Estate_Trust_Taxation

Question 1

How is Gift taxation different from Estate taxation?

Answer 1

• Gift - Property transferred while taxpayer is living
• Estates - result from the death of the death of individaul

Question 2

What is the annual exclusion amount for a taxpayer’s Gift taxation? What is required to get the exclusion?

Answer 2

• annual exclusion amount = $14,000 per year per spouse to each individual
• In order to get the exclusion, the recipient must immediately acquire a present interest in the property and get unrestricted access to the property and all of its benefits
• future interest - no $14,000 exclusion

Question 3

If a Gift is an annuity, what value is used for the Gift?

Answer 3

If the Gift is an annuity, use Present Value to determine the gross Gift

Question 4

What is the basic Gift tax calculation?

Answer 4

Gross Gifts (cash, FMV property, reduction in interest on loan, discount to sale of property)

• *-** 1/2 of Gifts (treated as given by spouse)
• *-** Total # of donees x $14,000 exclusion
• *-** Education and medical bills directly paid → exclude
• *-** Support of minor → exclude
• *-** Donation to political organization and charities → exclude
• *=** taxable Gift for CY
• *+** taxable gift PY
• *=** Total taxable gift

Question 5

How is a Gift taxed if a recipient gains a future ownership in the Gifted property?

Answer 5

• Recipient must gain ownership and all rights to property to get the annual exclusion.
• If recipient merely gains a future ownership, then the present value of the Gift is 100% taxable to donor and cannot exclude from Gift tax calc

Question 6

What are the deductions for Gift tax, besides the annual exclusion?

Answer 6

• Tuition and medical expenses paid directly to the provider organization (note: NOT books or dorm fees)
• Political contributions
• Charitable Gifts Unlimited
• Gifts to spouse

Question 7

What is the basis of Gifted property for the recipient?

Answer 7

• If a loss on sale, basis is FMV on the date of the Gift
• If a gain on sale, basis is same as donor’s basis
• No G/L if donor basis is less than sales price, and sales price is less than FMV @ Gift date

Question 8

How/when are Gift tax returns filed?

Answer 8

• Calendar-year basis only
• Due April 15
• if the donor dies, no later than the date for filing the estate tax return - 9 month after date of death
• form 709

Question 9

What are the basic characteristics of complex Trust?

Answer 9

• Income distributions are optional
• Accumulation of income ok
• Charitable contributions ok
• Contributions using tax-exempt income are not deductible
• Allowed personal exemption of $100
• Key Point: Distribution of Trust corpus (principal) ok

Question 10

What are the basic characteristics of a Simple Trust?

Answer 10

• **Must distribute all income distributions each year **
• CANNOT
  
  • make charitable contributions
  • distribute Trust corpus (principal)
• Personal exemption of $300

Question 11

How are Net Operating Losses handled in a Trust?

Answer 11

• Trusts can have a Net Operating Loss
• Any unused NOL flows through to the beneficiaries

Question 12

How are expenses and fees related to tax-exempt income handled in a Trust?

Answer 12

Expenses and fees from tax-exempt income are not deductible for either a Complex or Simple Trust

Question 13

When is property transferred in an Estate?

Answer 13

After the death of the donor

• unlimited marital deduction

Question 14

What amount of a decedent’s Estate is exempt from Estate Tax?

Answer 14

• The First $5,250,000 is exempt with a 40% tax on amount above that
• File an estate tax return (form 706) if decedent’s gross estate > $5,250,000 - if lifetime gift, the exemption amount is reduce by the amount of taxable lifetime gift - to see if need to file a return

Question 15

How are a decedent’s medical expenses handled with respect to an Estate?

Answer 15

Medical expenses paid by decedent’s estate within 1 year of death AND executor attached a waiver → go on **decedent’s final personal tax return **

Question 16

How is an Estate’s NOL handled?

Answer 16

• Estates can have a Net Operating Loss
• Any unused NOL flows through to the beneficiaries

Question 17

What does a gross Estate consist of?

Answer 17

Cash and Property - FMV at death or alternate valuation

Question 18

What is joint tenancy with respect to an Estate? How is it calculated?

Answer 18

• When two non-spouses jointly own property
• FMV at death X % Ownership = Amount in Estate

Question 19

What is tenancy by entirety?

Answer 19

1/2 of marital assets go to deceased spouses Estate

Question 20

What is tenancy in common in an Estate?

Answer 20

A, B, and C own property If A dies, FMV of As share goes to heirs

Question 21

How is Estate tax handled with respect to a beneficiary?

Answer 21

• Property received through inheritance → no income to recipient
• Property value is FMV at date of death OR 6 months later- alternative valuation date → AVD is used only if it reduce both value of the gross estate and amount of estate tax liability
• If property is sold prior to 6 month date and the alternative date is used, FMV at date of sale is used to value property
• Basis in property automatically assumes LT holding period

Question 22

What is distributable net income (DNI)?

Answer 22

• DNI = max amount of distribution that can be taxed to the beneficiary & max amount of distribution deduction for the estate, the rest is a tax free distribution of principal
• **if multiple distribution > DNI → DNI must be prorate to determine the portion of each distribution that must be include in gross income **
• DNI includes tax exempt income - municipal bond
• DNI does NOT include Net capital gain allocated to the corpus
• No exemption

Question 23

what credits may be offset against the gross estate tax in determining the net estate tax ?

Answer 23

• Foreign death tax credit – Taxes paid on property in other countries to the extent the property
  has been taxed twice.
• Unified credit – A credit that is large enough to eliminate the tax on an estate equal to
  the lifetime exclusion of $5,250,000
• State Death tax credit – Payments for State estate, inheritance, legacy or succession
  taxes.

Question 24

When is life insurance proceed included in the decedent’s gross estate?

Answer 24

Life insurance proceed is included in the decedent’s gross estate when:

• life insurance proceed is payable to the estate
• life insurance proceed is payable to another for the benefit of the estate
• the decendent possessed and incident of ownership on the police i.e. power to change the beneficiary, revoke, pledge, cancel policy

Question 25

Grantor & Irrevocable Trust

Answer 25

Grantor Trust : creator has the right to withdraw assets at any time - earnings are **taxed to the creator **

Irrevocable Trust: creator generally may not withdraw assets - trust is **tax separately from the creator or beneficiary **

Question 26

Deduction Trust/Estate - exception

Answer 26

• Managment/ feduciaries fees: only deduct based on the % of taxable income
• Charity: 100% deductible
• Income Distibution deduction - is allowed for distributions of income to beneficiaries

Question 27

**Trust and Estate income tax return **

Answer 27

Trust : calendar year, due 04/15 of following year, estimate payment required; exemption $100 complex, $300 simple; Form1041; 5 months extension

Estate income tax return: calendar year or fiscal year; begins on date of death; 3^1/2 months after close of the year; not estimated payment required the first 2 years ; exemption amount $600; Form1041

Question 28

Calculation of distributable net income (DNI)

Answer 28

(1) Add

(a) Personal exemption
(b) Any net capital loss deduction (limited to $3,000)
(c) Tax exempt interest (reduced by related nondeductible expenses)

(2) _Subtrac_t

(a) Net capital gains allocable to corpus
(b) Extraordinary dividends and taxable stock dividends allocated to corpus of simple trust

Deduction will be the LESSER of DNI or the amount distributed to beneficiaries (i.e., taxable income required to be distributed, plus other amount of taxable income distributed)