R4.4 – Estate, Trust, and Gift Tax

Question 1

Fiduciaries

Answer 1

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)

Question 2

Unified Estate and Gift Tax

Answer 2

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

Question 3

Income Taxation for Estates and Trusts

Answer 3

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

Question 4

Income Taxation for Estates and Trusts – Income Tax Formula

Answer 4

Gross Income (includes capital gains)
– Deductions
– Distribution deduction (maximum is DNI)
– Personal exemption
= Taxable income
   × Tax rates
   = Gross tax
     – Credits
     \+ Additional taxes
     = Tax Payable

Question 5

Income Taxation for Estates and Trusts – Income Tax Formula: Gross Income

Answer 5

Generally determined in the same with individuals

Includes capital gains

Question 6

Income Taxation for Estates and Trusts – Income Tax Formula: Deductions

Answer 6

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

Question 7

Income Taxation for Estates and Trusts – Income Tax Formula: Distribution Deduction

Answer 7

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

Question 8

Income Taxation for Estates and Trusts – Income Tax Formula: Distributable Net Income

Answer 8

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

Question 9

Income Taxation for Estates and Trusts – Income Tax Formula: Personal Exemptions

Answer 9

$600 for estates

$300 for simple trusts, and complex trusts that distribute all their income currently

$100 for other complex trusts

Question 10

Simple vs Complex Trusts

Answer 10

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.

Question 11

Income Taxation for Estates and Trusts – Income Tax Formula: Tax Credits

Answer 11

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

Question 12

Income Taxation for Estates and Trusts – Income Tax Formula: Additional Taxes

Answer 12

Fiduciaries pay AMT when applicable

Question 13

Income Taxation for Estates and Trusts – Procedural Rules

Answer 13

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

Question 14

Estate Tax

Answer 14

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)

Question 15

Estate Transfer Tax Formula

Answer 15

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 Due

Question 16

Estate Transfer Tax Formula – Gross Estate: Inclusions

Answer 16

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

Question 17

Estate Transfer Tax Formula – Nondiscretionary Deductions

Answer 17

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

Question 18

Estate Transfer Tax Formula – Discretionary Deductions

Answer 18

Unlimited charitable deduction

Unlimited marital deduction (spouse must be citizen)

Question 19

Estate Transfer Tax Formula – Adjusted Taxable Gifts

Answer 19

Taxable gifts other than those already included in gross estate

Question 20

Estate Transfer Tax Formula – Tax Rates

Answer 20

Maximum - 35%

Question 21

Estate Transfer Tax Formula – Unified Credit

Answer 21

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

Question 22

Estate Transfer Tax Formula – Other Credits

Answer 22

Foreign Death Taxes

Question 23

Gift Tax

Answer 23

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

Question 24

Gift Tax – Present vs Future Interest

Answer 24

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

Question 25

Gift Tax – Complete Gift

Answer 25

Unconditional

Irrevocable

Accepted by donee

Question 26

Unlimited Exclusions

Answer 26

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

Question 27

Gifts are not taxable to recipient

Answer 27

Basis of gifts received = donor’s basis + any gift tax paid due to appreciation in value inherent in gift

Question 28

Gift Tax Formula

Answer 28

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 gifts

Question 29

Generation-Skipping Transfer Tax

Answer 29

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)