Reyes contributed assets to a trust and designated daughter Maria as the income beneficiary and grandson Julio as the remainder beneficiary. This year, fiduciary accounting income was $50,000. The trustee paid $5,000 of this amount as Julio's high school tuition. Reyes pays Federal income tax on $5,000 for the year.

Question

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The grantor of a trust is taxed on the trust's income if the grantor retains any interest in the trust. In this case, Reyes designated his daughter as the income beneficiary, which means that Reyes retains an interest in the trust. Therefore, Reyes is taxed on the trust's income, even though the income was paid to his daughter.

Reyes Contributed Assets to a Trust and Designated Daughter Maria