Tax - Trusts & Estates Flashcards
Trust types: living vs testamentary
Living trust: created by grantor who is still alive at time trust is created
Aka inter vivos trust
Testamentary trust: created by individual’s will at or following date of grantor’s death
Trust types: revocable vs irrevocable
Revocable trust: may be amended, altered, or revoked by grantor at any time, provided a grantor is not mentally incapacitated
Irrevocable trust: may not be amended, altered, or revoked by grantor at any time until terms or purposes of trust have been completed
Trust types: simple vs complex
Simple trust: - all the income must be distributed on annual basis - does not distribute from corpus - does not have charitable deduction – Exemption amount is $300
Complex trust:
– All income does not have to be distributed on annual basis
– Exemption amount is $100
Taxable entities
Estates and trusts are separate taxable and cheese.
But taxable income from these entities are taxed to either entity or its beneficiaries according to income allocable to each party.
Tax returns
Estate and trust returns:
– IRS form 1041
– Due by 15th day of fourth month following close of tax year
– Estimated tax payments generally required
Estate tax returns:
– File if gross income is $600 or more
– May use either fiscal or calendar year
– May be exempt from estimated tax payments during first two tax years
Trust tax returns:
– File if either $600 or more gross income or any amounts taxable income
– Must use calendar year
Gross income
Basically same as for individual.
– Gains and losses recognize when property transfer to beneficiary in lieu of cash to satisfy specific cash request.
– No gain or loss recognize when specific property is transferred to beneficiary under specific bequest.
– IRD is in gross income.
– Trust receipts normally allocated to principal would be any receipts that I one time in nature. EG: stock splits, stock dividends, settlement of claims on property damage.
– Trust receipts that are normally allocated to income would be any receipts that are routine in nature and usually received on annual basis. EG: cash dividends, royalties, rents, interest.
Deductions
Similar to individual.
– Expenses for IRD not reported on decedents final tax return may be claimed by taxpayer receiving IRD. May deduct on both the state and income tax return.
– Estate may claim administration expenses and casualty losses as either a state text adduction or income tax seduction. Cannot be on both.
– Neither capital loss nor business loss sustained by decedent may be carried forward and adducted on the state tax return
– Trust payments normally allocated to principle: monthly mortgage principal payments
– Trust payments normally allocated to income: normal, ordinary, necessary payments that occur every year a month: insurance, taxes, monthly mortgage interest payments
Deductions: personal exemption
Personal exemption aloud: – $600 for a states – $300 for simple trusts – $4000 for qualified disability trusts – $100 for complex trusts/all other trusts
Deductions: charitable contribution
Unlimited deduction allowed to a state or complex trust if contribution is paid out of gross income.
– No deduction available for contributions paid from tax-exempt income
– No contribution deduction available to simple trusts
Deductions: distributable net income
Distributions of income to beneficiaries are allowed a seduction. But cannot exceed DNI.
– DNI sets limits on amount of distribution deductible
– DNI determines amount and character of income to be reported by beneficiaries
DNI amount is entity's taxable income before distribution deduction with following adjustments: Additions: – Personal exemption – Net tax-exempt interest – Net capital loss deduction Subtractions: – Net capital gains taxable to entity – For simple trusts, dividends allocable to corpus
Deductions: medical and funeral expenses
Deductible on estate’s return under following rules:
– Medical expenses of decedent paid within 12 months of death are deductible on decedent’s final tax return if not claimed as estate deduction
– Medical expenses not paid within one year of death deductible only on estate return
– Funeral expenses may be deducted on estate return
Beneficiary’s share of taxable income
Beneficiaries generally tax on income distributions that they receive.
Character of income is same to beneficiary as it was to estate or trust.
Beneficiary: simple trust
Beneficiaries are taxed on income that is required to be distributed to them, whether or not it is actually distributed during year.
Amount taxable is limited to trust’s DNI.
Beneficiary: complex trust
Beneficiaries must pay taxes on income required to be distributed currently, whether or not actually distributed, plus any other amounts paid, credited, or requires to be distributed for year.
- distributions from DNI are taxable
– Distributions in excess of DNI generally not taxable
– When more than one beneficiary receiving distribution, DNI is divided between beneficiaries using two-tier system of allocation.
Beneficiary: special tax situations for trusts
When grantor of trust retains beneficial enjoyment or substantial control over trust property or income, trust is disregarded and grantor is taxed on trust income.
When appreciated property transferred to trust and subsequently sold at gain within two years, special tax applies.
Gain will be taxed to trust at grantors applicable tax rate for year of sale.
