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)
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
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
4
Q
Principle vs. Income
Define income in estates and trusts?
A
- Return earned on the principal
5
Q
Principle vs. Income
Define “trusts” accounting income
A
- Trusts accounting income equals all income except allocations to corpus
6
Q
Tax Rates
How is tax imposed on trusts and estates?
A
- Tax is imposed on taxable income of trusts & estates, not principal
7
Q
Tax Rates
What is the applicable rate for fiduciary taxable income between $0 - $2,500?
A
15%
8
Q
Tax Rates
What is the applicable tax rate imposed on fiduciary taxable income between $2,500 - $5,950?
A
25% + $382.50
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
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
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
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
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
14
Q
Grantor Trust
Identify 2 qualifiers for a grantor trust
A
- Any trust where grantor is effective beneficiary
- Grantor has > 5% reversionary interest
15
Q
Grantor Trust
Define reversionary interest
A
- Property reverts back to or benefits the grantor
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
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
18
Q
Filing Requirements
What are the filing requirements for estates?
A
- must file if income > = $600
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
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
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
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
23
Q
Income Tax Formula
How is income tax computed for estates and trusts?
A
similarly to that of individuals
24
Q
Income Tax Formula
Are life insurance proceeds considered income of estates?
A
no - principal
25
# Income Tax Formula
Are capital gains taxable as income to estates and trusts?
No - capital gains are charged to trust principal and taxed to the estate
26
# Income Tax Formula
How is income in respect of a decedent treated for tax purposes?
Taxed as income to estate
27
# Income Tax Formula
What level of income do fiduciaries apply in computing deduction limits?
AGI
28
# Income Tax Formula
Is the STD deduction allowed in computing fiduciary income and applying deductions?
No - STD not allowed
29
# 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
**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
# Deductions:
How are deductions treated for estates and trusts?
the same as individuals
31
# Deductions:
True or False \>\>\>
* Expenses directly allocable to tax exempt income are allocated only to tax exempt income
True
32
# Deductions:
How is income allocated if it is for both tax exempt and other income?
* Reasonable portion of indirectly allocable expenses to both tax exempt & other income must be allocated to each class of income
33
# Deductions:
Are trustee fees deduction limited to 2% AGI?
No
34
# Deductions:
How are trustee fees and tax return preparation fees treated for tax purposes of a trust or estate?
fully deductible & not limited to excess over 2% of AGI
35
# Depreciation
How is depreciation allocated for estate purposes?
* Allocated in same proportions as income from estate unless instrument contain provisions apportioning the deduction
36
# Depreciation
True or False \>\>\>
* Any part of deduction in excess of trust income set aside for reserve is allocated between parties according to instrument
True
37
# 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?
70% or $7,000
38
# Depreciation
## Footnote
**_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?
30% or $3,000
39
# Additional Deductions:
Name 4 additional deductions that are available to trusts and estates
1 - NOL
2 - NCL up to $3,000
3 - Miscellaneous itemized deductions (subject to 2% floor)
4 - Charitable contributions (excluding simple trusts)
40
# Additional Deductions:
When is the NOL pass-through on personal return permitted?
in year fiduciary terminates
41
# Additional Deductions:
Is NOL carryover permitted for estates and trusts?
Yes
42
# Additional Deductions:
True or False \>\>\>
NOL is computed w/o regard to charitable contributions or distribution deductions
True
43
What are the personal exemptions for estates, trusts and complex trusts?
* Estate = $600
* Simple Trust = $300
* Complex Trust = $100
44
# Distribution Deduction:
What is the purpose of the distribution deduction?
* Often eliminates tax burdens for trusts or estates
* Allocates taxable income between fiduciary and beneficiaries
45
# Distribution Deduction:
What is the distribution deduction equal to?
* Generally equal to lesser of distributions or distributable net income
46
# Distributable Net Income
Define DNI or distributable net income
* Max deductible at fiduciary level
* Max taxable at beneficiary level
47
# Distributable Net Income
Compute DNI or distributable net income
## Footnote
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
# IRD
When is income in respect of a decedent or IRD not included on the final tax return of cash and accrual method taxpayers?
* Cash method taxpayer
* Amounts not received
* Accrual method taxpayer
* Amounts not properly accrued
49
# IRD
Is IRD stepped up to FMV on date of death as in the case of property?
No
50
# IRD
What basis does right to receive IRD have?
transferred basis
51
# IRD
What are IRD deductions?
* 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
# Estate Tax Deductions
What are estate tax deductions?
- tax attributable to IRD
- administrative expenses
- debts of decedent
53
# Estate Tax Deductions
Are estate tax deductions deductible on both Form 706 and Form 1041
No - double deductions are not allowed
* Right to deduct on Form 706 must be waived in order to deduct on Form 1041
54
How much is net investment income tax or NIIT?
3.8%
55
56
What amount of net investment income tax are estates and trusts required to pay?
* 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
Calculate undistributed net investment income
Net Investment Income
**-** Net investment income distributed to beneficiaries
**-** Net investment income paid or set aside for charity
**=** Undistributed Net Investment Income
58
Define the tax year and accounting method that estates and trusts must use
* 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
Are estates and trusts required to remit estimated payments?
Yes - but not required to pay estimated tax for its 1st 2 years
60
How are amounts and due dates of estimated tax payments determined for estates and trusts?
in same manner for individuals
61
Describe depreciation treatment in a trust
* 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
