question. You probably most people or maybe all the people watching, you know, they've had to file a tax return, right? They they have their W2 or whatever. Um, so they they may be they may have some level of familiarity with with tax accounting, but that's really, you know, from the conversations we've had, that's really a different animal than uh than trust accounting. So highlight, if you would,
4:02 what you think are the key distinctions between those two forms of accounting.
4:09 >> Right. So when people think about tax caring and trust accounting, normally people just say, "Hey, if I have a dollar of income, then it should be my $1 income." But trust accounting is totally different than tax caring. Tax accounting uh regulated by the federal. But the trust caring regulated by different state. So if you have a state law in New York or California, the state accounting has to be different than the the trust that you have open in Florida. So we Kevin and as a lawyer have to verify on term but then we as an accountant we also have to read the
4:45 trust instrument to decide hey which item should be calculated at the trust income and what should be allocated for the taxable income to report on the trust return. So that's a highlight major differences and some item could be trust considered trust income but for the federal level it could be considered package zam income. So we have to go into the deep of accounting and separate though
5:11 >> and and so so from the from the trust standpoint in fact what what might be income for an individual is actually not income at all. Am I understanding that correctly?
5:25 >> That is correct. So let's just say for an example municipal bond for the trust consider trust income because the trust receiving that income but for the trust and the beneficiary we can consider that uh tax exempt income. So for the federal purpose that you receive a $2 municipal interest that income for the trust only but on the tax return is a $2 but exam. So you have zero dollar and it's also leading to another item consider distributable net income which also
6:01 affecting how the trust calculate the taxable income and how much tax liability reported on the return.
6:07 >> Okay. So maybe we we should have distinguished here um at the beginning. Are we talking about um you know a revoke are we talking about an irrevocable accounting for an irrevocable trust where in essence the trust itself has to file a tax return. Um or are we talking about like a you know a grantor trust where even though it may be irrevocable for tax purposes it's you know it's considered as if it isn't there and so
6:42 whatever is happening within it really kind of you know floats through to the grtors um at least while while they're alive. talk if you would about those distinctions from a from an accounting standpoint so we can make sure that uh at least I'm not getting confused.
7:04 >> Correct. So that typically there are two different distinction between a revocable trust and nonrevocable trust or some people refer as irrevocable trust. So for the revocable trust or grant trust and all the income you consider grantor income. So it could be reported directly on the grtor income on the grtor personal type return and sometime if the grtor have too many item of income they can choose to file their own trust return but it doesn't mean the trust have to pay taxes is will issue a grant letter to the grtor to report it
7:41 on their personal income tax return. It's just easier for the grtor to manage your assets and manage your income on a separate return for a carrying purpose. On the other hand, the ear book of trust have to file required to file a separate type return if they have more than $600 of annual income. And this is where we all have to accounting for every single dollar that reporting. And sometime if the trust have only limited of assets holding very limited of uh income generate assets then you may or may not have to file a separate return for an
8:17 irrevocable trust even though it's required for $600. If they making less than $600 then we don't have to file.
8:25 >> Okay. So so already I'm learning new things here. So with with a revocable trust, one is not required to file a return, but one could do so. Um I guess as you you were saying if it makes handling the accounting easier. So
8:45 >> correct.
8:46 >> That's that's that's that's so if maybe give us an example of where that might be the case uh so people can have a sense of that.
8:56 >> 100%. So let's just say if the client had 10 different assets and nine of them were assigned to a revocable trust and this person also have two separate accountant to handle for them. Let's say I don't know about the trust tax return then I say hey you may need somebody else to file a trust tax return for you. I only handle personal return. So that if the client find another trust accountant to handle proper management of that one to make sure that all the asset under the trust have been accounted for the accounting income and
9:31 taxable income for federal purpose to report it. So it's make it easier for them in that case
9:39 >> and and so the the return now even though it's a revocable trust if if it's reporting
9:49 >> um if if if if you're doing a return for that revocable trust, do all the same rules of trust of trust taxation apply to that revocable trust even though in the end whatever income that has to be reported and on which tax has to be paid is going to be handled by the grtor or is it handled in essence as if the trust isn't there even though you're you're doing that that tax return for the trust?
10:21 >> There's a different rule for revocable and non-revocable trust. uh we typically when we file a return for revocable trust most of the time it's for the admin purpose and for the management of the assets only there's no different between the tax bracket for a revocable trust type because on the income report on the revocable trust will be passing on the grtor. So the granter at a regular tax bracket will be paying tax on owned income reported by revocable trust which they issue a schedule
10:56 a letter to the grtor and then the personal accountant for the grtor received that letter and then inputting all information on a personal return. So there's no different between the revocable and the personal income tax return.
11:11 >> Gotcha. And and that that letter is that kind of like a K1 that you might get from you know like an an LLC or something like that where they're reporting whatever is the the the income that the you know individual taxpayer needs to report. Is that kind I mean I'm not saying it is a K1 but is it similar to that? No, it's it's in a similar fashion. A schedule K1 showing all the income and profit coming from the entity but the grant letter also stating all the income produced by the state. The format is look different but they also say the grant letter on top of the pages
11:48 so it easier for the grtor to identify own item that's supposed to be reported on personal return.
11:54 >> Gotcha. Gotcha. Okay. So then switching back over to the non-revocable trust. So if it has more than $600 of income, it has to file a return. Now, is that income gross income? Is that net income? In other words, how how was it how what type of income does it have to be to meet that that $600 threshold?
12:20 >> The $600 threshold is a gross income before deduction. So even if you have a 601 from the interest income, then you have to report 601 and then you have the deduction of $600 on that one. So basically you be have a taxable income of only $1.
12:38 >> Okay. Wow. Okay. So So unless you've got very very small assets in a non-revocable trust, it sounds like it's you're you're going to be having to uh do a a tax return for it.
12:53 >> Correct. And I normally recommend people to file even though they may not be requiring to file because we want to keep track of pay what what asset generate income for them or this could be relating to their financial planning if the grtor want to reallocate the investment to making more income in the future instead of keeping track of profit and loss of each investment as well.
13:19 >> Gotcha. So, um, oh, shoot. I I I had my follow-up question now went away. Um,
13:27 >> so let's say that it's a nonrevocable trust and and let's just take a simple example. It it had, you know, $20,000 in net income um at the end of the the the tax year.
13:44 >> Uh, and it distributed all 20,000. Okay. Then uh presumably though it's it it still has to file a return. Um but if if it what happens from a tax payment standpoint if all the income is distributed
14:06 >> correct and before I answer this one that's also a different kind of e reokeable trust from the simple to complex. So if the trust instrument saying everything is taxable at the grtor or beneficiary level and the trust required to distribute on the net taxable income
14:25 >> then it being taxed differently. If the trust is considered a complex trust and they saying the trust have to pay tax on the capital gain then of the 20,000 assuming if the 10,000 capital gain then the trust is paying tax on that 10,000 of capital gain
14:43 >> and the other 10,000 will be passed on to the beneficiary to pay at their own personal income type bracket. So it's getting more interesting and more complex for the accountant to calculate and saying hey we have to re-examineize the trust instrument to say hey is this belong to capital income so that the trust will be paying tax on that or is considered ordinary income that we have to pass it on to the beneficiary.
15:11 >> Oh okay. So so um it let's say so let's let's let's go with kind of your example. Let's say $10,000 of the income was capital gains
15:24 >> and and it was required to be taxed at the trust level and the other $10,000 was you know in essence ordinary income that had to be distributed
15:34 >> when the $10,000 capital gain is distributed to the beneficiaries or or I guess the whatever the whatever the after tax amount is of that 10,000
15:47 >> right
15:47 >> what happens from a tax standpoint to those funds, right? I'm do we have in essence a a double taxation situation like we would for example when a corporation pays dividends or is it the case that well since it's already paid taxes at the trust level so now in essence it's distributed to the beneficiaries with no further tax obligation or is there some other you know way of that the IRS looks at it that you know is is is beyond uh you
16:22 know the way normal people think.
16:24 >> Correct. Then it's also leading to another like interesting uh question on the accounting for the trust is that consider up to distribution they could consider hey a portion of that corpus meaning the initial investment of the grtor. So that 10,000 after you assuming 2,000 of types were paid now you have 8,000 and if up to 8,000 2,000 of that will consider corpus. So the beneficiary only paying tax on 6,000 instead of eight. So that's another level of taxes that we have to consider. But if this
17:02 8,000 will only consider distributable net income, then the beneficiary may not be paying any taxes further because it's only paying tax at the trust level.
17:13 >> Okay. So, so at least in concept uh trusts are not subject to double taxation the way uh corporate dividends typically are.
17:26 >> Correct. Yes. And we try very careful to accurately calculate for own income and what is considered taxable income. And that's why the K1 from the ear trust will edate those number.
17:40 >> Gotcha. Gotcha. Okay. Let's take a quick break for a sponsor and we'll come back and talk about this some more.
17:45 >> Thank you.
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18:27 or visit magnumprops.com. Okay. So uh you were talking about a situation where the trust document uh in essence requires that uh ordinary income be distributed versus you know capital don't have to be. So talk if you would how different requirements within the trust document itself may or can affect
19:03 uh how the the the income the trust generates is taxed. So I could imagine, you know, we could have uh a non-revocable trust that gives the trustee, you know, in essence very wide discretion over distributions no matter what the source of the income is versus one where the there you know it's it's very closely prescribed uh what it is the trustee has to do with respect to distribution. So how how does h how does
19:38 that work um you know as as we look at you know what may be taxable from the trust perspective
19:45 >> correct beneficiaries uh perspective. Yeah, also from the trust perspective or trustee perspective uh we had not that I think you as a accounting we have to examine the trust document as well and some trust they saying hey here's the allocation of initial let's just say give it a number a million dollar distribution each year regardless of income or losses that you trust generated and then for the accounting purpose we have to consider if we have a year with loss then we have to take out
20:20 the corpus to distribute to the beneficiary. Then in the year of loss there's no taxable event to the beneficiary own that loss will or can be retained at the trust level if it's related to capital loss or passing on to the beneficiary depend on how the trust structure and it's also depend on if the trustee has a power to change or amending the trust instrument to say hey each year we will be distributing differently or it's a fixed income or the fixed corporate distribution each
20:55 year and in the year that the trust have more income then a million dollar may not be taking out from the corporate but only from the profit that own the investment generated. So the corporate stay intact with the trust we only distributing the profit from the annual investment that generated by owned assets.
21:16 >> Okay. Uh, so what would be the case though if distributions were completely discretionary? So I I'll give you an example. I I I'm a trustee on a trust like that right now. Now
21:29 >> candidly, one could argue that the trust document was not very well written. That that's, you know, a different discussion. But um but um the the fact of the matter is um there is no direction in the trust document at all as to uh you know what happens with income whether it needs to be distributed or it needs to be held. It's it's a 100% at at my discretion. Now in this particular case there hasn't been anything to distribute so it doesn't matter right now but you know down the
22:05 road after I get things straightened out there will be funds available income available for distribution but it will still be 100% at my discretion. So how might that affect the tax picture of you know of a trust like that and again it is a non-revocable trust. So
22:26 >> well in the picture like that if there's no indication of corpus or profit then most likely only income will be considered taxable income to the beneficiary in the year of the distribution happen. So assuming in 2026 uh the trust producing income and then owns the distributable income distributed to the beneficiary then part of that should or maybe I should say owner should be considered taxable income to the beneficiary but if the trust showing a loss then there
23:01 shouldn't be any income to the beneficiary.
23:04 >> Okay.
23:05 >> So it's changing from one year to another. I don't have a fixed answer for that.
23:09 >> Yeah. It depend on how it's go out for the 2020, you know.
23:13 >> Yeah. Okay. So, so it it would just sort of year by year it would have to be examined.
23:18 >> Correct.
23:19 >> And and would what would you advise a trustee in a situation like that to do? I mean, presumably we wouldn't wait until the year ends to start talking about this uh because then it might be it might be too late or or maybe not. maybe you know distributions could be made you know in 2027 for 2026. So talk a little bit about what kind of uh you know forought or or planning should a trustee be thinking about uh you know in
23:54 a situation where it it is discretionary and is likely to be changing by year. So in the year and I always recommend my trustee or beneficiary to have a talk quarterly to plan ahead of time instead of waiting until December 31st is too late for tax planning you know right
24:13 >> so if we talk in the Q3 or Q4 and we anticipating nothing in Q3 but all of a sudden in October or November uh trustee or beneficiary expecting some last amount income coming in then they can off to have election ction of 65 day for the following year to distribute income of the current year. So if you anticipating Q4 of 26 with a big income and then there's no time to make a appropriate distribution then you can make election to distribute the amount of income from 26 65 day into 27. So
24:52 that's is another option that we can do to offset and then to avoid paying taxes at the choice level. Gotcha. Okay. Okay. So, so there there are some there is some leeway. I guess it sounds like that even if there's some uncertainty, as long as it's planned for in advance, it can be it can be dealt with in a a reasonably satisfactory way.
25:17 >> Correct. Yes. And that is why I re highly recommend we have a quarterly meeting with the trustee and the grtor and then the beneficiary. Yeah.
25:25 >> Yeah. Yeah. and and and that certainly makes sense. So going going kind of going back a little bit, we were talking about the difference between, you know, capital gains and and ordinary income to the trust. So
25:41 >> um I I want to talk if if we could a little bit more about what constitute capital what constitutes capital gains. I know there's been uh quite a bit of discussion um in in the in the media over the last I don't know I think maybe year or more over this idea of uh taxing uh what amount to unrealized capital gains. Um, and it strikes me from a trusts perspective, again, a a non-revocable trust perspective,
26:16 >> uh, when are capital gains taxable? Other words, does it have to be a recognized gain or or or maybe this is an area where unrecognized gains are already uh subject to tax and it's just because most people don't know it or don't talk about it, you know, we don't realize this is currently how things work.
26:39 >> Correct. Yes. And you bring a very interesting point Kevin. Uh as we know a lot of state are proposing tax on unrealized gain and then this for the trust accounting purpose we may have to recognize unrecognized game as a trust accounting income but for the federal level unrealized gain is not considered taxable income. So on the book for the accounting purpose and for the choice accounting purpose you may have to report a million dollar unrealized gains as part of the for the carrying calendar year in 26 that you have 1 million
27:15 unrealized gain but on the trust return for the federal purpose the a million dollar will be removed from the trust return. So there's no taxable to the beneficiary or to the trust.
27:27 >> Okay. So from from that perspective then there really isn't any difference in how capital gains are treated um between a trust and say you know an LLC or something like that there was not taxable until till they're realized
27:43 >> at this moment correct level we have not seen that and we hoping not anything changed anytime soon. Yeah.
27:51 >> Yeah. So um so then let's let's flip over to that state side. Um because uh most states uh don't have an estate tax.
28:05 >> Right.
28:06 >> Right. Um however, as anyone who's been around this business learns pretty quickly, there's a difference between estate tax and income tax on an estate. Right. Those are two separate things, right? Yes. So, uh, talk if you would from a state perspective
28:30 >> about those two different aspects. And I because you know on the federal level for example the uh you know the the rate at which um the highest tax tax tax uh rate kicks in on a on an estate is much much lower than it is for you know a regular person right and so that that's just that that's just the way you know the law works. talk about those kinds of issues if you would from a state perspective recognizing that there's you know 50
29:06 different states and of course each one has got its own set of you know its own government and its own kind of way of dealing with this but but maybe if there's if there's some general principles that people should be a which people should be aware or or maybe highlight a couple of states that you know that uh you know
29:27 >> you can contrast them in terms of how they handle things.
29:31 >> Correct. So, I mean, everybody when it come to income tax, everybody think of California or New York, but I think I want to bring up like New Hampshire or Tennessee because that's state that nobody pay attention to, but they have a very distinct income tax. So, assuming in New Hampshire you have dividend income on dividend only, but then you don't have income on other ordinary income tax. So when it come to trust type return we prepare at the federal level and we may or may not have to prepare another trust at the state level then we have to follow with all the
30:06 trust TR uh a state regulation on how each state recognize income tax in those state and then even in Tennessee as well they don't tax you on the regular income tax ordinary but they tax you on the investment income and we have to report separately for the trust and separately for for federal and then the state level.
30:30 >> So So when you say ordinary income to the trust mean you know the way at least the way I'm thinking about it and this may very well be a mistake or my short-sightedness but I it seems to me
30:46 >> a a trust only owns assets investments that are producing investment income. So, correct.
30:53 >> What kind of ordinary income might a trust generate that would um I guess not be subject to to taxation in Tennessee or am I or am I misunderstanding you?
31:08 >> Well, uh ordinary income for the federal definition, we can only use a federal definition in this scenario because each state they have a different definition. So for assuming the trust have own a share in the company in the asset that producing ordinary income and ordinary income meaning just regular basis or daily operation that generate income is different from the investment where somebody holding stock and then producing dividend or interest income. So those are portfolio income instead of considered being ordinary income and
31:45 some trust is qualified to hold a business and some trust don't. So it's not every single trust will have ordinary income and not every trust will have to report that.
31:57 >> Okay. So, so let's say we there's a trust that let's say it it it owns um I don't know an escorp which you know throwing off uh you know a net income like the business has net income right it's reported on a K1 so that would be ordinary income then to the trust
32:18 >> 100% yes and that's why we have the gap trust for the qualified trust for the business purpose and is there some exception that the trust can own an escort because the federal and the NDI follow very carefully on that one to allow and anything that the beneficiary or the trustee doing handling wrong it could become revoking the status of trust so that making the trust not be able to own an escort any longer
32:48 >> okay okay so let's take another example let's say that the trust owns um an LLC that owns a piece of income producing real estate. So the and and again let's say it has a you know a net income at the end of the year that that net income is is that ordinary income is that investment income presumably it's not portfolio income but
33:12 >> correct rental income could be we have to break down into two other category as well because in general rental income you consider passive income to everybody but in some case scenario where exception are met then that rental income could become active income or could be considered ordinary income or losses. So we had to verify hey what kind of rental they holding and what are the requirement or what are the factors that we have to consider before we reporting that rental income as a regular passive income or should it be
33:49 considered active or ordinary income for our purpose.
33:53 >> Okay. So, so again this is this is fascinating right because this is this has been an issue for quite a number of years now right that you know just a regular person owns a property um and in general it's considered passive uh income but if they're actively involved in the running of the property or the managing of the property so then maybe it it is considered uh active income but that's if it's owned by a person right so if it's owned by a trust uh who would have to be
34:29 >> uh um involved actively in the managing of that property in order for the trust to be able to consider the income it generates active. Are we talking about the grtors, the beneficiaries, both? Neither words what what would be the what would be the tests for uh for the trust being able to potentially call it active income
34:52 >> in those scenario we may have the trustee as a active management for the trust to bring that category from the passive to active income and then the trustee had to play a significant role getting involved with almost a day-to-day operation of the rental and to make sure that the to qualify for that status to change because other factor we have to get involved and even if you just like reviewing financial statement may not qualify you for that active in involvement. So you have to
35:28 get into high level services through that rental or you have to like do the repairs yourself putting on the work hour and then we have the lock saying what did you do to the rental on a daily basis you know so it's getting more and more complex
35:44 >> right so if if the trustee hires a property management company to handle day-to-day you know running of the property would would that most likely be kind of ipso facto he's not active enough in the management of it to qualify as act to qualify as an active income source.
36:03 >> Correct. In general, if the trustee hire a property management company, most of the time they may not qualify for the active status unless the property manager just uh doing coordination and then the trustee is the one actually performing the work and work more than more hour than the property manager then they may qualify. Again, we have to like consider own facts and circumstances, you know. Sure. There's no one single similar cases.
36:33 >> Yeah. And I I I will note at this point if you're looking below you there's a there's a you know a scroll on the bottom of the screen. This is not legal accounting or financial advice. Okay, we're talking general principles here. But your indiv you know you need to look at your individual circumstance. You need to talk to your accountant to make sure that you know whatever it is you're doing comports with the facts of the case. I feel like maybe I should have said that at the beginning but uh hopefully people are you know reading the scroll. I always recommend the trustee or beneficiary to document everything they do. So if they doing
37:08 anything at least they have the supporting document for whatever they want to claim on the tax return.
37:13 >> Got it. Got it.
37:14 >> It helps the supporting the audit defend as well.
37:16 >> Yeah. Yeah. Makes sense. Makes sense. Let's take another sponsor break and we'll we'll come back for more. Mhm.
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38:01 searching. Okay. So, you know, we've we've we've talked, I think, a uh about a number of, you know, issues that,
38:12 >> you know, we need to look at when we're doing the, you know, the the uh trust accounting. So, let's
38:20 >> talk about u from an from an um kind of a a more sort of day-to-day income standpoint. talk if you would let's say that uh um a trust uh and and and let's talk about it both from a revocable and an irrevocable standpoint. talk about when the trust let's say it let's take an example of real estate it sells the property or correct maybe it's it it does a you know 1031 um tax deferred exchange but it's done
38:56 at the trust level
38:59 >> what are what are the from the trust standpoint what are the tax consequences of of of a you know transactions of that nature Sure as a trust level we have to calculate what consider in the 1031 chain. Uh most of the time people forget about this could be they done the 1031 but that's the factor that involved with the 1031 chain. So on regular basis we have to review the document on the 1031 to see if they receive any consider uh the call
39:35 of boot
39:36 >> for that boot could become a taxable income even though for the purpose and the trustee and benefits thinking oh let's do 31 so we don't have to pay taxes but if they do a a certain if they receive money or they receive additional loan for the transfer then it could be part of like partial taxable income to the trust and eventually passing down to the beneficiary and in the 1031 chain if a portion of that will consider partial uh re realized gain then we have to consider hey is there any recapture
40:12 or for ordinary income to report on the trust as well.
40:16 >> Okay. So in in in many ways uh this the selling the outright sale of a property or the exchange of a property you know under IRC 1031 it it sounds like it's handled pretty much the same way it would be whether the you know the seller and buyer is a trust or whether it's just you know any a natural person or or some other kind of entity that there isn't any uh particular difference between the two In general, there's no particular differences between the two.
40:51 >> Yeah.
40:52 >> Okay. Okay. Um All right. So, so next question. Um let's say that uh you know, you've got a trust that owns a a big portfolio of securities, right? stocks, bonds, whatever, ETFs, you know, all the you know, all the things in
41:13 >> uh you know that a you know wealth advisor might advise you know the trustee to hold. Um, and you know, at the end of the year, you got that 1099, right, that comes out and and it's got it's got some uh, you know, uh, there were some uh, you know, income just, you know, whatever uh, interest dividends, but there were also some uh, short-term capital gains. There were some long-term capital gains realized, right? So you you could have easily you know
41:48 several different types of income uh at the again at the trust level. So what's going to happen with with you know with respect to the income that's reported and and let's say by the way that it's it's you know it's reported under the tax ID number for the trust. So it's from the IRS's standpoint and also any state taxing authority
42:11 >> from their perspective it's being reported by the trust. So what what happens with that income uh from an you know from an accounting and tax standpoint uh you know so that you know you're not getting these notices from the IRS or in California be the you know franchise tax board saying hey you you know you didn't do your taxes right.
42:34 >> Correct. Yeah. And uh when we have a big portfolio income like that you can consider other deduction that may related to that income. So for the accounting as we were saying is a there's a gross income and there's a deduct deductible portion. So assuming if the trust have a trustee and then the trustee fee related to that income then the trust may have additional deduction. So on the surface if you have let's say 10,000 of income but then you have a trusty fee of 4,000 then now your taxable income may be going down to 6,000. So not own income will be
43:10 considered taxable income to the trust or to the beneficiary and not own trustee fee are deductible at the federal level. So we if the trusty fee relates to the management of the income and how the income dictate or distribute to beneficiary then it may be deductible for the federal purpose you know and that's affecting the DNI the distributable net income to the beneficiary which also changing how much type the trust and how much tax the beneficiary have to pay.
43:42 >> Okay. So, you know, here's, you know, as I as I think and and I'm I'm trying to help people understand this by comparing it to, you know, an individual versus a trust. So, so, for example, as an individual, um, you know, might own a house and so I can, you know, deduct
44:04 >> uh interest on my mortgage payments. I can deduct property taxes, right? um I can deduct medical expenses if they're over a certain percentage of a adjusted gross income, right? But when I think about a trust, it's like, well, I don't, you know, if a if a trust owns uh, you know, a piece of a piece of real estate, does it get all the same deductions or or maybe more deductions than a natural person would that could potentially offset some of this income
44:39 or, you know, talk if you would about that. Um because I I I my gut is there's there's some complexity there um that that people may not be thinking about.
44:54 >> Uh correct. Yes. Uh normally that's another way for people to optimizing and utilizing the saw cap deduction at the moment. A lot of like personal if you your personal level income go over like four or 600,000 you cannot deduct so cap 40,000 which is why the law changes in 2026 and allow people to deduct the 30,000 of residential property taxes before 2025 is cap out 10,000 but the law changing in July 25
45:27 >> just real just when you say s you're talking about state and local taxes deduction at the federal level for state and local taxes just so people understand the term you're using.
45:37 >> Oh 100%. My my bad. So
45:40 >> no no state and local income tax we call it s cap. So that before 2025 most of the time people can only deduct up to like 10,000 of either real estate property or personal income tax at the state level and deduction if they choose to itemize deduction on personal income tax. And there's another way to change that is people putting real estate into a trust to go around that one because a lot of real estate have to pay more in property tax especially if the properties uh in Texas or Florida where the property tax is very high two or 3%
46:16 of the real estate property. So uh it's go it's another alternative deduction for the property tax to go over 40,000 deduction and then people can have like five six different trust to put five six different real estate to get maximize the deduction instead of just deducting all the real estate on personal return which is also cap out by the income level and also by the annual deduction limitation.
46:45 >> Oh so that's that's fascinating. So, so each trust has its in essence its own salt limit.
46:54 >> Correct.
46:55 >> Oh, and so yeah, so you could you have a a much larger total deduction available uh even though you know the trust may have all the same beneficiaries but because the trusts are individual entities so then they get their own their own salt deduction.
47:12 >> Correct. Yeah. Assuming if you can have deducted 40,000 on personal level and then the trust also own three of them now you have 120,000 deduction on the property taxes which is a very significant amount.
47:27 >> Sure. Sure. Well, we're we're we're coming up on our time here. So, uh, I guess maybe some some closing thoughts on, you know, this this topic that we've been dealing with, the differences between, uh, trust accounting and tax accounting. What, you know, kind of wrap it up for us if you would um, here in in in the last couple of minutes, uh, you know, of of the show.
47:53 >> Sure. Yeah. uh uh my recommendation to people is uh reviewing trust instrument with their lawyer and then reviewing financial statement for the trust accounting and tax accounting with their CPA or accountant to get a better understanding of if they whether they overpaying taxes or is there any new strategy they can utilize to trust to reduce their tax liability.
48:19 >> Okay. And I want to I I want to bring this up. Uh, wait a minute. Here we go. So, um, this is Kong's, um, website. Hope I have the right one. Yeah,
48:33 >> correct. This is the right one.
48:35 >> Yeah. And so for those of you um who would like to get in touch with Guang, look right down below you in the show notes and you will see the URL to his website and and you can see um you know he deals with uh visionaries, entrepreneurs. Um I I don't know if I can No, I can't scroll down here. Let me go over here. I'll I'll scroll down a little bit so you can see here's his areas of practice. um precision tax compliance defense strategic advisory and there's you know where you can get in touch you you can
49:10 subscribe um to uh to his newsletter. So um you know I I uh I encourage you Oops. What did I do here? Okay, let's see. Uh nope. I wanna I want to get out of this mode now.
49:28 >> Right.
49:29 >> Okay. There we go. Um, so, uh, if if if you want to get in touch with Kang, uh, you know, also his contact information is right below us in the show notes. I'm sure he'll be happy to speak with you about your situation. And, uh, I I you know, I I we were talking before the show and and and Kang was was kind enough to suggest that, oh, this will be old hat for you, Kevin, because you've been a trustee and all. It's like not not not not so much. Not so much. You can see there were things that came up that that I didn't
50:05 know about before. It's one of the reasons why I love talking to accountants because it's it's an area where there is there is so so much to know. Um and so I I learn a lot when uh when I have someone as knowledgeable as Guang on the show. So thank you so much for for joining me today. Uh I'm I you know I think you know May we've only scratched the surface so I'm going to have to have you back on uh maybe in a few months and we'll we'll we'll get out our picks and shovels and start digging up more uh you know more accounting strategies that we can apply to them.
50:41 >> Correct. Yeah. And even as accountant I deal with this on every daily basis but we can always learn new thing every day you know. So talking to more accountant, talking to more lawyer and more trustee, we can all learn about the new thing that we can compensate or change the way we reporting. So thanks so much for your time today, Kevin.
51:00 >> You're welcome.
51:01 >> Thanks everybody for listening.
51:03 >> Yeah, I'll have you hang tight for just a minute while I wrap things up and we'll talk offline in a moment. So folks, uh you know again um if you have uh questions, comments um you know you can you look down below you'll see links to social my social media. You can feel free to post those um if it's something if especially if it's on LinkedIn that's kind of my major uh social media platform on which I deal. Um if you want to tag Kang and so that uh maybe he he can chime in as well. Um, but I'm always happy to see your your comments, your criticisms, your questions, and I'll I
51:39 definitely will respond. Uh, but you know, don't don't don't hesitate. There's also my email address down there as well if it's something private and you don't want to, you know, post it on social media. Just understand that I'm not going to answer a question unless it's in my area of expertise. However, if it's if it's outside of that area, I will look, you know, I will be happy to refer you to someone like like Kang who can uh who can help you uh with with whatever it is you're trying to figure out. So, real quickly, schedule of shows. Mondays like today at 10 a.m.
52:14 Pacific time, trust and estates weekly. Tuesdays at 10 a.m. Pacific time, business lessons from the military. Wednesdays at 10:00 a.m. Pacific time, people making money. And then every other Thursday at 5:00 pm Pacific time, we'll have a cocktail and a schmoo. Join me at Jiggers's place where we talk about all kinds of things that are not related to finances. So lots of opportunities for us to be together during the week. So again, Kang, thank you so much for joining me today and and sharing your immense knowledge on this topic. And that just leaves me to sign
52:51 off as I always do and remind you, Marie darling, you are my bell.