TAXATION FOR CO-OWNERSHIP, ESTATES AND TRUSTS Flashcards
When does co-ownership occur?
Co-ownership occurs when two or more heirs inherit an UNDIVIDED PROPERTY from a decedent or when a donor makes a gift of undivided property in favor of two or more donees.
What is the general rule for income tax purposes for co-ownerships? What are the exceptions to the general rule?
GR: A CO-OWNERSHIP IS EXEMPT FROM INCOME TAX. THE INCOME OF THE CO-OWNERSHIP WILL BE TAXABLE TO THE CO-OWNERS IN THEIR RESPECTIVE CAPACITIES.
EX: The following are the instances wherein a co-ownership may be TAXABLE AS A CORPORATION:
a. The co-owners APPOINTS AN ADMINISTRATOR WHO MANAGES THE AFFAIRS OF THE CO-OWNERSHIP by making investments therein from which profits are realized. This applies even if there is already a partition ordered by the court should joint management be given to one of the co-owners.
b. The co-owners USED THE COMMON PROPERTIES/INCOME DERIVED THEREFROM AS A COMMON FUND WITH INTENT TO MAKE PROFITS
c. When the property REMAINS UNDIVIDED FOR MORE THAN TEN (10) YEARS AND NO ATTEMPT WAS MADE TO DIVIDE THE SAME AMONG THE CO-HEIRS, nor was the property UNDER ADMINISTRATION PROCEEDINGS NOR HELD IN TRUST
d. In all other instances when the co-ownership activities are already beyond mere preservation of the co-owned property.
How shall estates and trusts be taxed?
The taxable income of (JUDICIALLY-SETTLED) estates and (IRREVOCABLE) trusts shall be computed in the SAME MANNER AND BASIS AS INDIVIDUALS, WITH THE FOLLOWING ADDITIONAL DEDUCTIONS:
a. Amount of the income of the estate or trust for the taxable year which is to be distributed currently by the fiduciary to the beneficiaries.
b. The amount of income collected by a guardian of an infant which is to be held or distributed as the court may direct.
N.B.
The distributed income to beneficiaries is taxable to them
If the trust is administered in a foreign country:
a. A and B are not deductible
b. Income distributed to beneficiaries are not deductible
What happens when an estate is settled judicially?
The estate becomes taxable as a separate entity, and the fiduciary/trustee files the ITR and pays the tax thereon.
What happens when an estate is settled extrajudicially?
The estate does not become taxable as a separate entity, and its income is to be declared by the beneficiaries. The heirs and the beneficiaries file the ITR of the estate and pays the tax due thereon.
What is meant by “corpus of the estate”? What is its treatment for tax purposes?
Corpus of the estate means SHARE IN THE INHERITANCE, NOT SHARE IN INCOME OF THE INHERITANCE.
It is non-deductible from estate’s gross income.
T or F
The amount of income of the estate during the year that is paid or credited to the legatee/heir/beneficiary is subject to final withholding tax of 15%
False, the 15% is CREDITABLE WITHHOLDING TAX, not FWT.
What happens when a trust is irrevocable?
It shall be taxable as a separate entity.
What happens when a trust is revocable?
It shall not be taxable as a separate entity, and the income of the revocable trust shall be part of the income of the grantor.
T or F
An income of a trust administered abroad generated income of 5,000,000 of which 1,000,000 was transferred to Mr. Abdul, the beneficiary. The trust also incurred expenses of 300,000. Mr. Abdul also has compensation of 200,000.
The taxable income of the trust is 3,700,000.
The taxable income of Mr. Abdul is 1,200,000.
False. For both the estate and the beneficiary, the income transferred to the beneficiary is NOT DEDUCTIBLE SINCE THE TRUST IS ADMINISTERED ABROAD. The correct taxable income is:
Trust: 4,700,000
Mr. Abdul: 200,000
What happens when a trust is created in which the income of the trust is for the benefit of the grantor?
The income of the trust is to be declared and taxed on the grantor.
Explain the consolidation of trusts.
Income of trusts shall be CONSOLIDATED when:
a. There are two or more trusts which derive income
b. The CREATOR OF THE TRUST IN EACH INSTANCE IS THE SAME PERSON
c. The BENEFICIARY IN EACH INSTANCE IS THE SAME.
What happens when the trust is administered abroad?
In case of a trust administered in a foreign country, the amount of the income of the estate or trust for the taxable year which is distributed currently by the fiduciary to the beneficiaries is not deductible from the gross income of the estate or trust.
