Section 280-RICR-20-55-7.8 - ExamplesA. Situation A: The will of a resident individual establishes a discretionary trust. During the lifetime of the wife (W), income (except capital gains) may, in the discretion of the trustee, be paid to W, the son (S), the daughter (D) or any issue of S or D, or the income may be accumulated. On W's death, the principal is to be distributed in equal shares to S and D or to the issue of either if S and/or D are not living at that time. Thus, the trustee has a discretionary power to distribute accumulated income or principal to W, S, D or to any issue of S or of D. 1. During the year all of the income except capital gains is currently paid to W. The trust realizes $1,000 of long-term capital gains and retains those gains.a. WHAT IF: W and S are Rhode Island residents and D resides in another state and is not a Rhode Island individual?b. ANSWER: Since presumptively the principal will ultimately pass in equal parts to S and D (one of whom is a resident individual and the other is not), the capital gains are therefore being accumulated one-half for a resident and one-half for a nonresident. Thus, one-half of the retained income (capital gains) is subject to Rhode Island personal income tax and a RI-1041 Form is required to be filed. The fact that W is a resident individual is immaterial concerning the capital gains because the principal will eventually go to S and D.c. WHAT IF: W resides in another state and is not a Rhode Island resident; S and D are both Rhode Island resident individuals?d. ANSWER: Since all of the capital gains are being accumulated for future distribution to persons who are Rhode Island resident individuals, the trust is therefore considered a resident trust with respect to the capital gains and a RI-1041 Form is required to be filed as it pertains to the retained income (capital gains).2. During the year the trust receives $10,000 of income and realizes $1,000 in long term capital gains. The trustee pays $8,000 of income to W; accumulates the remaining $2,000; and makes no principal distributions. a. WHAT IF: S is a Rhode Island resident individual and W and D both reside in another state and are not Rhode Island resident individuals?b. ANSWER: Since one of the beneficiaries S (who, in the discretion of the trustee) may receive the entire accumulated income, is a resident individual, the trust is considered a resident trust with respect to the income retained. Because one of the two remaindermen is a resident individual, one-half of the capital gains retained are subject to Rhode Island personal income tax.c. WHAT IF: W is a resident of another state and S and D are both Rhode Island resident individuals?d. ANSWER: The trust is a resident trust and must report and pay Rhode Island taxes on all the retained income.B. Situation B: The will of a resident individual establishes a discretionary trust. During W's lifetime, the trustee is authorized, but not required, to pay income (except capital gains) and/or principal in its discretion among a group consisting of W, S, D, the issue of S and the issue of D. On W's death, the trust divides into two separate trusts with S receiving a life income from one with the principal passing to his issue at his death; and D receiving a life income from the other with the principal passing to her issue at her death. 1. WHAT IF: During the year the trustee distributes all income and realizes $2,000 of long term capital gains. W is a Rhode Island resident individual. S is a Rhode Island resident individual as are his minor children. D resides in another state and has two children, a son (GS) who is 22 and a Rhode Island resident individual and a daughter (GD) who resides in the other state.2. ANSWER: Because capital gains are presumptively accumulated for future distribution, the trust is therefore a resident trust with respect to 3/4 of the capital gains. The reasoning behind this is that one half is being accumulated for the benefit of S's issue (all of whom are Rhode Island residents) and one quarter (one half of one half) are being accumulated for GS who is also a Rhode Island resident.280 R.I. Code R. § 280-RICR-20-55-7.8