Unit 19: Trusts and Estates Flashcards
Income tax returns for trusts and estates are commonly referred to as:
“Fiduciary” tax returns
If an estate or trust has a loss in its final year, the loss can:
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.
NIIT
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
8960
Used to report NIIT
Net investment income that is subject to the tax includes:
- 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
2022 estate exemption amount:
$600
2022 estate exclusion amount:
$12.06m
Who does not have to file a 706
An estate with a value less than $12.06 Million
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:
- 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
8971
Used to report the value of the property on an estate tax return and is added to an individual Schedule A
Final 1040 deadline
April 15th of the year following the taxpayer’s death
What is IRD
Income in Respect of a Decedent
- Any taxable income that was earned but not recieved by the decedent by the time of death.
Who pays taxes in IRD?
The person or entity that receives the income
IRD can come from various sources, including:
- 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
If IRD is received by a beneficiary and subject to income tax on their return,
The beneficiary can claim a deduction for estate tax paid on the IRD
Estate Tax IRD deduction:
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
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:
- 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
Where can expenses for settling an estate be deducted?
On either the 1041 or 706
Due date for 1041
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.
1041 must be filed for any domestic estate that has gross income for the tax year of:
$600 or more, or a beneficiary who is a nonresident alien (with any amount of income)
What form is filed to make the DSUE election?
706
The gross estate is based upon the fair market value of the decedent’s property and includes:
- 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
Basic exclusion amount in 2022
$12,060,000
Applicable credit amount in 2022
$4,769,800
Deductions from the gross estate may include:
- 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
The following items are not deductible from the gross estate:
- Federal estate taxes paid
- Alimony paid after the taxpayer’s death. These payments would be treated as distributions to a beneficiary
If a beneficiary receives a distribution over DNI, What is taxed?
Only the DNI
IDD
“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.
Simple trust exemption:
$300
Qualified disability trust exemption:
$4,400
The IRC defines a simple trust as a trust that:
- Must distribute all of its income currently
- Makes no distributions of principal
- Makes no distributions to charity
A complex trust:
- 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
Abusive or fraudulent trust arrangements may promise such benefits as:
- 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
3520
Taxpayers are required to file when contributing property to a foreign trust, or receiving distributions from a foreign trust.
