Unit 19: Trusts and Estates

Question 1

Income tax returns for trusts and estates are commonly referred to as:

Answer 1

“Fiduciary” tax returns

Question 2

If an estate or trust has a loss in its final year, the loss can:

Answer 2

Be passed through to the beneficiaries, allowing the potential deductions on their returns. Losses cannot be passed through to beneficiaries in a non-termination year.

Question 3

NIIT

Answer 3

3.8% tax on net investment income

Applies to the lesser of:

• Undistributed net investment income, or
• Excess of adjusted gross income over the threshold amount at which the highest tax bracket begins

Question 4

8960

Answer 4

Used to report NIIT

Question 5

Net investment income that is subject to the tax includes:

Answer 5

• Interest, dividends, and capital gains
• Rent and royalty income
• Non-qualified annuities
• Income from businesses involved in trading of financial instruments or commodities
• Income from businesses that are passive activities for the taxpayer

Question 6

2022 estate exemption amount:

Answer 6

$600

Question 7

2022 estate exclusion amount:

Answer 7

$12.06m

Question 8

Who does not have to file a 706

Answer 8

An estate with a value less than $12.06 Million

Question 9

Beneficiaries must generally treat estate items the same way on their returns as they are treated on the estate’s return. The executor of any estate required to file an estate tax return must furnish to the IRS a statement identifying:

Answer 9

• The value of each interest in that property as reported on the estate tax return, and
• Any other information about the interest that the IRS might require

Question 10

8971

Answer 10

Used to report the value of the property on an estate tax return and is added to an individual Schedule A

Question 11

Final 1040 deadline

Answer 11

April 15th of the year following the taxpayer’s death

Question 12

What is IRD

Answer 12

Income in Respect of a Decedent

• Any taxable income that was earned but not recieved by the decedent by the time of death.

Question 13

Who pays taxes in IRD?

Answer 13

The person or entity that receives the income

Question 14

IRD can come from various sources, including:

Answer 14

• Unpaid salary or wages that were earned (but not recieved) before the taxpayers’s death
• Distributions from traditional IRAs and employer-provided retirement plans
• Deferred compensation benefits
• Accrued but unpaid interest, dividends, and rent
• Accounts receivable of a sole proprietor who has died

Question 15

If IRD is received by a beneficiary and subject to income tax on their return,

Answer 15

The beneficiary can claim a deduction for estate tax paid on the IRD

Question 16

Estate Tax IRD deduction:

Answer 16

Miscellaneous itemized deduction on Schedule A and is not subject to the 2% floor, so it is still available as an itemized deduction after the Tax Cuts and Jobs Acts

Question 17

Form 1041 is a fiduciary income tax return used to report the ongoing income for a domestic decedent estate, a trust, or a bankruptcy estate:

Answer 17

• Current income and deductions, including gains and losses from the disposition of the entity’s property and excluding certain items such as tax-exempt interest
• A deduction for income that is either held or future distributions or distributed currently to the beneficiary
• Any income tax liability

Question 18

Where can expenses for settling an estate be deducted?

Answer 18

On either the 1041 or 706

Question 19

Due date for 1041

Answer 19

15th day of the 4th month following the end of the entity’s tax year, but a 5 1/2 month extension may be requested.

Question 20

1041 must be filed for any domestic estate that has gross income for the tax year of:

Answer 20

$600 or more, or a beneficiary who is a nonresident alien (with any amount of income)

Question 21

What form is filed to make the DSUE election?

Answer 21

706

Question 22

The gross estate is based upon the fair market value of the decedent’s property and includes:

Answer 22

• The FMV of all property owned by the decedent at the time of death
• One-half of the full value of property held as joint tenants with the right of survivorship if the only other owner at the time of death was the decedent’s spouse
• Life insurance proceeds payable to the state, or payable to the heirs, for policies owned by the decedent
• The decedent’s share of the fair market value of property held as joint tenants with those other than a spouse. In this situation, the decedent’s share is based on their share of the acquisition costs of the property.
• The value of certain annuities or survivor benefits payable to the heirs
• The value of certain property that was transferred within three years before the decedent’s death

Question 23

Basic exclusion amount in 2022

Answer 23

$12,060,000

Question 24

Applicable credit amount in 2022

Answer 24

$4,769,800

Question 25

Deductions from the gross estate may include:

Answer 25

• Funeral expenses paid out of the estate
• Administration expenses for the estate
• Debts owed at the time of death
• The martial deduction
• The charitable deduction
• The state death tax deduction

Question 26

The following items are not deductible from the gross estate:

Answer 26

• Federal estate taxes paid
• Alimony paid after the taxpayer’s death. These payments would be treated as distributions to a beneficiary

Question 27

If a beneficiary receives a distribution over DNI, What is taxed?

Answer 27

Only the DNI

Question 28

IDD

Answer 28

“Income distribution deduction”
- Is allowed to trusts and estates for amounts that are paid, credited, or required to be distributed to beneficiaries. The income distribution deduction is calculated on Schedule B and is limited to the lesser of distributions minus any tax-exempt income of DNI minus any tax-exempt income.

Question 29

Simple trust exemption:

Answer 29

$300

Question 30

Qualified disability trust exemption:

Answer 30

$4,400

Question 31

The IRC defines a simple trust as a trust that:

Answer 31

• Must distribute all of its income currently
• Makes no distributions of principal
• Makes no distributions to charity

Question 32

A complex trust:

Answer 32

• Is allowed to accumulate income
• Can make discretionary distributions of income
• Can make mandatory or discretionary distributions of principal, and
• Can make distributions to charity

Question 33

Abusive or fraudulent trust arrangements may promise such benefits as:

Answer 33

• Deductions for personal expenses paid by the trust
• Depreciation deductions for an owner’s personal residence
• A stepped-up basis for property transferred to the trust
• The reduction or elimination of self-employment taxes
• The reduction or elimination of gift and estate taxes

Question 34

3520

Answer 34

Taxpayers are required to file when contributing property to a foreign trust, or receiving distributions from a foreign trust.