Estate, Trust & Gift Taxation

Question 1

Estate has 2 taxes

Answer 1

Income Tax -Tax on income i.e. Royalties, Rent, Div.’s etc.
AND
Estate Tax - Tax on fair value of assets ex. RE, stocks, autos, planes, etc.

Question 2

Unified Estate & Gift Tax (transfer tax)

Answer 2

The estate tax & gift tax have been unified into one

“Transfer Tax”

Question 3

Lifetime Gifts

Answer 3

a) Certain Gifts qualify for UNLIMITED Exclusion
b) In addition gifts of $14,000 or less per yr/per donee are excluded
c) For 2014 a $2,081,000 unified estate & gift tax credit
effectively exempts from the gift tax cumulative, non-excluded gifts having a value of $5,340,000

Question 4

Death Time Transfers

Answer 4

a) Certain death time transfers, are excluded from the estate tax
b) The unified estate & gift tax credit effectively exempts from estate/gift tax the first $5,340,000 of otherwise taxable cumulative gifts and death time transfers. Amt changes each year.

Question 5

Income Taxation Rules for Estates & Trusts

Answer 5

Basically type of taxable income centers around the classification of all receipts & disbursements:

1) Principal (corpus) - Capital Gains(Losses) unless written provisions to the contrary) remain with the trust and allocated to corpus. They are taxed at the trust or estate level.
2) Income

Question 6

Distributable Net Income (DNI) what it is

Answer 6

A limitation on the amount the trust or estate can deduct with respect to distributions to beneficiaries on line 18 of form 1041.

Question 7

DNI Computation (HIGHLY TESTED ON CPA EXAM)

Answer 7

Estate Trust Gross Income (Including Cap Gains)

Adjusted Total Income (Form 1041, Line 17)
+ Adjusted Tax Exempt Interest
(Attributable to corpus)
=Distributable Net Income (DNI)

DNI is ultimately going to be the amount that could be taxable if distributed.

Question 8

Estate/Trust Income Tax Return (1041) Deductions are:

Answer 8

Ordinary & Necessary expenses incurred in:

1) carrying on a trade or business
2) production of income
3) management or conservation of income-producing property (including the trustee’s or executor’s fees).
4) determination, collection or refund of any tax
5) contributions to a charity (an unlimited charitable deduction is allowed if such contributions are provided for in the will).

Question 9

Income distributed to the Beneficiaries

Answer 9

Income distributed to the beneficiaries (reported on K-1s on form 1041) retains the same character as the income had at the fiduciary level (same as partnership taxation).

Question 10

Estate Must File Return if Annual Income > $600

IMPORTANT - TESTED ON

Answer 10

The exemption for an estate is $600

An Estate does not get a “Standard Deduction”

Question 11

ESTATE tax year has a choice because

REMEMBER: You can die ANY time.

Answer 11

Can choose:
1) Calendar Year
OR
2) Fiscal Year (Date of Death)

Question 12

Estate Estimated Payments

Answer 12

Exempt from making Estimates for the first 2 years.

Question 13

Estate Tax Return (Form 706)

Answer 13

Must be filed 9 mos after Date of Death Unless extension is filed.

(Remember:9 months to birth & 9 months to death taxes)

Question 14

Applicable Exclusion Amount

Answer 14

$5,340,000 (The tax on this excludable amount is $2,081,800 for 2014).

Question 15

Income Distribution Deduction for Estates & Trusts is:

Answer 15

The LESSER of
1) Actual Distributions
OR
2)DNI-Distributable Net Income (less adjusted tax-exempt interest i.e. “net”)

Question 16

Tax Forms for Estate and Trusts

Answer 16

Trust - 760 due 9 mos after date of death

Estate - 1041 due 4/15

Question 17

Complex Trust vs. Simple Trust (Differences)

Answer 17

Complex trusts may accumulate current income, distribute principal, and provide for charitable contributions.

Simple trusts may only make distributions from current income (not corpus, or principal), must distribute all income currently, and may not make charitable contributions.

Either trust may have more than one beneficiary, have a grantor that is not an individual, or have beneficiaries that are not individuals.

Question 18

A Simple Trust

Answer 18

1) Only makes distributions out of current income (can’t make distributions from “Corpus” or principal)
2) Is required to distribute all of its income currently
3) Cannot take a deduction for charitable contributions
4) Is entitled to a $300 exemption in arriving at its taxable income

Question 19

A Grantor Trust

Answer 19

1) Individual who established the trust retains control over the trust assets.
2) Is considered a disregarded entity for income tax. Any taxable income or deductions of a grantor trust is reported on the income tax return of the grantor
3) Can be a qualified shareholder of an S Corporation
4) Is generally NOT included in the estate of the grantor upon his death

Question 20

A Complex Trust

Answer 20

1) May accumulate current income
2) May distribute principal or “Corpus”
3) May deduct charitable donations
4) Is entitled to a $100 exemption

Question 21

Four (4) items that qualify for unlimited exclusion from being included on a gift tax return.

Answer 21

1) payments made directly to an educational institution for a donee’s tuition (note doesn’t include room & board)
2) payments made directly to a health care provider for medical care
3) charitable gifts, and
4) marital transfers.

Question 22

In an estate tax return, property owned by a spouse owned jointly

Answer 22

is split 50/50

Question 23

Other joint property is

Answer 23

100% less other owner’s contribution

Question 24

A fiduciary must file a return on Form 1041 if the estate

Answer 24

has gross income of $600 or more for the tax year and if none of the beneficiaries are nonresident aliens.

Question 25

The generation-skipping transfer tax is imposed

Answer 25

IN ADDITION TO any gift or estate tax that may result from a transfer.

The generation-skipping transfer tax is imposed on transfers of future interest who are TWO generations or MORE below the donor’s generation.

Question 26

In regards to ordinary and necessary administration expenses paid by the fiduciary of an estate, they are deductible

Answer 26

On the fiduciary income tax return ONLY IF the estate tax deduction is waived for these expenses.

To deduct administration expenses, a statement must be filed with the income tax return stating that those deductions have not been taken on the decedent’s estate tax return.

Question 27

These offset against the calculated amount of tentative estate tax on Form 706 to determine the estate tax payable with the estate tax return?

Answer 27

1) The applicable credit
and
2) the amount of gift taxes payable on prior gifts made (after 1976)

reduce the amount of calculated tentative estate tax to arrive at the amount of estate tax payable with the estate tax return (Form 706).

Question 28

For the Estate Tax Return (Form 706) Deductions are:

Answer 28

1) Non-discretionary expenses :
a) Medical (pd w.in 1 yr of death) and not on 1040
b) expenses for Administering and Settling the estate (If Estate not big enuf to file Form 706, then take on 1041)
c) Outstanding debts of decedent
d) Claims against the estate
e) Funeral costs
f) Certain taxes
2) Discretionary expenses(Rembmer the 2 that ruled your life: God & Spouse)
a) Unlimited charitable deductions
b) Unlimited marital deduction

Question 29

Trick Question

Answer 29

Tax Preparer = Someone who is PAID