A trust grants a noncumulative annual withdrawal right to the beneficiary equal to the greater of $5,000 or 5% of the trust corpus. Which tax implication applies?

A trust grants a noncumulative annual withdrawal right to the beneficiary equal to the greater of $5,000 or 5% of the trust corpus. Which tax implication applies?

• A. No tax implications, since the power is deemed de minimis.
• B. No tax implications, if the value of the power is less than $10,000.
• C. The beneficiary will be taxed on the withdrawal portion only if the power is exercised.
• D. The beneficiary will be taxed on the income from the withdrawal portion of the trust, whether or not the power is exercised.

Answer: (D)

A noncumulative annual withdrawal right creates a currently exercisable withdrawal power over a portion of the trust’s assets. Because the beneficiary has this power, the tax rules treat the portion of the trust income that would be distributed if the power were exercised as belonging to the beneficiary for tax purposes. In other words, the beneficiary is taxed on the income attributed to the withdrawal portion of the trust even if the withdrawal is not actually made. This is why the correct implication is that the beneficiary will be taxed on the income from the withdrawal portion of the trust, whether or not the power is exercised. The idea that the power is de minimis or irrelevant unless exercised does not apply here, since the existence of the power itself triggers the tax inclusion.

A noncumulative annual withdrawal right creates a currently exercisable withdrawal power over a portion of the trust’s assets. Because the beneficiary has this power, the tax rules treat the portion of the trust income that would be distributed if the power were exercised as belonging to the beneficiary for tax purposes. In other words, the beneficiary is taxed on the income attributed to the withdrawal portion of the trust even if the withdrawal is not actually made. This is why the correct implication is that the beneficiary will be taxed on the income from the withdrawal portion of the trust, whether or not the power is exercised. The idea that the power is de minimis or irrelevant unless exercised does not apply here, since the existence of the power itself triggers the tax inclusion.