Bryant - Course 4. Tax Planning. 9. Income Taxation of Trusts and Estates Flashcards
Name the trust that the grantor retains a right to payment of a fixed amount for a fixed number of years.
Grantor Retained Annuity Trust (GRAT)
Name the trust that the grantor retains the right to payment of a fixed percentage of the value of the trust property (determined annually) for a number of years.
Grantor Retained Unitrust (GRUT)
Name the trust that is now limited to transfers of a personal residence or certain tangible property, such as a painting, in situations where the grantor retains the use of the property during the term of the trust.
Grantor Retained Income Trust (GRIT)
Name the trust that is a personal residence GRIT
Qualified Personal Residence Trust (QPRT)
QPRT in Practice Example:
Assume a widow places her $200,000 personal residence into an irrevocable trust. The trust provides that she will live in the personal residence for a 10-year term. At the end of that time, the personal residence will pass to her children. This trust is known as a Qualified Personal Residence Trust (QPRT).
The present value of her right to live in the personal residence for 10 years is $98,330 (0.491651 × $200,000). The 0.491651 comes from IRS Publication 1457. Since the entire value of the personal residence placed in trust is $200,000 and the income interest retained by the grantor is $98,330, the value of the future interest gift being made at that point to the remainder person is the difference, $101,670. This entire amount ($101,670) is a taxable gift because the gift tax annual exclusion is allowed only for gifts of a present interest. Of course, up to $12,920,000 (2023) in gift taxes and estate taxes can be sheltered by her unified credit which means that the widow will pay no gift tax. Assuming the widow has gifted over $12,920,000, and a minimum 40% gift tax bracket applies, the gift tax would be $40,668.
If the $200,000 property appreciates at an after-tax rate of 5%, the property will be worth $325,779 by the end of the 10-year term.
Should the widow die before the term expires, the trust assets would be included in her estate at their values as of her date of death. It is treated as if the trust never existed in the first place so there would be no federal death tax savings.
But if the widow survived the 10-year period (no matter by how short a period of time), none of the trust assets would be in her estate. At a 40% estate tax bracket, the savings would be approximately $89,644 [40% × ($325,779 - $101,670)]. Furthermore, because the property would not pass through probate, probate costs on $325,779 would be avoided.
GRATs and GRUTs can provide similar gift, estate, and generation-skipping transfer tax discounts. A married couple could each establish GRATs and GRUTs (or split gifts) so as to utilize both spouses’ unified credits and marginal gift and estate tax brackets.
Finnegan and Maeve are a married couple living in a community property state. They decide to transfer their community property to a GRAT. Finnegan passes away during the term of the GRAT.
Where is the value of the community interest allocated?
* Left in the GRAT.
* Included in Maeve’s estate.
* Included in Finnegan’s estate.
Included in Finnegan’s estate.
If a couple transfers community property to a Grantor Retained Annuity Trust (GRAT) or Grantor Retained Unitrust (GRUT), each may reserve the right to the payment for the trust term as to his or her respective community interest. If either dies during the trust term, the value of his or her community interest in the trust would be included in his or her taxable estate, either in whole or in part.
A trust may qualify as a simple trust if:
- All income must be distributed currently,
- Funds cannot be paid, permanently set aside, or used for charitable purposes, and
- Amounts allocated to the corpus of the trust cannot be distributed.
A complex trust is any trust that does not qualify as a simple trust. It is allowed to:
- accumulate income,
- have a charitable beneficiary, and/or
- distribute principal.
A trust may qualify as a simple trust if it complies with which of the following? (Select all that apply)
* The trust instrument requires that all income must be distributed currently.
* The trust instrument does not provide that any amounts are to be paid, permanently set aside, or used for charitable purposes.
* The trust does not distribute amounts allocated to the corpus of the trust.
* The trust does distribute amounts allocated to the corpus of the trust.
The trust instrument requires that all income must be distributed currently.
The trust instrument does not provide that any amounts are to be paid, permanently set aside, or used for charitable purposes.
The trust does not distribute amounts allocated to the corpus of the trust.
To qualify as a simple trust, the trust instrument must require that all income be distributed currently, does not provide that any amounts are to be paid, permanently set aside, or used for charitable purposes, and does not distribute amounts allocated to the corpus of the trust.
Which type of trust is a useful technique when a client wants to purchase certain tangible assets, such as a work of art, then retain the right to display it in his or her own home and have it pass to a specified person immediately and without probate at death?
* Grantor retained income trust (GRIT)
* Grantor retained annuity trust (GRAT)
* Grantor retained unitrust (GRUT)
* Qualified personal residence trust (QPRT)
Grantor retained income trust (GRIT)
A grantor retained income trust (GRIT) is a useful technique when a client wants to purchase certain tangible assets, such as a work of art, then retain the right to display it in his or her own home and have it pass to a specified person immediately and without probate at death.
However, if the grantor is unable to establish the value of the retained interest, the gift of the transferred remainder will equal 100% of the value of the transferred property.
A GRAT, GRUT, or QPRT is an excellent “estate freezing” device with respect to post-transfer appreciation.
* False
* True
True
100% of post-gift appreciation in a property’s value escapes estate, gift, and generation-skipping transfer tax. This makes a GRAT, GRUT, or QPRT an excellent “estate freezing” device with respect to post-transfer appreciation.
The fiduciary (or one of the joint fiduciaries) must file Form 1041 for a taxable domestic trust that has:
- Any taxable income for the tax year,
- Gross income of $600 or more (regardless of taxable income), or
- A beneficiary who is a non-resident alien.
Which IRS Form grants taxpayers an automatic six-month extension without the need to file intervening forms?
Form 7004
Which IRS Form is to apply for an automatic 6-month extension of time to file Form 706, Form 706-A, Form 706-NA, Form 706-QDT?
Form 4768
Trusts must use which calander as taxable year.
Estates use which calander as taxable year.
A taxable trust must use the calendar year (i.e., the tax year ending December 31).
An estate is created on death and may choose any tax year it chooses. This ability to choose a tax year allows the executor to determine the number of months in the first tax year of the estate. More importantly, the use of a fiscal year allows the estate to make income distributions to heirs which will not be subject to taxation until the following calendar year.
A distribution from a trust or estate is deemed to have been made on the last day of the trust’s or estate’s taxable year, regardless of when during the tax year the distribution was actually made.
Taxable Year Selection Example:
Tom died on April 1, 2022. John, his executor, chooses a fiscal year-end of January 31, 2023. In July of 2022, John makes a distribution to the heirs of $50,000 from the income of the estate. Since the estate’s taxable year ends on January 31, 2023, the distribution to the heirs is deemed to have been made in 2023 even though they got the distribution in 2022.
When is the income is taxable to the heirs?
The income is taxable to the heirs in 2023.
What is the Tax Treatment of Distributions to Beneficiaries?
The beneficiary of a simple trust must include in his or her gross income the amount of income required to be distributed currently, whether or not distributed, or if the income required to be distributed currently to all beneficiaries exceeds the Distributable Net Income (DNI), his or her proportionate share of the DNI. Distributable Net Income (DNI) is the amount of the taxable trust income which, by a complex IRS calculation, is deemed to be the amount of trust income that is available to be paid to beneficiaries and can be used to reduce the trust’s taxable income.
Trust Taxation Calculation Example:
Jane and Macy Jones’ living trust has a taxable income of $30,000. What is their living trust’s estimated taxes?
Base Tax + (Rate x Amount Over)
$3,491 + [0.37 x ($30,000 - $14,450)]
$3,491 + (0.37 x $15,550)
$3,491 + $5,753.50
$9,244.50
Jack has a calendar year trust. When must he file his Form 1041 for 2023?
* December 31, 2023
* January 1, 2024
* April 1, 2024
* April 15, 2024
April 15, 2024
For calendar year estates and trusts, Form 1041 and Schedule K-1 must be filed on or before April 15, 2024, for 2023.
A fiduciary must file Form 1041 for a domestic trust taxable under Section 641 if it meets which of the following requirements? (Select all that apply)
* Any taxable income for the tax year
* Gross income of $1,000 or more (regardless of taxable income)
* A beneficiary who is a nonresident alien
* Gross income of $600 or more (regardless of taxable income)
* Taxable income of $600 or more
Any taxable income for the tax year
A beneficiary who is a nonresident alien
Gross income of $600 or more (regardless of taxable income)
A fiduciary must file Form 1041 for a domestic trust taxable under Section 641 that has:
* any taxable income for the tax year,
* gross income of $600 or more (regardless of taxable income), or
* a beneficiary who is a nonresident alien.
An estate has chosen a June 30, 2021 taxable year-end. If Ed Doyle, an heir of an estate, received a distribution of income from the estate in December, 2020, what year must he report the income on his individual tax return?
* 2020
* Half in 2020; half in 2021
* 2021
* Prorated over the tax year of the estate
2021
Distributions from an estate are deemed made on the last day of the estate’s tax year. In this case, Ed reports the income for 2021, even though the distribution occurred in the calendar year 2020.
What refers to the income and expense items that are used to determine the amount the income beneficiaries are entitled to receive from the trust or estate each year?
Trust accounting income
Items of income and expense that are allocated to ____________ are not used in calculating accounting income.
* principal
* depreciation
* interest
* capital gains
principal
Items of income and expense that are allocated to principal are not used in calculating trust accounting income.
Describe Trust Taxable Income
Trust and estate taxable income is the total taxable income of the trust or estate for the tax year. With some exceptions, taxable income for trusts and estates is calculated as individual and corporate taxable income. Taxable trust income is not the same as trust accounting income. Taxable trust income, as distinguished from trust accounting income, includes income allocated to principal, such as capital gain.
A trust must figure taxable income using the method of accounting regularly used in keeping the trust’s or estate’s books and records. Generally, permissible methods include the cash method, the accrual method, or any other method authorized by the Internal Revenue Code. In all cases, the method used must clearly reflect income. To change the accounting method, a trust or estate must get consent by filing Form 3115.
