R4 Estate, Trust, and Gift Taxation

Question 1

What are the filing requirements (Form 1041) and estimated tax requirement for the annual estate income tax return?

Answer 1

Form 1041 must be filed if annual income is more than $600:

• Estate gets a persona exemption of $600
• Estate is exempt from estimated payments for 2 years

Question 2

Define the distributable net income (DNI)

Answer 2

\+ Estate (trust) gross income (including capital gains)
- Estate (trust deductions)
= Adjusted Total Income
\+ Adjusted Tax-Exempt interest
-Capital gains allocated to corpus 
= Distributable Net Income (DNI)

Question 3

What is the income distribution deduction?

Answer 3

Is the lesser of:
*Total distributions (including income required to be distributed currently) to beneficiary less tax-exempt income
OR
*DNI (less adjusted tax-exempt interest)

Question 4

Define gross estate

Answer 4

The gross estate is the FMV at the date of death (or if AVD selected the FMV of the earlier of 6 months or date of distribution) of all the decedent’s worldwide property, including real property, personal tangible property, and intangible property.

The gross estate also includes the FMV of the decedent’s share of jointly held property.

Question 5

Identify some non discretionary deductions for an estate

Answer 5

Examples of non-discretionary deductions for an estate:
Medical expense (form 1041)
Administrative expenses (form 706)
Outstanding debts of decedent
Claims against the estate
Funeral costs
Certain taxes (including state death taxes)

Question 6

Define the applicable credit for 2013 and state the amount

Answer 6

The applicable credit is the estate and gift tax calculated on total lifetime and death-time transfers up to $5,250,000. (applicable exclusion credit)

The tax credit is $2,045,800.

The amount of credit shelters lifetime and death-time transfers (gift and/or estate) of up to $5,250,000.

Question 7

State the formula for determining the estate tax

Answer 7

FMV of Assets
- Liabilities
= Net Worth
- Discretionary deductions (charity, marital)
= Taxable Estate
x Tax Rate (40%)
= Estate Tax
- Credits ($2,045,800)
= Federal Estate Tax

Question 8

What is the annual exclusion for gifts?

Answer 8

$14,000 or $28,000 for couples

Unlimited exclusions for:

• Tuition paid directly to an education organization
• Fees paid directly to a health care provider for medical care of the donee
• Charitable gifts
• Marital deduction

Question 9

What is the difference between a present interest gift and a future interest gift?

Answer 9

The postponement of a right to use, possess, or enjoy the property distinguishes a future interest from a present interest

A present interest qualifies for the annual exclusion ($14,000)

A future interest or present without ascertainable value does not qualify for the annual exclusion

Question 10

Identify how the tax due on current gifts is determined

Answer 10

Gross gifts in a calendar year at FMV
- Exclusion of $14,000 per donee per year (26,000 married)
- Payments made directly to educational institutions and/or health care providers
- Unlimited marital deduction 
- Charitable gifts
= Taxable gifts this year
\+ Taxable gifts prior years
= Cumulative Lifetime gifts 
- Gift Tax on prior gifts
- Applicable credit 
= Tax due on current gifts

Question 11

Distinguish between two types of trusts

Answer 11

Simple Trust:

• Distribution is made out of current income only
• All income must be distributed
• No deduction is allowed for charitable contributions
• Exemption is $300

Complex Trust:

• Distribution may be out of principal (corpus)
• Income may be accumulated within the trust
• Deductions are allowed for charitable contribution
• Exemption is $100