Income Taxation of Trusts and Estates

Question 1

When a person dies, the personal rep is responsible for filing:

Answer 1

• Final Income Tax Return of deceased (Form 1040)
• Estate Income Tax Return (Form 1041)
• Estate Tax Return (706)

Question 2

Final Income Tax Return deadline

Answer 2

• Same as if taxpayer were still alive

Question 3

Income and deductions on Final Income Return

Answer 3

• Will be included up to the date of death
• Anything after date of death:
  
  • Any income recieved attritubale to assets in the estate will be on Form 1041

Question 4

What form should unpaid medical expenses be deducted from?

Answer 4

• 1040 if:
  
  • There are no estate taxes due
• 706 if:
  
  • Estate taxes are due

Question 5

Capital losses/Passive losses deduction?

Answer 5

• Any carryovers or suspended passive losses are ALLOWED on final return
  
  • But the rest are LOST FOREVER

Question 6

What is Form 1041 used for?

Answer 6

• For BOTH estates and trusts when it comes to income earned by estate and/or trusts

Question 7

1041 - For Estates - What activity can trigger this form?

Answer 7

• Reports any TAXABLE activity after the death of the person BUT BEFORE all assets have been distributed by the estate
• Activity can include:
  
  • Any income received or realized, including gains/losses from selling assets
  • Investment income, dividends, interest or rental income
  • Deductions, including expenses of administering the estate
  • IRD - income in respect of decedent

Question 8

When must 1041 be filed?

Answer 8

• If estate has GROSS INCOME of $600 OR MORE during tax year
• Due date:
  
  • One or before the 15th day of the 4th month following the close of the tax year

Question 9

When does personal rep have to start paying estimated taxes for the estate’s income?

Answer 9

• NOT UNTIL THE THIRD YEAR
  
  • If estate is still there

Question 10

IRD

Answer 10

• Any income that was EARNED but not received by decedent at time of death
• Not included on final tax return:
  
  • IS INCLUDED ON TAX RETURN OF PERSON/ENTITY THAT RECEIVES THE INCOME
• Keeps tax nature as if decedent were still alive

Question 11

What can be deducted on Final Form 1040?

Answer 11

• Final medical expenses (subject to the floor)
• Suspended passive activity losses
• Casualty losses

Question 12

What can be deducted on 1041?

Answer 12

• Executor fees
• Admin expenses (accounting, legal, etc)
• Casualty losses

Question 13

What can be deducted on 706?

Answer 13

• Medical expenses
• Executor fees
• Admin expenses
• Casualty losses

Question 14

What parties can income a trust receives be taxable to?

Answer 14

• Grantor
• Trust itself
• Bene

Question 15

Two types of trust bene’s

Answer 15

• Income bene
  
  • Has a interest in the income of the trust
• Remainder bene
  
  • Receives trust property at TERMINATION of trust or after set period of time

Question 16

How is an income bene taxed?

Answer 16

• To the bene
• Trust itself can deduct this income

Question 17

Simple vs Complex Trust

Answer 17

• Simple
  
  • Will distribute ALL of its income
• Complex
  
  • MAY RETAIN and ACCUMULATE income

Question 18

When will a trust pay tax on trust income tax rates?

Answer 18

• When the income ACCUMULATED within the trust.
• So it’s usually better to distribute money from trust to the bene’s so that tax burden will be less (since trust tax rates are higher than regular income tax rates)

Question 19

What is Form 706 used for?

Answer 19

• Used to report VALUE OF ESTATE on date of death
• Used to calculate estate tax due

Question 20

When is 706 required?

Answer 20

• For those who have an estate over the basic exclusion OR
• If the gross estate PLUS the adjusted taxable gifts made during life EXCEEDS lifetime exlcusion amount

Question 21

When is 706 and estate tax due?

Answer 21

• NINE MONTHS after date of death
• Extension is allowed for an additional SIX MONTHS for filing
• Extension is also allowed for paying estate tax (not to exceed 12 months) and must be reasonable cause
• Same penalties as with regular income tax

Question 22

What is the electin for portability?

Answer 22

• For the surviving spouse to ELECT (has to elect) if they want to use BOTH spouses exlcusions if they were to die in the SAME YEAR