Ch 4: Estate, Trust, and Gift Taxation Flashcards
What are the filing requirements (Form 1041) and estimated tax requirement for the annual estate income tax return?
Form 1041 must be filed if annual income is $600 or more. Additionally
1) Estate gets a personal exemption, $600
2) Estate is exempt from estimated tax payments for two years
Define distributable net income (DNI).
DNI is a limitation on the amount the trust or estate can deduct with respect to distributions to beneficiaries. Formula:
+ Estate (trust) gross income (including capital gains)
(Estate (trust) deductions)
Adjusted total income
+ Adjusted tax exempt interest
(capital gains allocated to corpus)
Distributable net income (DNI)
What is the income distribution deduction?
The income distribution deduction is the lesser of the following:
1) Total distributions (including income required to be distributed currently) to beneficiary less tax exempt income OR
2) DNI (less adjusted tax exempt interest)
Define gross estate.
The gross estate is the FMV at the date of death (or at the earlier of date of distribution or six months after the decedent’s worldwide property, including real property, personal tangible property, and intangible property. The gross estate also includes the FMV of the decedent’s share of jointly held property.
Identify some nondiscretionary deductions for an estate.
1) Medical expenses
2) Administrative expenses
3) Outstanding debts of decedent
4) Claims against the estate
5) Funeral costs
6) Certain taxes (including state death taxes)
Define the applicable credit for 2012 and state the amount.
The applicable credit is the estate and gift tax calculated on total lifetime and deathtime transfers of up to $5,120,000 (2012). For 2012, the tax credit is $1,772,800. The amount of credit shelters lifetime and deathtime transfers (gift and/or estate) of up to $5,120,000.
State the formula for determining the estate tax.
+ Gross estate
(Nondiscredionary and discretionary deductions)
Taxable estate
+ Aggregate adjusted taxable gifts made during life
Tentative tax base at death
x Uniform tax rates
Tentative estate tax
(Gift tax paid in prior years)
Gross estate tax
(Applicable credit)
Estate tax due
What is the annual exclusion for gifts?
Each year an individual can give any number of people up to $14,000 (2013) each without gift tax ramifications. Unlimited exclusions:
1) Amounts directly paid on behalf of a donee:
A) Tuition paid directly to an educational organization
B) Fees paid directly to a health care provider for medical care of the donee
2) Charitable gifts
3) Marital deduction
What is the difference between a present interest gift and a future interest gift?
1) The postponement of a right to use, possess, or enjoy the property distinguishes a future interest from a present interest.
2) A present interest qualifies for the annual exclusion ($14,000 in 2013).
3) A future interest (or a present interest without ascertainable value) does not qualify for the annual exclusion.
Identify how the tax due on current gifts is determined.
- Gross gifts in a calendar year (at FMV)
(Exclusion of $13,000 per donee per year ($26,000 if married and “gift splitting”))
(Payments made directly to educational institutions and/or health care providers)
(Unlimited marital deduction of gift to donor’s spouse)
(Charitable gifts)
Taxable gifts this year
+ taxable gifts prior years
Cumulative lifetime gifts
- Tax on cumulative gifts (calculate)
(gift tax on prior gifts)
(applicable credit)
Tax due on current gifts
Distinguish between the two types of trusts.
- Simple Trusts:
1) Distribution is made out of current income only
2) Income is taxable to beneficiary
3) All income must be distributed
4) No deduction is allowed for charitable contributions
5) Exemption is $300 - Complex Trusts:
1) Distributions may be out of principal (corpus)
2) Income may be accumulated within the trust (no income distribution requirement)
3) Deductions are allowed for charitable contributions
4) Exemption is $100
