Unit 8 Flashcards
Form 1041
- Estates and trusts must file Form 1041.
- This form is for fiduciary tax returns.
Add one for when you die
What would cause an estate to file?
- Estates with gross income of $600 or more must file.
- Also, if there’s a nonresident alien beneficiary, the estate must file.
What must happen for a trust to file?
- Trusts must file if they have any taxable income.
- Additionally, trusts with gross income of $600 or more must file.
- If there’s a nonresident alien beneficiary, the trust must file.
Do grantor trusts need to file?
Not usually
Calendar year tax deadline?
April 15th
Fiscal year deadline
15th day of the 4th month following the close of the tax year
When does the first tax year start for an estate?
The date of death - can be any period of 12 months
When is the tax year chosen for an estate?
When the first return is filed
Trusts use what tax year?
Calendar year
Capital gains, dividend and interest income that is required to be distributed to the beneficiaries are taxed how
taxed as capital gains and income to the beneficiaries
Can a beneficiary be taxed on something that was not actually distributed to them?
Yes, beneficiaries are taxed on all distributions made to them.
They’re also taxed on what was required to be distributed, even if not actually distributed.
Income on a grantor trust is taxed to whom?
the grantor
Are grantor trusts subject to taxation?
Not usually
Grantor Trust Rules:
- Grantor can revoke or alter the trust.
- Grantor keeps beneficial enjoyment.
- Grantor maintains administrative powers or control of beneficial enjoyment.
- Income can be used to pay life insurance premiums for grantor or spouse, except if it’s irrevocably payable to charity.
- Income may be distributed to support the grantor’s children.
- Trust corpus returns to the grantor, even if reversionary interest is just 5% of trust assets.
Simple trusts
- Must distribute all current accounting income to beneficiaries in the year earned.
- Cannot distribute principal or have charitable beneficiaries.
- Have a personal exemption of $300.
Complex trust
- Not required to make distributions.
- Can accumulate income, have charitable beneficiaries, or distribute principal during the tax year.
- Trust classification can change from simple to complex and vice versa based on distributions.
- Trusts with an option to distribute or accumulate income are always complex.
- Considered complex in their final year as principal must be distributed upon termination.
- Have a personal exemption of $100.
Personal exemption for complex trust?
$100
Personal exemption for simple trust?
$300
When must a simple trust distribute all current accounting income?
Must distribute all current accounting income to beneficiaries in the year earned
Can a simple trust distribute principal?
No
What if I want my simple trust to have a charitable beneficiary?
You can’t
When/how would trust classification change?
Trust classification can change from simple to complex and vice versa based on distributions.
Can a simple trust turn into a complex trust?
Yes and vice versa
Complex trusts can do what vs simple trusts
Can accumulate income, have charitable beneficiaries, or distribute principal during the tax year.
Revocable trust
- Grantor has the right to terminate the trust.
- Transferring assets into a revocable trust isn’t considered a completed gift for gift tax purposes.
- Treated as a grantor-type trust for income tax purposes.
- Assets in the trust are subject to estate tax upon the grantor’s death.
Trusts that can distribute or accumulate income are always what
complex
A revocable trust is treated as what type of trust for tax purposes?
Grantor
Who has the right to terminate a revocable trust?
Grantor
Irrevocable Trusts
- Cannot be revoked once created.
- Transferring assets into these trusts is typically considered a completed gift subject to gift taxes.
A completed gift is made when transferring to what type of trust?
Irrevocable
Trust accounting income
the items of income and expense that are used to determine the amount the income beneficiaries are entitled to receive from the trust each year
Trust document says what re: accounting income
specify what the accounting income is, and how capital gains and expenses are allocated to income or principal
Finding trust taxable income
- Calculated by subtracting deductions for distributions, charitable contributions, and investment advisor fees from total income.
- Applicable personal exemption is then deducted to determine taxable income.
Distributable Net Income
DNI
- Allocates taxable income between beneficiaries and the trust.
- It’s the maximum amount taxable to beneficiaries.
- Excess distributions over DNI are non-taxable return of principal.
- Beneficiaries are taxed on the lesser of the DNI allocation or the amount required to be distributed per the trust document.
Excess distributions over DNI are what
Taxable return of principal
Trust beneficiaries are taxed on what re: DNI
Beneficiaries are taxed on the lesser of the DNI allocation or the amount required to be distributed per the trust document.
Estate Income Tax:
- Estates file and pay taxes while assets are collected and debts settled.
- Income tax for an estate resembles that of a complex trust.
- Personal exemption is raised to $600.
Estate personal exemption
$600
Income tax for an estate resembles what kind of trust
Complex
