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REG > Taxation on Estates, Trusts, & Exempt Organizations > Flashcards

Taxation on Estates, Trusts, & Exempt Organizations Flashcards

1
Q

What occurs with a trust?

A

The trustee has legal title to the beneficiary’s property, and has a fiduciary duty to use it properly

Rights and duties outlined in a trust instrument

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2
Q

What are the four elements of a trust?

A

(1) settlor/trustor
(2) trustee
(3) trust property
(4) beneficiary

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3
Q

What is a trustor?

A

Whoever causes the trust to exist

Can be same person as trustee or beneficiary

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4
Q

What can a trustee not delegate?

A

Control over the trust property

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5
Q

What occurs if a trustee becomes incapable to perform (or unwilling)?

A

The trust is not thereby dissolved – usually the court will appoint a trustee

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6
Q

What is another term for the property held in the trust?

A

Trust res

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7
Q

Under what circumstances can future property be held in trust?

A

Only insofar as the settlor/trustor has a present interest in it

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8
Q

If the trustee has legal ownership over the trust property, what does the beneficiary have?

A

Equity ownership

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9
Q

Does a trust need written documentation to exist?

A

No – all that is needed is an expressed intention

Sometimes the Statute of Frauds will require writing (e.g. with real property)

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10
Q

Is consideration needed to form a trust?

A

Not a present one, but it is needed to bind an agreement to form a future one

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11
Q

How can a trust be terminated?

A

It depends on what the trust instrument specifies, e.g. who it enables to terminate the trust

Oftentimes it will terminate when its purpose has been completed or made impossible

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12
Q

What is the merger doctrine?

A

If one person becomes the sole trustee and sole beneficiary, then the trust is terminated simply because there’s no purpose to it – someone caring for property for his own sake doesn’t need a trust

This is because the legal title and equitable title have merged into one

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13
Q

What is the difference between an active trust and a passive trust?

A

Active = trustee has positive duties to manage the property

Passive = trustee doesn’t have any duties but to hold title to the property until the beneficiary can attain ownership

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14
Q

Depending on the type of beneficiary, what are the two main kinds of trusts?

A

Charitable and private

Charitable = beneficiary is the public in general, or a large portion of it

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15
Q

What different rules apply to charitable trusts?

A

(1) the cy-près doctrine can be applied to them
(2) they are valid even when the specified beneficiaries are indefinite
(3) they are not under the rule against perpetuities

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16
Q

What is the cy-près doctrine?

A

If a charitable trust has an impracticable or impossible purpose, the court can direct the trust res to a very similar purpose

“cy-près” = French for “so near” or “so close”

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17
Q

What is the rule against perpetuities?

A

Designed to limit the length of time during which someone can exercise power over property intended for a beneficiary – particularly if the person is already deceased

Generally this restricts any contingencies that would allow the deceased title-holder to have control (i.e. to not give the property to a beneficiary) for 21 years

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18
Q

What are express and implied trusts, and what are the different types of implied trusts?

A

Express = created by the trustor’s expressed intention

Implied = created implicitly by circumstances and actions as the law infers
-the two types are resulting trusts and constructive trusts

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19
Q

What is the difference between a resulting trust and a constructive trust?

A

Resulting = the trust exists when the intention of a settlor to create a trust is inferred from his actions (e.g. giving property to someone else without consideration)

Constructive = the trust exists to remedy a wrong, where someone who wrongly acquired property (e.g. by violating a fiduciary duty) ought to transfer ownership to another

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20
Q

What is the difference between an inter vivos trust and a testamentary trust?

A

Inter vivos = trust is created during trustor’s lifetime

Testamentary trust = trust is created upon trustor’s death, usually by a will

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21
Q

What is a spendthrift trust?

A

A trust where the property rights cannot be transferred at all, not even to the beneficiary, until the trust ceases to exist (whether by the settlor’s revoking, by time, or by beneficiary’s death)

Usually exists if the beneficiary is financially irresponsible, or to protect his assets from creditors

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22
Q

What is a tentative trust?

A

A bank account opened by the trustor in his own name, but designating himself “as trustee” for a beneficiary – this becomes irrevocable if the trustor dies

Also called a Totten trust

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23
Q

What is the Uniform Principal and Income Act (UPAIA)?

A

If a trust has assets that generate income and some beneficiaries are to receive the principal and others to receive rights to income, the distribution of assets can get complicated. Where this is not dealt with in the trust instrument itself (e.g. saying that the trustee has sole authority in the matter), the UPAIA applies

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24
Q

What is the general rule in allocating income between income beneficiaries and principal beneficiaries?

A

Ordinary inflows are deemed income; extraordinary inflows are deemed as additions to capital

  • ordinary examples: cash dividends, interest, rent revenue, net income from a non-corporate business managed by the trustee
  • extraordinary examples: stock dividends or splits, cash from selling trust assets
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25
Q

What is the general rule in allocating expenses between income beneficiaries and principal beneficiaries?

A

Ordinary expenses for the trust are paid out of income; extraordinary expenses out of principal

  • ordinary examples: depreciation expense, cost to preserve and maintain trust assets, ordinary taxes on income or real estate, insurance on trust assets
  • extraordinary examples: net losses from a non-corporate business managed by the trustee, capital improvements, principal repayments on loans, costs to buy or sell trust assets
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26
Q

How do estate and trust taxes avoid double taxation?

A

Beneficiaries can be taxed just as the estates and trusts can, but if there is income generated by the estate/trust which is then distributed to the beneficiary, only one party need pay tax on it – the other can deduct it

Usually the parties can choose in any circumstances who pays taxes on how much income

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27
Q

What is a very important distinction in taxation for estates and trusts?

A

The assets (or trust res) and the income generated by those assets

The assets can also be called the principal or corpus

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28
Q

Under what circumstances would assets transferred to a trust be taxed at the settlor’s tax rates, rather than the trust’s?

A

If the assets are appreciated in value and the trust sells them within two years

This is to keep such taxes in the higher brackets of the settlor who intends to get a tax break by having a trust sell his assets

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29
Q

What occurs if a trust or estate has deductions or loss carryovers that haven’t been applied by the time the trust ends?

A

They can be transferred to the beneficiaries

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30
Q

What is the difference between a simple trust and a complex trust?

A

Simple = all annual income is distributed each year, no distributions are made except out of income, and no charitable donations are made

Complex = every other trust – and these are mostly subject to the same rules as simple trusts

31
Q

For complex trusts that accumulate income (rather than doling it out yearly), how does the income tax work?

A

A problem arises from the fact that income can be earned one year, held in trust, distributed later, and then taxed at that later rate rather than when it was earned

There is thus a “throwback rule,” where the income is taxed as it would have been when originally earned

32
Q

How does the income tax calculation for estates and trusts compare to individuals’?

A

The same – both get deductions, credits, and so on

33
Q

What is the personal exemption amount for estates and trusts?

A

As of 2013, these amounts are:

  • $600 for estates
  • $300 for simple trusts
  • $100 for complex trusts
34
Q

When is a beneficiary liable for a simple trust’s income?

A

In the year that income ought to be distributed, regardless of whether it actually is distributed

35
Q

Do estates and trusts all need to have calendar years as their tax years?

A

No, estates can elect a fiscal year, as can charitable trusts and trusts qualifying as 501(a) tax-exempt organizations

36
Q

What is the minimum gross income which would require a trust or estate to pay income tax?

A

$600 (as of 2013)

37
Q

How often are trusts and estates required to make tax payments?

A

Trusts – every quarter (estimated payments)

Estates – the taxable year which is two years following the decedent’s death

38
Q

What is distributable net income (DNI)?

A

The total taxable income passed on to the beneficiary, and thus the total income which the estate or trust can deduct for itself

-this card is wrong

39
Q

Are specific bequests of property taxable to the estate/trust?

A

No, but if they are fulfilled with substitute property, then they are taxable

40
Q

What is a real estate investment trust (REIT)?

A

A trust where the trustee has title to and manages real estate for the beneficiaries

Yet this is not just any real estate trust – it must qualify as a REIT in order to avoid being taxed like a corporation

41
Q

What are the qualifications for a trust to be a REIT?

A

(1) certificates of ownership are freely transferable
(2) 100 or more certificate holders each year, and the majority of the certificates cannot be concentrated in 5 or fewer people
(3) trust’s primary business is not real estate
(4) majority of trust’s income comes from real estate
(5) trustee has centralized control
(6) >=90% of taxable income is distributed to certificate holders

42
Q

What liability do certificate holders for a REIT have?

A

Limited liability

REIT certificates can be traded as securities, so they have limited liability

43
Q

What is a funeral trust?

A

A trust where funeral services are prepaid, the money paid being held in trust

44
Q

What is the general rule for funeral trust taxation?

A

The trust is treated as a “grantor trust” – i.e. all annual income earned by the trust assets is taxable to the trustor, not to the trust

45
Q

Under what circumstances can a funeral trust not be treated as a grantor trust?

A

(1) trust is created by contract with funeral business
(2) all beneficiaries have themselves contracted with funeral business
(3) trust’s purpose is to manage assets solely for funeral or burial
(4) all contributions are either from the beneficiary or for his benefit
(5) trustee elects for trust to be a qualified funeral trust

This all would mean that the trust tax rate applies and that the trustee is liable for the tax, rather than the trustor

46
Q

Is there any limitation on contributions to a funeral trust?

A

No, though there used to be a $9,000 limitation before 2008

47
Q

What is a Coverdell Education Savings Account (CESA)?

A

A trust where the trustor pays for the education expenses of a beneficiary who is at most 18, handled by an approved trustee

Also can be called education IRAs, because they behave so similarly to IRAs

48
Q

As related to a CESA, what are qualified educational expenses?

A

Not merely college expenses, but also expenses for (e.g.) elementary school, even public schools

Also includes special needs services related to education

49
Q

What is the maximum contribution for a CESA?

A

As of 2013, the max is $2,000 per beneficiary per contributor, though multiple people can contribute to one beneficiary

This is phased out for MAGIs from $190k - $220k for married filing jointly taxpayers, and $95k - $110k for everybody else

50
Q

Are CESA contributions tax-deductible?

A

No

51
Q

What occurs if CESA funds are distributed for non-educational expenses (or in excess of educational expenses)?

A

They are then taxed and subject to a 10% penalty

This penalty is inapplicable if the beneficiary dies or becomes disabled

52
Q

What occurs if a beneficiary turns 30 and there are still undistributed CESA funds?

A

They are automatically taxed and penalized 10%

Before he turns 30, the funds can still avoid this tax by transferring the funds to a family member’s CESA, including cousins

53
Q

How does CESA relate to tax credits?

A

If a taxpayer does not already claim a credit on the student, he can claim a Lifetime Learning credit or American Opportunity credit instead

The taxpayer can also exclude distributions from taxable income in the same year

54
Q

How do CESA rules change for a special-needs beneficiary (SNB)?

A

Contributions can be made even if he is older than 18, and he can turn 30 without forcing any taxation or penalty

55
Q

What are qualified tuition programs (QTPs)?

A

Plans to prepay for tuition at current rates

Also called 529 plans

56
Q

Which kinds of plans can qualify as QTPs?

A

Ones established by a state, ones established by an eligible educational institution, or qualified accounts

57
Q

Can someone contribute non-cash contributions to QTPs?

A

No, only cash contributions are permitted

58
Q

How do QTP contributions relate to the gift tax?

A

Any contributions are treated as gifts and thus can be placed under that exemption – they also are exempt from generation-skipping transfer taxes

The same applies to CESA contributions

59
Q

How are distributions on QTPs taxed?

A

All deferred income (i.e. amounts gained beyond the original contribution) are taxable to the beneficiary

60
Q

How do QTPs relate to tax credits?

A

If a taxpayer does not already claim a credit on the student, he can claim a Lifetime Learning credit or American Opportunity credit instead

The taxpayer can also exclude distributions from taxable income in the same year

This is the same as with CESA

61
Q

According to IRC Section 501(c), what are the first three of ten types of organizations entirely exempt from income tax?

A

(1) corporations organized under a congressional act that exempts them
(2) organizations formed for religious, educational, charitable, etc. purposes
(3) organizations which facilitate amateur sports competitions without providing facilities or equipment

62
Q

According to IRC Section 501(c), what are the second three of ten types of organizations entirely exempt from income tax?

A

(4) organizations whose aim is to prevent cruelty towards animals and children
(5) business leagues, chambers of commerce, real estate boards, labor organizations, etc.
(6) nonprofit football leagues

63
Q

According to IRC Section 501(c), what are the last four of ten types of organizations entirely exempt from income tax?

A

(7) social clubs supported only by membership fees
(8) trusts for employee pensions and profit-sharing
(9) private foundations
(10) some condo management associations

64
Q

Which organizations cannot qualify for tax-exempt status?

A

Any organization which:

  • seeks to influence laws
  • makes a profit, even if all profit goes towards tax-exempt organizations
65
Q

What must a qualifying organization do to achieve tax-exempt status?

A

(1) Apply for it and (2) maintain it by refraining from forbidden transactions

66
Q

At what point in time is an organization deemed to be tax-exempt?

A

If it files with the IRS within fifteen months of the end of the month of the organization’s inception, then it is deemed to be tax-exempt retroactively to its inception

Otherwise, it is deemed to be tax-exempt once it receives notice that its filing for tax-exempt status is valid

67
Q

Can the IRS retroactively revoke tax-exempt status?

A

Yes

68
Q

What does a tax-exempt organization need to file annually?

A

A return which provides information about the organization

Private foundations must always file this, but it is not required for (1) organizations with under $25,000 in gross receipts or (2) churches, church-affiliated schools, corporations exempt by an act of Congress, and some state organizations

69
Q

When is a tax-exempt organization’s annual return due?

A

On the 15th of the fifth month after the organization’s accounting period – usually May 15

70
Q

What is unrelated business taxable income (UBTI)?

A

Income on which a tax-exempt organization must nonetheless pay taxes

71
Q

When are the taxes on UBTI due?

A

Ordinarily, by the time the annual return is due

If there is more than $1k in UBTI, the return must be filed within 2 1/2 months of its fiscal year-end – usually March 15

72
Q

When does income qualify as UBTI?

A

If it occurs from some operation that is both (1) regular to the organization and (2) not substantially related to its tax-exempt purpose

73
Q

What cannot be classified as UBTI?

A

(1) income from activities done predominantly by volunteers
(2) royalties, dividends, interest, and annuities
(3) selling items received by donation
(4) income from a business conducted for the convenience of people in the organization
(5) income from games of chance

Exception to (2): annuities and interest from debt-financed investments can still be UBTI

74
Q

How is UBTI taxed?

A

The tax will be the same as for a corporation or a trust, depending on the nature of the tax-exempt organization (usually a corporation)

However, a special deduction for UBTI deducts the first $1,000 in UBTI

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