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Question for the Money Doctors

Question submitted on Feb 12, 2014.

Question

My uncle is paying for my childrens college. He set up an irrevocable spendthrift trust and makes payments from the trust to the university my kids attend.

Is the amount that my uncle pays the university considered income to my children? Do my children have to fill out a tax form to pay tax on it? They are both still in school and neither one of them have jobs.

Answer

It depends on how the trust was set up, potentially how much income the trust makes and potentially how much is distributed to pay for college. If your kids receive a federal form K-1 from the trust indicating the income that they were allocated, then yes, that would be income that they need to consider. If they receive such a form K-1, it will likely be interest & dividends. Then they must follow the rules at this link to determine whether they have to file an income tax return:

http://www.irs.gov/Individuals/Do-You-Need-to-File-a-Federal-Income-Tax-Return%3F-


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