Reference no: EM131211166
On January 1, 2015, Marjani transfers shares with a fair market value of $250,000 to a newly established inter vivos trust to benefit her 25 year old son, Naeem. The cost of these securities to Marjani was $80,000. During 2015, the trust receives a taxable dividend on these shares of $25,000, all of which is distributed to Naeem.
What are the tax consequences of these transactions to Marjani, the trust and Naeem?
a. The trust will report dividends received of $25,000 and will claim the dividend tax credit. There will be no tax consequences for Naeem or Marjani.
b. The trust will have no income. Naeem will report dividends received of $25,000 which must be grossed up and will claim the dividend tax credit. There will be no tax consequences for Marjani.
c. Marjani will report a taxable capital gain of $85,000 [(1/2)($250,000 - $80,000)]. The trust will have no income. Naeem will report dividends received of $25,000 which must be grossed up and will claim the dividend tax credit.
d. Marjani will report a taxable capital gain of $85,000 [(1/2)($250,000 - $80,000)]. The trust will report dividends received of $25,000 which must be grossed up and will claim the dividend tax credit. There will be no tax consequences for Naeem.
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