Question

XYZ establishes a secular trust for Bob. Which of the following is/are true?

I. Bob will be able to defer a portion of his current income.
II. The benefits will be subject to the creditors of XYZ.
III. The plan is an informally funded plan.
IV. Because there is no substantial risk of forfeiture, taxation will occur at the time the contribution is made.
A. I, II
B. IV
C. II, IV
D. All of the above
E. None of the above

Answer 1

In the case of a secular trust established by XYZ for Bob, taxation will occur when contributions are made to the trust because there is no substantial risk of forfeiture; hence, Bob cannot defer income. Therefore, the true statement is that taxation occurs at the time the contribution is made.

Step-by-step explanation:

When XYZ establishes a secular trust for Bob, several tax implications and protections from creditors are considered. Here are the statements evaluated for their truthfulness:

• Bob will be able to defer a portion of his current income. This is not true because with a secular trust, taxation occurs as contributions are made, so Bob cannot defer income.
• The benefits will be subject to the creditors of XYZ. This is typically false, as trusts are often used to protect assets from creditors, depending on the setup and jurisdiction.
• The plan is an informally funded plan. This is false; a secular trust is a formally funded deferred compensation plan.
• Because there is no substantial risk of forfeiture, taxation will occur at the time the contribution is made. This is true for secular trusts, as the taxation occurs when the trusts are funded, rather than when the benefits are received.

Therefore, the correct answer reflecting the true statements about a secular trust for Bob is option B. IV.