R4 Estate, Trust, and Gift Taxation

Question 1

What are the filing requirements (form 1041) and estimated tax requirements for annual estate income tax returns?

Answer 1

Form 1041 must be filed if annual income is $600 or more.
Additionally:

1. Estates gets a personal exemption of $600
2. Estate is exempt form estimated tax payments for 2 years

Question 2

Define distribution 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
= DNI

Question 3

What is the income distribution deduction?

Answer 3

The income distribution deduction is the lesser of the following:

Total distribution (invluding 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 at the earlier of date of distribution or 6 months after the date of death if the alternative valuation date is elected) 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 nondiscretionary deductions for an estate.

Answer 5

Examples of nondiscretionary deduction for an estate:

1. Medical expenses
2. Administrative expenses
3. Outstanding debts of decedent
4. Claims against the estate
5. Funeral costs
6. Certain taxes (including state death taxes)

Question 6

Define the applicable credit for 2014 and state the amount?

Answer 6

The applicable credit is the estate and gift tax calculated on total lifetime and death-time transfer of up to $5,340,000 (2014).

For 2014, the tax credit is $2,081,800.

The amount of credit shelters lifetime and death-time transfers (gift and / or estate) of up to $5,340,000

Question 7

State the formula for determining the estate tax.

Answer 7

\+ Gross estate
- Nondiscretionary and discretionary deductions
= Taxable Estate
\+ Aggregate Adjusted taxable gifts made during life
= Tentative tax base at death
x Uniform tax rate
= Tentative estate tax
- Gift tax paid in Prior years
= Gross Estate Tax
- Applicable credit
= Estate tax due

Question 8

What is the annual exclusion for gifts?

Answer 8

Each year an individual can give any number of people up to $14,000 each w/o gift tax ramifications.

Unlimited exclusion:

1. Amount directly paid on behalf of a donee

A. Tuition directly to educaiton org

B. Fee paid directly to a health care provider for medical care of the donee

2. Charitable Gifts
3. Marital Deductions

Question 9

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

Answer 9

1. The postponement of a right to use, possess, or enjoy the property distinguishes a future interest from a present interest.
2. A present interest qualifies for the annual exclusion $14K
3. A future interest (or a present interest without ascertainable value) does not qualify for the annual exclusion

Question 10

Distinguish between simple trust and complex trusts.

Answer 10

Simple Trusts:

1. Distributions is made out of current income only
2. Income is taxable to beneficiary
3. All income must be distributed
4. No deduction is allowed for charitable contribution
5. Exemption is $300

Complex trusts

1. Distributions may be out of principal (corpus)
2. Income may be accumulated within the trust (no income distribution requirement)
3. Deduction are allowed for charitable contributions
4. Exemption is $100