Estate, Trust, and Gift Taxation

Question 1

What are the filing requirements (Form 1041) and estimated tax requirement for the annual estate income tax return?

Answer 1

Form 1041 vmust be filed if annual income is $600 or more. Additionally:

• Estate gets a personal exemption, $600.
• Estate is exempt from estimated tax payments for two years.

Question 2

Define distributable net income (DNI)

Answer 2

\+  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)

Question 3

What is the income distribution deduction?

Answer 3

Lesser of:

1) Total distributions (including income required to be distributed currently) to beneficiary less tax-exempt income

OR

2) DNI (less adjusted tax-exempt interest)

Question 4

Define gross estate.

Answer 4

The gross estate is the FMV at the date of death (or at the earlier of date of distribution or six months after the date of death if the alternate valuation date is elected0 of all the decedent’s worldwide property, including real property, personal tangible property, and intangible property. The gross estate also includes the fair market value of the decendent’s share of jointly held property.

Question 5

Identify some nondiscretionary deductions for an estate.

Answer 5

Examples of nondiscretionary deductions for an estate:

Medical Expenses
Adminstrative Expenses 
Outstanding debts of decedent
Claims against the estate
Funeral costs
Certain taxes (including state death taxes)

Question 6

Define the applicable credit for 2014 (Estate) and state the amount.

Answer 6

The applicable credit is the estate and gift tax calculated on total lifetime and deathtime transfers of up to $5,340,000 (2014). For 2014 the tax credit is $2,081,800. The amount of credit shelters lifetime and death-time transfers (gift and/or estate) of up to 5,340,000.

Question 7

State the formula for determining the estate tax.

Answer 7

\+ Gross Income
- Non-discretionary 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

Question 8

What is the annual exclusion for gifts?

Answer 8

Each year an individual can give any number of people up to $14,000 (2014) each without gift tax ramifications.

Unlimited Exclusions:

Amounts directly paid on behalf of a donee:

- Tuition paid directly to and educational organization
- Fees paid directly to a health care provider for medical care of the donee. 

Charitable Gifts

Marital deduction

Question 9

What is the difference between a present interest gift and a future interest gift?

Answer 9

• The postponement of a right to use, possess, or enjoy the property distinguishes a future interest from a present interest.
• A present interest qualifies for the annual exclusion ($14,000 in 2014)
• A future interest (or a present interest without ascertainable value) does not qualify for the annual exclusion.

Question 10

Identify how the tax due on current gifts is determined.

Answer 10

1. Gross Gifts in a calendeer year (at FMV)
   - Exclusion of $14,000 per donee per year (28K if MFJ)
   - PMT’s made directly to EDU. Institutions/Health Care
   - Unlimited maritial deduction of gift to donor’s spouse.
   - Charitable gifts
   __________________________________________
   = Taxable gifts this year
   + Taxable gifts prior years
   __________________________________________
   = Cumualtive lifetime gifts

2) Tax on cumulative gifts (calculate)
- Gift tax on prior gifts
- Applicable Credit
_________________________________________
= Tax due on current gifts

Question 11

Distinguish between the two types of trusts.

Answer 11

Simple Trusts

- Distribution is made out of current income only
- Income is taxable to beneficiary
- All income must be distributed
- No deduction is allowed for charitable contributions
- Exemption is $300

Complex Trust

- Distributions may be out of principal (corpus)
- Income may be accumulated within the trust (no income distribution requirement)
- Deductions are allowed for charitable contributions
- Exemption is $100