Trusts & Estates Flashcards
What is the difference between complex and simple trusts?
Complex trusts may accumulate current income, distribute principal, and provide for charitable contributions. Simple trusts may only make distributions from current income (not corpus, or principal), must distribute all income currently, and may not make charitable contributions. Either trust may have more than one beneficiary, have a grantor that is not an individual, or have beneficiaries that are not individuals.
What is a grantor trust?
When the creator is treated as the owner of a trust, it is referred to as a grantor trust.The person who transfers property to a trust retains certain powers over the trust (or treats the trust as being owned by the transferor for income tax purposes).
An executor of a decedent’s estate that has only U.S. citizens as beneficiaries is required to file a fiduciary income tax return, if the estate’s gross income for the year is at least:
A fiduciary must file a return on Form 1041 if the estate has gross income of $600 or more for the tax year and if none of the beneficiaries are nonresident salients.
How is DNI calculated for a simple trust?
The computation of distributable net income includes all of a trust’s gross income (even tax-exempt income) except capital gains attributable to corpus, and is reduced by all of a trust’s deductions except the exemption. Thus, tax-exempt interest, the fiduciary fee, and taxable interest income would all be taken into account in determining the distributable net income of a trust, but the trust’s exemption would not be.
What is the standard deduction for a trust or an estate in the fiduciary income tax return?
$0 - Not allowed
Is a trust or estate required to use the calendar year as their taxable period for income tax purposes?
Estates - No
Trusts - Yes
An estate may choose the same accounting period as the decedent, or it may choose a calendar year or any fiscal year it wishes, with a few limited exceptions. Wursts (except tax-exempt trusts) must adopt a calendar year.
What amount of a distribution is taxable to a beneficiary?
The amount of income an estate beneficiary reports from the estate is limited by the estate’s distributable net income. If the estate distributed MORE than the DNI, then ALL of its DNI is taxed to the beneficiary and the estate will have no taxable income to report. The amount the beneficiary received in cash OVER the amount of taxable income is treated as a nontaxable distribution of principal.
For 2019, what amount of a decedent’s taxable estate is effectively tax-free if the maximum applicable estate and gift tax credit is taken?
The maximum amount that can be transferred pursuant to a death tax-free is $11,400,000 (2019).
What is the annual return for gift taxes and when is the gift tax return due?
Form 709 is the annual return. Due date is April 15.
How is the Income Distribution Deduction calculated for a trust?
A trust’s income distribution deduction is the lesser of the actual distribution to the beneficiary or distributable net income less tax-exempt income.
When is the income tax return of a trust due?
The income tax return of a trust on Form 1041 is due on the 15th day of the fourth month after the close of its taxable year.
How are capital gains treated in an estate or trust?
Rule: Absent written provisions to the contrary, capital gains and losses are classified as principal and must remain with the estate or trust (i.e., allocated to corpus) to be taxed at the estate or trust level.
Is tax-exempt interest and capital gains and losses included in DNI?
All other taxable income (i.e., gross income net of deductible expenses) generated by the fiduciary assets is generally classified as distributable net income (DNI). Distributable net income is adjusted total income (line 17 on the Form 1041) with modifications for tax-exempt interest (included in DNI and allocated as tax-exempt) and capital gains and losses (excluded from DNI and allocated to corpus).
How are amounts distributed to beneficiaries treated?
Amounts distributed to beneficiaries by a trust retain the same character (i.e., ordinary income or tax-exempt income) as they had at the trust level. If additional amounts are distributed, it is a distribution of principal or corpus and is non-taxable.
