Estates, Trusts, and Gifts

Question 1

What are Trusts and Estates?

Answer 1

Separate Entities, often called fiduciaries. Created under a fiduciary relationship in which assets (Principal or “Corpus”) have been transferred to the entity so that a person with fiduciary responsibility for the entity can hold legal title to the property for the benefit of named “beneficiaries.”

Question 2

Are Estate Distributions Taxable?

Answer 2

Taxable to recipient and deductible to the Estate.

Question 3

What taxes are estates subject to?

Answer 3

Income Tax and Estate Tax

Question 4

What is the Estate Transfer Tax?

Answer 4

•Lifetime Gifts:
o 14K or less per year/per done are excluded
o 2,117,800 unified estate and gift tax credit are exempted.
•Death Time Transfers
o Certain death time transfers are excluded
o Gift Tax Credit of 2,117,800 exempts the first 5,430,000 of taxable cumulative gifts and death time transfers.

Question 5

What type of accounting is used for estates and Trusts?

Answer 5

Fiduciary Accounting: Revolves around classification of all receipts and disbursements as either principal/corpus or income.

Question 6

How do estates account for capital gains and losses?

Answer 6

Capital Gains and Losses are classified as principal and must remain with the trust (allocated to corpus) to be taxed at the trust or estate level.

Question 7

What is the impact of distributable net income (DNI)?

Answer 7

Limitation on the amount the trust or estate can deduct with respect to distributions to beneficiaries.

Question 8

What is the DNI Formula?

Answer 8

Gross Income (Including Capital Gains) – Deductions = Adjusted total Income + Adjusted Tax-Exempt Interest – Capital Gains (Attributable to corpus) = Distributable Net Income

Question 9

What is the income distribution deduction?

Answer 9

Lesser of: Actual Distribution or DNI – Adjusted Tax Exempt Interest.

Question 10

What is the exemption for the income of an estate?

Answer 10

$600

Question 11

What is a simple trust?

Answer 11

Makes distributions out of current income; cannot make distributions from the trust corpus.

Question 12

What is the simple trust exemption?

Answer 12

$300

Question 13

How much may a trust deduct amounts distributed to beneficiaries?

Answer 13

Deduct amount distributed to beneficiaries up to DNI – Adjusted tax-exempt interest)

Question 14

What is a complex trust?

Answer 14

Accumulates current income, can distribute principal, may deduct charitable contributions.

Question 15

How much is a complex trust’s exemption in arriving at TI?

Answer 15

$100

Question 16

What is a trust’s income distribution deduction?

Answer 16

Lesser of DNI (less adjusted tax-exempt interest) – Adjusted tax exempt interest or Distributions (Less tax-exempt income).

Question 17

What is the estate tax?

Answer 17

Transfer tax rather than an income tax. Imposed on the value of the property transferred by the decedent at death.

Question 18

When must an estate tax return be filed?

Answer 18

9 Months (Birth + Death)

Question 19

What is a gross estate?

Answer 19

Value at the date of death or alternate valuation date of all the decedent’s worldwide property.

Question 20

When are life insurance proceeds included in the gross estate?

Answer 20

If deceased/estate is beneficiary or had incidence of ownership at death.

Question 21

When is the alternate valuation date used in the gross estate’s FMV of property?

Answer 21

Alternate Valuation date decreases both estate value and tax: earlier of (1) date property is distributed or (2) six months after date of death.

Question 22

What is the gross estate?

Answer 22

FMV of Property (Date of death or Alternate valuation date) + Insurance Proceeds if in control or estate is beneficiary, income entitled to be received, and revocable transfers.

Question 23

What is the difference between a present vs future interest?

Answer 23

Right to use, possess, or enjoy the property distinguishes a future interest from a present interest.

Question 24

Why is the distinction between a present interest and future interest important?

Answer 24

Present interest qualifies for the annual exclusion of 14K for gifts.

Question 25

What gifts receive an unlimited exclusion?

Answer 25

Payments directly to education or health care providers, charitable gifts, and marital deduction.

Question 26

Why is the distinction between a complete gift interest and future gift important?

Answer 26

Complete gifts are not considered part of the estate, incomplete gifts are included in the estate.

Question 27

When must an estate’s income tax return be filed?

Answer 27

April 15th or 4mths and 1 days after the end of the fiscal year.

Question 28

What amount of property is included in the gross estate of the first spouse to die?

Answer 28

50% of all property owned by the couple, regardless of which spouse furnished the original consideration, as they are considered to have owned the property as joint tenants with rights of survivorship.

Question 29

What standard deduction is allowed in the tax return of an estate or trust?

Answer 29

There is no standard deduction.

Question 30

Are gifts of income out of an estate or trust allowable?

Answer 30

No.

Question 31

The generation-skipping transfer tax is imposed:

Answer 31

As a separate tax in addition to the gift and estate taxes.

Question 32

Trust’s accounting income does not include what?

Answer 32

Gains and/or fees allocable to corpus.

Question 33

Which expenses can be deducted in a trust?

Answer 33

Those allocable to income.