Chapter 4 Section 4: Estate, Trust, and Gift Taxation Flashcards
What taxes are estates subject to?
Income tax
Estate tax
What is the unified estate and gift tax?
What is excluded?
The estate and gift tax were combined into one
Gifts of $14,000 or less per year/per donee
There is a credit basically undoing any gifts that total less than $5,430,000
Define Distributable Net Income (DNI)
A limitation on the amount the trust or estate can deduct with respect to distributions to beneficiaries
What is the formula for DNI?
Estate Gross Income - Estate Deductions = Adjusted Total Income \+ Adjusted Tax-Exempt Interest - Capital Gains (Attributable to Corpus) = DNI
What deductions are allowed for DNI?
Any ordinary and necessary expenses incurred to produce the income
Also charity is unlimited as long as the gift was specified in the will
What character does income take on when distributed?
It keeps the same character it had before it was distributed
What is the amount of the income distribution deduction?
The lesser of:
Actual distributions to beneficiaries or
DNI less adjusted tax-exempt interest
What form does estate (or trust) income tax go on?
1041
What is the exemption for an estate?
Do they get a standard deduction?
$600
No
What year can an estate elect to have?
Calendar year
Fiscal year - anytime (due 4/15)
Does an estate make estimated tax payments?
Not for the first two years
What year does a trust have?
Calendar
What can a trust deduct in regards to distributions?
Any amount distributed up to the DNI
Define Simple Trust
Only makes distributions out of current income, not out of corpus
Must distribute all income currently
Cannot take charitable contribution deduction
Entitled to $300 deduction
Define grantor trust
The grantor retains control over the assets
Is a disregarded entity and is reported on the grantor’s 1040
Can be a qualified shareholder of an S Corp
Define complex trust
All trusts that are not simple. May accumulate current income May distribute principal May deduct charitable contributions Permitted an exemption of $100
What form does the estate tax go on?
706
What is the filing deadline for the estate tax?
9 months after death
What goes into the gross estate?
FMV of property owned (at date of death, date of distribution, or 6 months after death) Insurance proceeds Incomplete gifts Revocable transfers All property entitled to be received
What is the formula for estate tax due?
Gross estate - Nondiscretionary deductions = Adjusted gross estate - Discretionary deductions = Taxable estate \+ Adjusted taxable gifts = Tentative tax base at death x Uniform tax rate = Tentative estate tax - Gift taxes payable = Gross estate tax - Applicable credit = Estate tax due
What goes into nondiscretionary deductions (expenses)
Medical expenses (inc tax return or estate return)
Administrative expenses (inc tax return or estate return)
Outstanding debt of decedent
Claims against the estate
Funeral cost
Certain taxes
What goes into discretionary deductions (expense)
Unlimited charitable deduction
Unlimited marital deduction
What is the deceased spouse’s unused exclusion?
If your spouse died first and didn’t use the whole $5,430,000, you get the remainder
What other credits reduce the gross estate tax?
Foreign death taxes
Prior transfer taxes
Who pays the gift tax?
The person giving the tax
What form does the gift tax go on?
709
What is the exclusion for the gift tax?
$14,000 per year per donee
What are the gifts that qualify for the unlimited exclusion from the gift tax?
Payments directly to an educational institution
Payments directly to a health care facility
Charitable gifts
Martial deduction
Does a gift have present vs. future interest?
Is it complete or incomplete?
Present
Complete
What makes a gift incomplete?
Conditions or revocability
What is the formula for tax due on current gifts?
Gross gifts (FMV) - Exclusion of 14,000 for each donee - Unlimited marital deduction - Unlimited charitable deduction = Taxable gifts \+ Prior year taxable gifts = Cumulative lifetime gifts x Tax rate = Tax on cumulative lifetime gifts - Gift tax paid on prior gifts - Applicable credits = tax due on current gifts
Explain the generation-skipping transfer tax
Prevents an individual from escaping a sort of double taxation if they give their stuff to their kid, and then their kid gives it to the grandchildren, by which time it’s cut in half twice. If you give it straight to your grandchildren, they tax it twice anyway.
