Income Taxation of Trusts and Estates

Question 1

Filing Requirements

Answer 1

• trusts and estates must file a return if they have more than $600 in gross income for the tax year.
• a trust must file a return if it has any taxable income for the year
• taxable trust files form 1041 to report income and distributions to beneficiaries
• due date is the 15th day of the fourth month following the end of the entity’s tax year.

Question 2

Choice of Taxable Year

Answer 2

• Trusts must use a calendar year unless they are tax-exempt, charitable, or a grantor trust.
• Estates may choose a calendar or fiscal year

Question 3

Tax Treatment of Distributions to Beneficiaries

Answer 3

• the income of a trust or estate is taxed to the beneficiaries if it distributed, and it is taxed to the trust if it is retained.
• beneficiaries are also taxed on the amount that is required to be distributed even if it is not distributed.

Question 4

Tax Rates for Trusts & Estates

Answer 4

Rate - Taxable Income
15% - $0-$2,550
25% - $2,551-$6,000
28% - $6,001-$9,150
33% - $9,151-$12,500
39.6% - over $12,500

Question 5

Grantor Trusts

Answer 5

-when a grantor creates a trust and retains certain powers or control over a trust, the trust is considered a grantor trust, and the trust income will be taxed to the grantor.

Question 6

Powers that make a Grantor Trust

Answer 6

• trust income is paid to the grantor or to the spouse
• trust income may be payable to the grantor or spouse
• trust income is accumulated for future distribution to grantor or spouse
• trust income is or may be used to purchase life insurance on the grantor or spouse
• grantor retains a reversionary interest
• trust income is or may be used to discharge a legal obligation of the grantor or grantors family
• grantor retains power to revoke or amend the trust
• grantor can dispose of income or corpus at less than full value
• the grantor can borrow from the trust without adequate security or interest
• grantor retains the right to alter the beneficial enjoyment of the trust property or its income.

Question 7

Simple Trusts

Answer 7

• are required to distribute all of their current accounting income to beneficiaries
• cannot make charitable contributions and cannot make distributions in excess of current account income (no principal)
• has a standard deduction of zero and personal exemption of $300.

Question 8

Complex Trusts

Answer 8

• can accumulate income, make charitable contributions, and distribute principal to beneficiaries.
• has a standard deduction of zero and personal exemption of $100.

Question 9

Trust Taxable Income

Answer 9

-determined by taking accounting income and subtracting a trust’s deductions and distributions.

Question 10

Distributable Net Income (DNI)

Answer 10

• DNI includes capital gains, to the extent included in accounting income, and ignores capital losses, unless used to offset capital gains.
• A trusts deductions for distributions cannot exceed its DNI
• DNI includes tax-exempt income
• the income distribution deduction does not include any tax-exempt income, as the tax-exempt income is not part of the trust’s taxable income. It does not include capital gains either
• DNI is the ceiling for the amount to be included in the income of the beneficiaries
• the trust avoids double taxation on DNI because there is a deduction for any income that is actually distributed to beneficiaries

Question 11

Estate Income Tax

Answer 11

• income tax calculation is the same as for a complex trust
• there is a personal exemption of $600
• the expenses of administration may be deducted either on the estate’s income tax return or on the estate tax return, but not both.