Sally transfers property to a revocable trust. Under the terms of the trust agreement, Allison is to receive income for ten years at which time the remainder is to go to Tom. During the year, the trust earns $10,000 in corporate bond interest income and recognizes a capital gain of $20,000. The interest is distributed to Allison and the capital gain is properly allocated to principal. Allison (not Sally)will pay tax on

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The trust is a revocable trust, which means that Sally can change or revoke the trust at any time. As a result, the trust is not considered a separate taxpayer, and the income and capital gains of the trust are taxed to Sally. However, under the terms of the trust agreement, Allison is to receive the income from the trust for ten years. Therefore, Allison will pay tax on the $10,000 of interest income that she receives from the trust.

Sally Transfers Property to a Revocable Trust