R4.4 – Estate, Trust, and Gift Tax Flashcards
Fiduciaries
Fiduciaries = Trusts & Estates
Estates and trusts are separate income taxpaying entities
– Distributions deductible to the entity
– Distributions taxable to the recipient
Estates subject to two separate taxes
– Income tax (due annually)
– Estate tax (one-time only transfer tax)
Unified Estate and Gift Tax
Estate tax and gift tax have been unified into a single transfer tax
– Transfers during the life of the donor triggers a gift tax
– Transfer at death triggers estate tax
$2,045,800 unified estate and gift tax credit = first $5,250,000 of transfers from an estate and/or gifts will not trigger tax liability
Note: Transfer taxes were unified in 1976, so special rules apply to transfers before 1976
Income Taxation for Estates and Trusts
Receipts and disbursements of trusts and estates are categorized as either principal (corpus) or income
Distributions of income to beneficiaries is deductible, and tax is paid on undistributed taxable income
Note: Income distributed to the beneficiaries is taxable to the beneficiaries
– Reported on Schedule K-1 (Form 1041) and retains the same character as the income had at the fiduciary level
Income Taxation for Estates and Trusts – Income Tax Formula
Gross Income (includes capital gains)
– Deductions
– Distribution deduction (maximum is DNI)
– Personal exemption
= Taxable income
× Tax rates
= Gross tax
– Credits
\+ Additional taxes
= Tax PayableIncome Taxation for Estates and Trusts – Income Tax Formula: Gross Income
Generally determined in the same with individuals
Includes capital gains
Income Taxation for Estates and Trusts – Income Tax Formula: Deductions
Deductions = ordinary and necessary expenses incurred in:
– Carrying on a trade or business
– Production of income
– Management or conservation of income-producing property (including the trustee’s executive’s fees)
– Determination, collection, or refund of any tax
– Contributions to charity
Income Taxation for Estates and Trusts – Income Tax Formula: Distribution Deduction
Deduction for distributions of income is limited to distributable net income (DNI)
Distribution deduction is the lesser of
1) actual distribution to beneficiary
or
2) distribution distributable net income (less adjusted tax-exempt interest)
Adjustable tax-exempt interest is tax exempt interest income reduced by interest of investment expenses related to text-exact interest
Adjustable tax-exempt interest is tax exempt interest income reduced by interest of investment expenses related to tax exempt interes
Income Taxation for Estates and Trusts – Income Tax Formula: Distributable Net Income
Estate (trust) gross income (includes capital gains)
– Estate (trust) deduction (ordinary and necessary)
= Adjusted total income
+ Adjusted tax-exempt interest*
– Capital gain attributable to corpus
= Distributable Net Income
Income Taxation for Estates and Trusts – Income Tax Formula: Personal Exemptions
$600 for estates
$300 for simple trusts, and complex trusts that distribute all their income currently
$100 for other complex trusts
Simple vs Complex Trusts
Simple trust
– Distributes all income currently, and
– Makes no distributions of corpus currently, and
–Makes no current charitable contributions
If any requirement not met, trust is complex.
Trust can be simple one year and complex the next year.
Income Taxation for Estates and Trusts – Income Tax Formula: Tax Credits
Generally, tax credits allowed to individuals allowed to fiduciaries
Tax credits typically must be apportioned between the fiduciary and the beneficiaries based on income allocated to each
Income Taxation for Estates and Trusts – Income Tax Formula: Additional Taxes
Fiduciaries pay AMT when applicable
Income Taxation for Estates and Trusts – Procedural Rules
Annual Estate or Trust Income Tax Return - Form 1041
Estates must file a return when annual income exceeds $600.
Tax year
– Trusts must use calendar year
– Estates can select any year end
Tax return due on the 15th day of 4th month after year-end
Estimated income taxes
–Trusts must pay estimated income taxes
– Estates pay estimated income taxes after the first two tax years of operation
Estate Tax
Estate tax is a transfer tax imposed on the value of property transferred by a decedent at death
If gross estate exceeds $5,250,000 (2013), a Form 706 must be filed
– File form 706 within 9 months of death (extension available)
Estate Transfer Tax Formula
Gross estate
– Nondiscretionary Deductions
= Adjusted Gross Estate
– Discretionary Deductions
= Taxable Estate
\+ Adjusted taxable gift (post-1976 gifts that were taxed)
= Tentative Tax Basie
× Uniform Tax Rates
= Tentative Estate Tax
– Gifts Taxes Paid (on post-1976 gifts)
= Gross Estate Tax
– Uniform Credit (up to $2,045,800 credit)
= Estate Tax DueEstate Transfer Tax Formula – Gross Estate: Inclusions
Gross estate is the value at the date of death up all the decedent’s worldwide property
– Alternate valuation date = 6 months from the date of death
FMV of property
– 50% of property jointly owned with spouse
– Consideration paid for other jointly owned property
Insurance proceeds
– Decedent/estate as beneficiary
– Decedent had incidents of ownership
Incomplete gifts
Revocable transfers
Income in respect of the decedent
Estate Transfer Tax Formula – Nondiscretionary Deductions
Medical expenses (> 7.5% AGI, paid within one year of death, not already deducted on Form 706, executor files appropriate waiver)
Administrative expenses (not already deducted elsewhere)
Outstanding debts of decedent
Claims against the state
Funeral costs
Certain taxes
Estate Transfer Tax Formula – Discretionary Deductions
Unlimited charitable deduction
Unlimited marital deduction (spouse must be citizen)
Estate Transfer Tax Formula – Adjusted Taxable Gifts
Taxable gifts other than those already included in gross estate
Estate Transfer Tax Formula – Tax Rates
Maximum - 35%
Estate Transfer Tax Formula – Unified Credit
Unified credit = $2,045,800 for 2013
Eliminates tax on net estate of $5,250,000
Unused credit from spouse dying after 2010 may be used for the surviving spouse’s estate when he/she later dies
Estate Transfer Tax Formula – Other Credits
Foreign Death Taxes
Gift Tax
Gift tax is a transfer tax paid by certain donors of gifts
– Affected donors = donors who give > $14,000/donee per year ($28,000/donnee for MFJ with gift splitting)
– Affected donors must file Form 706
Every transfer of money or property for less than adequate consideration is a gift.
2013 annual exclusion is $14,000 (or $28,000 with gift-splitting) per donee
– Gifts must be present interest and complete to qualify for exclusion
Gift Tax – Present vs Future Interest
Present interest = right to income or to enjoy property currently
Future interest = right to use, possess, or enjoy property postponed
Gift to minor considered a present interest if the minor has right to property upon reaching age 21
Gift Tax – Complete Gift
Unconditional
Irrevocable
Accepted by donee
Unlimited Exclusions
For payments made to
– An education institute on behalf of a donee
– A health care provider on behalf of a donee
– A charity
– A spouse
Gifts are not taxable to recipient
Basis of gifts received = donor’s basis + any gift tax paid due to appreciation in value inherent in gift
Gift Tax Formula
Gifts in current year
– $14,000/donnee exclusion
– Unlimited marital gifts
– Charitable gifts
= Taxable gifts this year
\+ Prior taxable gifts
= Cumulative taxable gifts
× Tax Rate
= Tax on cumulative taxable gifts
– Gift tax paid on prior gifts
– Applicable credit
= Tax due on current giftsGeneration-Skipping Transfer Tax
Supplemental tax that prevents avoidance of transfer taxes by skipping one generation of recipients
Triggered by transfer of property to someone more than one generation younger than donor or decedent
E.g. grandparent → grandchild
Doesn’t apply if intervening generation is dead
Tax = highest estate and gift tax rate in effect
Applies to all lifetime transfers in excess of $5,250,000 ($10,500,000 MFJ and gift-splitting)
