Trusts and Estates

Question 1

What are the different forms for Trusts, Estates, and Gifts

Answer 1

Form 1041 - Estate income tax return (to report income rec’v AFTER death I/S)
Form 706 - Estate tax return (form of property tax on value of estate AT THE TIME of death B/S)
Form 709 - Gift tax (based on unified transfer tax and combined w/ 706 gross estate and lifetime exclusion)

Question 2

Diff between Remainder and Income earnings and list of each

Answer 2

Remainder (B/S)- Original property, corpus, Cap gains, Bonds + accrued interest, stock dividends/splits
Income (I/S)- Rent income/exp, Interest/dividends, Property taxes, Royalty, Muni bond interest.

Question 3

What are the 2 types of trusts to create?

Answer 3

Inter vivos = Living trusts

Testamentary = at time of death

Question 4

What are the conditions for a Valid Express Trust?

Answer 4

BRATS
Beneficiary- Income and Remainder beneficiaries
Reasonable intent- valid purpose; usually separation of control of assets from benefits
Assets- must contain corpus
Trustee- to exercise control
Specified life- identifiable termination point

Question 5

What are the options of allocation for trusts?

Answer 5

Per capita- each beneficiary rec’v equal share

Per stirpes- each group (generation) rec’v equal share

Question 6

If you die without a will what order do assets get distributed?

Answer 6

1. Spouse
2. Descendants (children/grandchildren)
3. Ascendants (parents/grandparents)
4. Collateral (brothers/sisters)

Question 7

When are estates created?

Answer 7

At the time of a person’s death to temporarily hold property until it can be distributed to heirs. Must pay income taxes on the earnings (1041)

Question 8

What are requirements for filing Fiduciary Income Tax return (1041)?

Answer 8

Must file annually (income>exemption)
Trust - calendar required, quarterly estimates, exemptions 300 simple, 100 complex
Estate - calendar or fiscal, quarterly est not req. 1st 2 years, exemption 600

Question 9

Explain a gantor trust

Answer 9

Grantor reserves right to withdraw assets at any time- considered revocable, for tax not a real trust (grantor’s 1040) but will get taxed on 706

Question 10

Diff between simple and complex trusts

Answer 10

Simple- distributions equal to DNI to beneficiaries each year; 1041 prepared every year; cap gains result in retained income; exemption 300; distributions may exceed DNI, only up to DNI included in beneficiaries gross income.
Complex- Fails to meet simple AND satisfies 1 of 3..
1. Less than DNI dist. & some current income retained in trust.
2. Amounts perm set aside for charitable gifts
3. Dist was made from amounts allocated to that principal (corpus)
Exemption 100
Pays taxes on undistributed income

Question 11

Income tax trusts/estates (1041) calc

Answer 11

Gross income (same as ind except include income in respect of decedent)
(Deductions) with 3 exceptions…
1. Fiduciary fees (% of taxable income)
2. Charity (give 100%)
3. Income distribution deduction (taxed only once)
(Personal exemptions)
= Taxable income
** Certain costs are deductible (to extent exceed 2% of adj income) related to property that would not have been incurred if property was not held in trust

Question 12

What is DNI and its calc

Answer 12

Max amount that can be taxed to beneficiaries as income- the rest is dist of principal.
Gross income - same
+ Muni bond interest
Don’t include cap gains!
Deductions - same except no income dist deduction
No personal exemption
= DNI

Question 13

What are the 3 types of gift transfers?

Answer 13

Present interest- Start enjoyment NOW (can use 14,000 exclusion)
Future interest- Must be reported regardless of size at present value (cannot enjoy now, cannot use annual exclusion- must be irrevocable!)
No interest- Revocable trust, not reported (still considered part of taxpayer’s estate)

Question 14

What are excluded from the definition of taxable gifts?

Answer 14

Transfers to spouses
Transfers to qualified charitable org
Political contributions to org
Payment of medical or tuition of another (must be directly to provider and doesn’t include dorm room fees, supplies, or textbooks)

Question 15

What is the lifetime exclusion amount for gift taxes?

Answer 15

$5,490,000 for 2017 (husband and wife can each use exclusion)

Question 16

Gross gifts - Form 709 calc

Answer 16

+Cash, Property, Loan interest, Bargain sale, Irrevocable trust @ PV (NOT=life ins, charity, political cont, joint acct’s, revocable trusts)
= Gross gifts
- Exclusions (Support minors, Marital, Education/Medical, 14,000 exclusion- start enjoy NOW!)
= Taxable gifts (709)

Question 17

Taxable estate calc (Form 706)

Answer 17

Like a personal B/S:
+ All assets (Income in respect of decedent, or A/R)
+ Life ins proceeds (even if not pd. to decedents estate)
+ Revocable trust
+ 1/2 prop w/ spouse
= Gross estate (FV @ death or AVD 6 months)
- Deductions (Charity, marital, medical, mortgages, admin, funeral, etc)
= Taxable estate (706)

Question 18

Tax due on Form 706

Answer 18

Taxable gifts (from form 709)
\+ Taxable gifts over the years
\+ Taxable estate (706)
= Total taxable transfer
x tax rate
= Tentative tax liability
- Unified credit
- Other credits
- Prepayments
= Tax due (706, due 9 months after death)

Question 19

What is a Totten Trust?

Answer 19

A Totten trust is not actually a trust; it is an account that is payable on demand. Individuals may style financial instruments such as a bank account or an asset as “Owner A in trust for Beneficiary B.” Owner A has control of the asset during his life, but upon death, the asset passes to Beneficiary B without having to go through probate or a will.

Question 20

Max contributions to CESA

Answer 20

Coverdell Education Savings Account- contribute up to 2,000 per beneficiary per year, must be under the age of 18

Question 21

What to include in gross income of beneficiary when trust distributes more than DNI?

Answer 21

The excess is not included in the beneficiaries gross income and the excess is shared proportionately (120 DNI, distributes 60 and 90. The 90 benny would include 72 in gross income [90/150 * 120=72]

Question 22

When is a simple trusts income taxed?

Answer 22

Taxed to the beneficiary in the year the income is required to be distributed, whether or not it actually is distributed (Sec 652(a)]