A trust that requires all income to be distributed on an annual basis.

A trust that requires all income to be distributed on an annual basis.

• A. Simple
• B. Testamentary
• C. Intestate
• D. Abatement

Answer: (A)

Trusts are categorized by how they handle income. A simple trust is required to pass all of its current income to the beneficiaries each year and cannot accumulate that income within the trust. Because the income is distributed, the beneficiaries report and pay taxes on it, rather than the trust being taxed on undistributed income. This exactly describes a trust that must distribute all income annually, which is why this option fits best. The other ideas refer to different concepts: a testamentary trust is created by a will, an intestate situation means dying without a will, and abatement concerns how distributions are reduced when assets are insufficient.

Trusts are categorized by how they handle income. A simple trust is required to pass all of its current income to the beneficiaries each year and cannot accumulate that income within the trust. Because the income is distributed, the beneficiaries report and pay taxes on it, rather than the trust being taxed on undistributed income. This exactly describes a trust that must distribute all income annually, which is why this option fits best.

The other ideas refer to different concepts: a testamentary trust is created by a will, an intestate situation means dying without a will, and abatement concerns how distributions are reduced when assets are insufficient.