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Regulation > 12.1 - Income Taxation --- Estates, Trusts & Wealth Transfer Taxes > Flashcards

12.1 - Income Taxation --- Estates, Trusts & Wealth Transfer Taxes Flashcards

1
Q

What is an estate?

A

Collection of assets held by recently deceased individuals (aka decedent)

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2
Q

What is a trust & what does it provide?

A

Trust is a collection of assets ultimately distributed to beneficiaries

  • Take more planning to setup than estates
  • Provide additional benefits to beneficiary
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3
Q

Principle vs. Income

Define principial (aka Res) in estates and trusts?

A
  • Pronounced “rays” or corpus
  • Property included in the estate or trust
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4
Q

Principle vs. Income

Define income in estates and trusts?

A
  • Return earned on the principal
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5
Q

Principle vs. Income

Define “trusts” accounting income

A
  • Trusts accounting income equals all income except allocations to corpus
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6
Q

Tax Rates

How is tax imposed on trusts and estates?

A
  • Tax is imposed on taxable income of trusts & estates, not principal
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7
Q

Tax Rates

What is the applicable rate for fiduciary taxable income between $0 - $2,500?

A

15%

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8
Q

Tax Rates

What is the applicable tax rate imposed on fiduciary taxable income between $2,500 - $5,950?

A

25% + $382.50

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9
Q

Tax Rates

What is the applicable tax rate imposed on fiduciary taxable income between $5,950 - $9,050?

A

28% + $1,232.50

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10
Q

Tax Rates

What is the applicable tax rate imposed on fiduciary taxable income between $9,050 - $12,400?

A

33% + $2,100.50

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11
Q

Tax Rates

What is the applicable tax rate imposed on fiduciary taxable income greater than $12,400?

A

39.6% + $3,206.00

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12
Q

Simple Trust

Identify 3 qualifiers of simple trusts

A
  • Requires current distribution of all income
  • Requires no distribution of principal
  • No provision for charitable contributions
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13
Q

Complex Trust

Identify 4 qualifiers for a complex trust

A
  • Any trust other than simple trust
  • May accumulate income
  • May provide for charitable contributions
  • May distribute amounts other than income
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14
Q

Grantor Trust

Identify 2 qualifiers for a grantor trust

A
  • Any trust where grantor is effective beneficiary
  • Grantor has > 5% reversionary interest
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15
Q

Grantor Trust

Define reversionary interest

A
  • Property reverts back to or benefits the grantor
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16
Q

Grantor Trust

Who is the owner of a grantor trust and how is income accumulated?

A
  • Grantor considered owner of trust & income can accumulate for grantor’s spouse
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17
Q

How is income attributed to principal treated for grantor trusts?

A
  • Income attributable to principal is treated as owned by grantor
    • Grantor obligated to pay associated tax
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18
Q

Filing Requirements

What are the filing requirements for estates?

A
  • must file if income > = $600
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19
Q

Filing Requirements

What are the filing requirements for trusts?

A
  • must file if there is any taxable income or
  • $600 or more of gross income
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20
Q

Filing Requirements

When are tax returns due for trusts and estates?

A
  • Return due by 15th day of 4th month after close of entity’s tax year
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21
Q

Filing Requirements

What is the extended due date for filing estate and trust tax returns?

A
  • Extended due date is 5 ½ months later for 2016 & later tax years
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22
Q

Filing Requirements

When must a nonresident alien who is beneficiary of a domestic estate file their estate return?

A
  • Must file return regardless of income
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23
Q

Income Tax Formula

How is income tax computed for estates and trusts?

A

similarly to that of individuals

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24
Q

Income Tax Formula

Are life insurance proceeds considered income of estates?

A

no - principal

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25
Q

Income Tax Formula

Are capital gains taxable as income to estates and trusts?

A

No - capital gains are charged to trust principal and taxed to the estate

26
Q

Income Tax Formula

How is income in respect of a decedent treated for tax purposes?

A

Taxed as income to estate

27
Q

Income Tax Formula

What level of income do fiduciaries apply in computing deduction limits?

A

AGI

28
Q

Income Tax Formula

Is the STD deduction allowed in computing fiduciary income and applying deductions?

A

No - STD not allowed

29
Q

Income in Respect of a Decedent:

Ross, a calendar-year, cash-basis taxpayer who died in June 2015, was entitled to receive a $10,000 accounting fee that had not been collected before the date of death. The executor of Ross’s estate collected the full $10,000 in July 2015. This $10,000 should appear in

A – only the decedent’s final individual income tax return

B – only the estate’s fiduciary income tax return

C – only the estate tax return

D – Both the fiduciary income tax return and the estate tax return

A

D – Both the fiduciary income tax return and the estate tax return

Income that a decedent had a right to receive prior to death but that was not includible on his or her final income tax return is income in respect of a decedent. The $10,000 is properly includible in the estate’s (fiduciary) income tax return because Ross was a cash-basis taxpayer and would not properly include income not yet received at the time of death in his final return. Since the money was owed to Ross (he had a right to receive it), it is an asset of the estate and must be included on the estate tax return also.

30
Q

Deductions:

How are deductions treated for estates and trusts?

A

the same as individuals

31
Q

Deductions:

True or False >>>

  • Expenses directly allocable to tax exempt income are allocated only to tax exempt income
A

True

32
Q

Deductions:

How is income allocated if it is for both tax exempt and other income?

A
  • Reasonable portion of indirectly allocable expenses to both tax exempt & other income must be allocated to each class of income
33
Q

Deductions:

Are trustee fees deduction limited to 2% AGI?

A

No

34
Q

Deductions:

How are trustee fees and tax return preparation fees treated for tax purposes of a trust or estate?

A

fully deductible & not limited to excess over 2% of AGI

35
Q

Depreciation

How is depreciation allocated for estate purposes?

A
  • Allocated in same proportions as income from estate unless instrument contain provisions apportioning the deduction
36
Q

Depreciation

True or False >>>

  • Any part of deduction in excess of trust income set aside for reserve is allocated between parties according to instrument
A

True

37
Q

Depreciation

Depreciation Example # 1:

  • Estate income = $10,000; Beneficiary distribution = $7,000 or 70%; Estate retention = $3,000 or 30%

How much is the beneficiary’s depreciation?

A

70% or $7,000

38
Q

Depreciation

Depreciation Example # 1:

Estate income = $10,000; Beneficiary distribution = $7,000 or 70%; Estate retention = $3,000 or 30%

How much is the estate’s depreciation?

A

30% or $3,000

39
Q

Additional Deductions:

Name 4 additional deductions that are available to trusts and estates

A

1 - NOL

2 - NCL up to $3,000

3 - Miscellaneous itemized deductions (subject to 2% floor)

4 - Charitable contributions (excluding simple trusts)

40
Q

Additional Deductions:

When is the NOL pass-through on personal return permitted?

A

in year fiduciary terminates

41
Q

Additional Deductions:

Is NOL carryover permitted for estates and trusts?

A

Yes

42
Q

Additional Deductions:

True or False >>>

NOL is computed w/o regard to charitable contributions or distribution deductions

A

True

43
Q

What are the personal exemptions for estates, trusts and complex trusts?

A
  • Estate = $600
  • Simple Trust = $300
  • Complex Trust = $100
44
Q

Distribution Deduction:

What is the purpose of the distribution deduction?

A
  • Often eliminates tax burdens for trusts or estates
  • Allocates taxable income between fiduciary and beneficiaries
45
Q

Distribution Deduction:

What is the distribution deduction equal to?

A
  • Generally equal to lesser of distributions or distributable net income
46
Q

Distributable Net Income

Define DNI or distributable net income

A
  • Max deductible at fiduciary level
  • Max taxable at beneficiary level
47
Q

Distributable Net Income

Compute DNI or distributable net income

A

Taxable income before distribution deduction

+ Personal exemption deduction

+ Net tax-exempt interest

+ Capital losses allocated to principal

- Capital gains allocated to principal

- Taxable stock dividends allocated to principal

- Extraordinary dividends allocated to principal

= Distributable net income

48
Q

IRD

When is income in respect of a decedent or IRD not included on the final tax return of cash and accrual method taxpayers?

A
  • Cash method taxpayer
    • Amounts not received
  • Accrual method taxpayer
    • Amounts not properly accrued
49
Q

IRD

Is IRD stepped up to FMV on date of death as in the case of property?

A

No

50
Q

IRD

What basis does right to receive IRD have?

A

transferred basis

51
Q

IRD

What are IRD deductions?

A
  • Expenses accrued before death but not deductible on final return b/c decedent used cash method
    • Deductible on both estate and fiduciary income tax return
52
Q

Estate Tax Deductions

What are estate tax deductions?

A
  • tax attributable to IRD
  • administrative expenses
  • debts of decedent
53
Q

Estate Tax Deductions

Are estate tax deductions deductible on both Form 706 and Form 1041

A

No - double deductions are not allowed

  • Right to deduct on Form 706 must be waived in order to deduct on Form 1041
54
Q

How much is net investment income tax or NIIT?

A

3.8%

55
Q
A
56
Q

What amount of net investment income tax are estates and trusts required to pay?

A
  • 3.8% NIIT on < of:
    • Undistributed net investment income for tax year or
    • Any excess Fiduciary Taxable Income over the amount at which highest tax bracket for estates & trusts begins for tax year

2016 = $12,400

57
Q

Calculate undistributed net investment income

A

Net Investment Income

- Net investment income distributed to beneficiaries

- Net investment income paid or set aside for charity

= Undistributed Net Investment Income

58
Q

Define the tax year and accounting method that estates and trusts must use

A
  • Estate
    • may adopt any tax year ending within 12 months after death
  • Trusts
    • must generally adopt calendar year
  • Any permissible accounting method may be used
59
Q

Are estates and trusts required to remit estimated payments?

A

Yes - but not required to pay estimated tax for its 1st 2 years

60
Q

How are amounts and due dates of estimated tax payments determined for estates and trusts?

A

in same manner for individuals

61
Q

Describe depreciation treatment in a trust

A
  • Deductible only to the extent a reserve is required or permitted under the trust instrument or local law
    • And income is set aside for the reserve & actually remains in the trust
  • If instrument silent;
    • Allocate = proportion as income

Regulation (67 decks)

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