Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

ISEA-2019-BUS > BUSINESS - SPECIALIZED RETURNS > Flashcards

BUSINESS - SPECIALIZED RETURNS Flashcards

1
Q

A Trust

A

A trust is a fiduciary relationship with respect to a person’s property in which one person (the trustee) holds the title to the property for the benefit of another person (the beneficiary).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

A Trustee holds _____ ______ of a Trust

A

Legal Ownership

This is because the Trustee actually has the Title.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

The Beneficiary holds ______ ______ of a Trust

A

Equitable Title

This is because they will actually receive the benefit (income) from the property.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Formation of a Trust

A

In order to create a trust, the settlor (the person who “settles” property in a trust) must clearly show intent to create a trust.

This is done by demonstrating intent to separate legal and equitable ownership of the property between two people.

Usually done in writing, but not necessary unless it is real estate.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

The Settlor of a Trust

A

This is the person who creates the trust. Also called the GRANTOR.

The settlor may also be a trustee and/or a beneficiary of the trust, but the settlor is NOT allowed to be the only trustee and the only beneficiary.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

The Trustee of a Trust

A

This is the person who holds the legal title to the trust property that will provide benefit to others.

As trustee, the trustee has a fiduciary responsibility to the beneficiaries.

The trustee is supposed to manage the trust and distribute the income of the trust to the beneficiaries in the manner set out in the trust instrument.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Implied Powers of a Trustee

A

The power to sell assets

The power to lease assets

The power to incur and pay reasonable expenses in the administration of the trust.

NOTE: They don’t have the right to do anything contrary to their implied duties.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Trust Property must be:

A
  1. EXISTING
  2. IDENTIFIABLE(described in enough detail that it can be identified with certainty)
  3. CAPABLE of OWNERSHIP and to be transferred

Note: Property that doesn’t yet exist ca NOT be used as Trust Property. (ie. an expected inheritance)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

The Beneficiary of a Trust

A

The person (or persons) for whose benefit the trustee is holding the property.

The beneficiary holds the equitable title in the trust property and is able to enforce the terms of the trust.

Any person or group (ie. club, church, etc) may be a beneficiary.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Active vs. Passive Trusts

A

An active trust is one that requires the trustees to manage and administer the trust.

A passive trust imposes no duties on the trustees; they simply hold the legal title.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Charitable vs. Private Trusts

A

A charitable trust is one that provides benefit to the public or at least to a large segment of the public.

All other trusts are private trusts.

NOTE: Requirements of charitable trusts are easier to meet, and the courts work to help get them done.

And they are not subject to the Rule of Perpetuities = they can last forever.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Express vs. Implied Trusts

A

An express trust is specifically created by the settlor’s expression of their intent.

An implied trust is created by an action of law based on the intention of the settlor to create a trust. But NOT specifically expressed

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Inter Vivos and Testamentary Trusts

A

An inter vivos trust is created while the settlor is living and comes into existence during their lifetime.

A testamentary trust comes into existence only upon the death of the settlor.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

A Spendthrift Trust

A

This type of trust prohibits the beneficiary from transferring their rights to others, including creditors, which prevents creditors of the beneficiary from laying claim to the principal or income of the trust.

To protect a beneficiary from themselves. It can NOT be terminated by the beneficiaries.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Real Estate Investment Trust

A

A REIT is created by transferring the title to real estate to a trustee, who then manages the property for the beneficiaries.

A qualifying REIT does not need to pay corporate taxes, and income is taxed only at the level of the beneficiary.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Termination of a Trust

A

Generally, trusts are terminated either by a method outlined in the trust agreement or by an operation of law.

When there are no income beneficiaries a trust automatically terminates.

Parties to the trust can terminate the trust, but only if the power to do so is granted to them in the trust.

If all of the beneficiaries (including future beneficiaries) agree to terminate the trust, the trust will be terminated if it does not defeat a purpose of the trust.

The trust terminates itself if the trust states that it will exist only for a certain period of time.

A trust can also terminate if all of the purposes for which it was created are completed or become impossible to complete.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Allocation of Trust Income

A

If money coming into the trust is allocated to INCOME then it will be distributed to the beneficiaries.

If it is allocated to the PRINCIPAL then it will be retained as trust PROPERTY. And it will be distributed when the Trust terminates.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

The Remainderman

A

The person to whom the trust PROPERTY will be transferred upon termination of the trust is called the remainderman.

Note: A Remainderman is not required.

19
Q

Allocation of Income

A

If the trust instrument states that the trustee has the rights to determine where income is allocated, then the decision of the trustee is usually final.

However, if the trust agreement is silent regarding allocation, then allocation to income and principal is governed by the Uniform Principal and Income Act.

20
Q

Uniform Principal and Income Act.

A

(UPAIA) is one of the uniform acts that have been promulgated in an attempt to harmonize the law in all fifty U.S. states. The Act was completed by the Commissioners on Uniform State Laws in 1997, and amended in 2000.

21
Q

Ordinary and Extraordinary

A

Under the UPAIA generally, ordinary receipts are treated as distributable income and extraordinary receipts are allocated to the principal.

Similarly, ordinary (current) expenses needed to keep the property productive are allocated to the income of the trust, while extraordinary expenses and those that will benefit the remainderman are allocated to the principal.

22
Q

Receipts and Expenses Related to INCOME in a Trust

This is a common Test Question

A

RECEIPTS to INCOME

  • Rent received from property owned by the trust
  • Cash dividends
  • Distributions of stock and stock rights in other corporations
  • Interest on notes or bonds
  • Royalties

EXPENSES from INCOME:

  • Cost of insuring property of the trust
  • Interest on loans or mortgages secured by trust property
  • Ordinary income taxes, property taxes, and estate taxes
  • Cost of repairing and preserving trust property
  • Depreciation allowance
23
Q

Receipts and Expenses Related to the PRINCIPAL in a Trust

This is a common Test Question

A

RECEIPTS to PRINCIPAL

  • Stock dividends and stock splits
  • Proceeds from the sale of trust assets
  • Amounts received in settlements of claims on behalf of the trust
  • Income earned on property prior to the formation of the trust

EXPENSES from PRINCIPAL:

  • Cost of capital (permanent) improvements
  • Losses sustained in operation of business
  • Mortgage and loan principal payments
  • Costs incurred in purchase or sale of trust property
  • Real estate taxes on improvements
24
Q

Schedule F (Form 1040)

A

Used by Farmers to figure their net profit or loss from Regular Farming Operations.

Includes operation of a:

Stock
Dairy
Poultry
Fish
Fruit
Truck Farm
Plantation
Ranch
Range
Orchard
Crop Shares
Nursery
25
Q

Livestock held primarily for sale is a farm product, is included in…

A

INVENTORY, and reported on Schedule F.

26
Q

The Profit/Loss of Farm Products bought by a farmer for resale are determined by…

A

the difference between the Selling Price and the Basis in the item (cost to farmer)

27
Q

Schedule F Income Reported does NOT include dispositions of:

A
  1. Land (§1231 property)
  2. Depreciable Land Improvements
  3. Depreciable Farm Equip
  4. Depreciable Buildings
  5. Depreciable Livestock (ie. Draft, Sport, Dairy)
  6. Raised livestock held for draft, sport, dairy
28
Q

Land and depreciable property used in farming are NOT capital assets.

True or False?

A

True.

Note: Form 4797 is used by farmers to report these transactions as ordinary income, or

Capital Gain under the rules for §1231 transactions.

29
Q

Most property held more than one year is §1231 property.

True or False?

A

True.

In addition to having the character of §1231, property that is subject to the allowance for depreciation is ALSO subject to the provisions of either §1245 or §1250.

30
Q

A farmer who sells depreciable property (§1245 & §1250 property) at a gain, may have to recognize all or part of the gain as ordinary income under the Depreciation Recapture Rules.

True or False?

A

True.

A gain on the disposition of §1245 property is treated as Ordinary Income to the extent of depreciation allowed or allowable.

Any remaining gain after the DRR is a §1231 gain, taxed as Capital Gain.

31
Q

Net §1231 gains are Ordinary Gains up to the amount of Non-Recaptured §1231 losses from the 5 prior years; the rest is a Long-Term Capital Gain.

A

Losses from §1231 property are Ordinary Losses.

If not held for at least 12 months, the property is NOT subject to §1231 treatment, and any gain or loss is Ordinary Income reported in Part II of Form 4797.

32
Q

GAIN on the sale of Raised Livestock is the Gross Sale Price reduced by any expenses of the sale.

Sale expenses include:

A
  • Sales Commissions
  • freight or hauling
  • etc

The basis of the animal is $0 if the TP deducted the costs of raising it.

33
Q

Gain on he sale of Purchased Livestock is the…

A

The
Gross Sales Price
minus the
Adjusted Basis and any Expenses.

34
Q

Report livestock for sale (whether raised or bought for resale) on…

A

Schedule F

35
Q

Livestock (not for sale) such as for draft, sport, or dairy are reported on…

A

Form 4797

36
Q

Livestock that is sold or exchanged due to adverse conditions in a specific year may NOT be required to be reported until the next year.

True or False?

A

True.

Conditions to be met:

  1. Principal trade is Farming
  2. Cash Method Accounting
  3. Prove the sale was weather related
  4. Feds declared the weather condition eligible
37
Q

Farmers MUST include in income any crop insurance proceeds. And is generally recognized in the year received.

True or Fals?

A

True.

Fed Gov’t payments are treated as Crop Insurance Proceeds.

38
Q

When can farmers postpone reporting Crop Insurance Proceeds to the following year?

A

In the following conditions.

  1. Cash Method Accounting is used.
  2. Crop Insurance Proceeds are received same tax year crops are damaged.
  3. If under normal business practices they would have included income from the damaged crops in the Following Tax Year.
39
Q

Income Averaging for Farmers

A

The practice of averaging all or some of a farm’s income by Allocating It to the 3 Prior Years (Base Years).

Only allowed for farmers who are:

  • Individuals
  • Partnership Partners
  • S Corp Shareholders
These CANNOT use averaging:
Corporations
Partnerships
S Corps
Estates
Trusts

See Schedule J for details.

The goal of Income Averaging is to lower income over the 3 years to save on taxes in the high earning year through a lower tax bracket.

40
Q

Farming and Estimated Tax Payments Rule.

A

Estimated Tax Payments are NOT required for a TP with 2/3 of gross income from farming, who pays entire tax liability by March 1st following the tax year.

OR

to avoid penalites, the TP MUST make 1 estimated payment by Jan 15 (following the tax year) equaling or the LESSER of 66.6% of the tax due, or 100% of the Prior Year Tax liability.

41
Q

Gross Income From Farming:

A
  1. Gross Farm Income from Sch F (Form 1040)
  2. Gross Farm Rental Income from Form 4835
  3. Gross Farm Income from Sch E (Form 1040)
  4. Gains from the sale of livestock used for draft, breeding, sport, or dairy purposes (Form 4794)
42
Q

These are NOT included in Gross Income from Farming

A
  1. Wages as a farm employee
  2. Income from contract grain harvesting and hauling with workers and machines furnished by the TP
  3. Gains from the sale of farmland or depreciable farm equip.
43
Q

What is the percentage you can claim for the use of a car or light truck as business use WITHOUT allocation records?

A

You can claim
75% of the use of a car or light truck as business use without any allocation records if you
used the vehicle during most of the normal business day directly in connection with the business of farming. You choose this method of
substantiating business use the first year the
vehicle is placed in service.

NOTE: Once you make this
choice, you may not change to another method
later.

The following are uses directly connected
with the business of farming.
• Cultivating land.
• Raising or harvesting any agricultural or
horticultural commodity.
• Raising, shearing, feeding, caring for,
training, and managing animals.
• Driving to the feed or supply store.

44
Q

Estate and Trust Income Taxation

A

Income, deductions, gains, losses, etc. of the estate or trust

Income that is either accumulated or held for future distribution or distributed currently to the beneficiaries

Income tax liability of the estate or trust

ISEA-2019-BUS (13 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions