Tax and Investment Planning with Royalty Trusts

In: Business and Management

Submitted By magadog14
Words 364
Pages 2
TAX AND INVESTMENT PLANNING WITH ROYALTY TRUSTS

This article starts off by describing what a royalty trust is, how it works, and why corporations use them. It then goes on to talk about the flow through of a trust royalty, the taxes associated with them, and depletion. Finally, it gives insight as to what account to place a royalty trust in based on financial goals.
Royalty Trusts & Corporations Royalty trusts are legal entities established to produce income from natural resources. While they do contain some of the same characteristics of equities, they are neither a stock nor debt. It distributes all of its cashflow to its unit holders, reduces risk, and hedges against inflation. Also, the variables used in predicting future returns are more easily obtained through government reports. Next, Corporations have the potential to raise more capital when compared to conventional financing. In the tax laws, when there is a transfer of royalties to a shareholder, the corporation is not required to get back their cost of drilling and can avoid further tax restrictions.
Tax liabilities Determining a trust royalty grantor is based on how it is acquired. Once the grantor is established, they must report certain items outlined in the tax laws based what percentage they hold. Also, the grantor is applicable to tax credits designed to promote investment into certain natural resources. As the natural resource available depletes, the basis of the asset is reduced. There are two methods used to determine the depletion amount, cost & percentage depletion, and the method that creates the biggest deduction should be used.
Account Selection The biggest factor in choosing an account to place a trust royalty into is financial goals. If an investor is trying to meet future needs then a retirement account is the ideal account. Additionally, if…...

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