12.1 - Income Taxation --- Estates, Trusts & Wealth Transfer Taxes Flashcards
What is an estate?
Collection of assets held by recently deceased individuals (aka decedent)
What is a trust & what does it provide?
Trust is a collection of assets ultimately distributed to beneficiaries
- Take more planning to setup than estates
- Provide additional benefits to beneficiary
Principle vs. Income
Define principial (aka Res) in estates and trusts?
- Pronounced “rays” or corpus
- Property included in the estate or trust
Principle vs. Income
Define income in estates and trusts?
- Return earned on the principal
Principle vs. Income
Define “trusts” accounting income
- Trusts accounting income equals all income except allocations to corpus
Tax Rates
How is tax imposed on trusts and estates?
- Tax is imposed on taxable income of trusts & estates, not principal
Tax Rates
What is the applicable rate for fiduciary taxable income between $0 - $2,500?
15%
Tax Rates
What is the applicable tax rate imposed on fiduciary taxable income between $2,500 - $5,950?
25% + $382.50
Tax Rates
What is the applicable tax rate imposed on fiduciary taxable income between $5,950 - $9,050?
28% + $1,232.50
Tax Rates
What is the applicable tax rate imposed on fiduciary taxable income between $9,050 - $12,400?
33% + $2,100.50
Tax Rates
What is the applicable tax rate imposed on fiduciary taxable income greater than $12,400?
39.6% + $3,206.00
Simple Trust
Identify 3 qualifiers of simple trusts
- Requires current distribution of all income
- Requires no distribution of principal
- No provision for charitable contributions
Complex Trust
Identify 4 qualifiers for a complex trust
- Any trust other than simple trust
- May accumulate income
- May provide for charitable contributions
- May distribute amounts other than income
Grantor Trust
Identify 2 qualifiers for a grantor trust
- Any trust where grantor is effective beneficiary
- Grantor has > 5% reversionary interest
Grantor Trust
Define reversionary interest
- Property reverts back to or benefits the grantor
Grantor Trust
Who is the owner of a grantor trust and how is income accumulated?
- Grantor considered owner of trust & income can accumulate for grantor’s spouse
How is income attributed to principal treated for grantor trusts?
- Income attributable to principal is treated as owned by grantor
- Grantor obligated to pay associated tax
Filing Requirements
What are the filing requirements for estates?
- must file if income > = $600
Filing Requirements
What are the filing requirements for trusts?
- must file if there is any taxable income or
- $600 or more of gross income
Filing Requirements
When are tax returns due for trusts and estates?
- Return due by 15th day of 4th month after close of entity’s tax year
Filing Requirements
What is the extended due date for filing estate and trust tax returns?
- Extended due date is 5 ½ months later for 2016 & later tax years
Filing Requirements
When must a nonresident alien who is beneficiary of a domestic estate file their estate return?
- Must file return regardless of income
Income Tax Formula
How is income tax computed for estates and trusts?
similarly to that of individuals
Income Tax Formula
Are life insurance proceeds considered income of estates?
no - principal
Income Tax Formula
Are capital gains taxable as income to estates and trusts?
No - capital gains are charged to trust principal and taxed to the estate
Income Tax Formula
How is income in respect of a decedent treated for tax purposes?
Taxed as income to estate
Income Tax Formula
What level of income do fiduciaries apply in computing deduction limits?
AGI
Income Tax Formula
Is the STD deduction allowed in computing fiduciary income and applying deductions?
No - STD not allowed
Income in Respect of a Decedent:
Ross, a calendar-year, cash-basis taxpayer who died in June 2015, was entitled to receive a $10,000 accounting fee that had not been collected before the date of death. The executor of Ross’s estate collected the full $10,000 in July 2015. This $10,000 should appear in
A – only the decedent’s final individual income tax return
B – only the estate’s fiduciary income tax return
C – only the estate tax return
D – Both the fiduciary income tax return and the estate tax return
D – Both the fiduciary income tax return and the estate tax return
Income that a decedent had a right to receive prior to death but that was not includible on his or her final income tax return is income in respect of a decedent. The $10,000 is properly includible in the estate’s (fiduciary) income tax return because Ross was a cash-basis taxpayer and would not properly include income not yet received at the time of death in his final return. Since the money was owed to Ross (he had a right to receive it), it is an asset of the estate and must be included on the estate tax return also.
Deductions:
How are deductions treated for estates and trusts?
the same as individuals
Deductions:
True or False >>>
- Expenses directly allocable to tax exempt income are allocated only to tax exempt income
True
Deductions:
How is income allocated if it is for both tax exempt and other income?
- Reasonable portion of indirectly allocable expenses to both tax exempt & other income must be allocated to each class of income
Deductions:
Are trustee fees deduction limited to 2% AGI?
No
Deductions:
How are trustee fees and tax return preparation fees treated for tax purposes of a trust or estate?
fully deductible & not limited to excess over 2% of AGI
Depreciation
How is depreciation allocated for estate purposes?
- Allocated in same proportions as income from estate unless instrument contain provisions apportioning the deduction
Depreciation
True or False >>>
- Any part of deduction in excess of trust income set aside for reserve is allocated between parties according to instrument
True
Depreciation
Depreciation Example # 1:
- Estate income = $10,000; Beneficiary distribution = $7,000 or 70%; Estate retention = $3,000 or 30%
How much is the beneficiary’s depreciation?
70% or $7,000
Depreciation
Depreciation Example # 1:
Estate income = $10,000; Beneficiary distribution = $7,000 or 70%; Estate retention = $3,000 or 30%
How much is the estate’s depreciation?
30% or $3,000
Additional Deductions:
Name 4 additional deductions that are available to trusts and estates
1 - NOL
2 - NCL up to $3,000
3 - Miscellaneous itemized deductions (subject to 2% floor)
4 - Charitable contributions (excluding simple trusts)
Additional Deductions:
When is the NOL pass-through on personal return permitted?
in year fiduciary terminates
Additional Deductions:
Is NOL carryover permitted for estates and trusts?
Yes
Additional Deductions:
True or False >>>
NOL is computed w/o regard to charitable contributions or distribution deductions
True
What are the personal exemptions for estates, trusts and complex trusts?
- Estate = $600
- Simple Trust = $300
- Complex Trust = $100
Distribution Deduction:
What is the purpose of the distribution deduction?
- Often eliminates tax burdens for trusts or estates
- Allocates taxable income between fiduciary and beneficiaries
Distribution Deduction:
What is the distribution deduction equal to?
- Generally equal to lesser of distributions or distributable net income
Distributable Net Income
Define DNI or distributable net income
- Max deductible at fiduciary level
- Max taxable at beneficiary level
Distributable Net Income
Compute DNI or distributable net income
Taxable income before distribution deduction
+ Personal exemption deduction
+ Net tax-exempt interest
+ Capital losses allocated to principal
- Capital gains allocated to principal
- Taxable stock dividends allocated to principal
- Extraordinary dividends allocated to principal
= Distributable net income
IRD
When is income in respect of a decedent or IRD not included on the final tax return of cash and accrual method taxpayers?
- Cash method taxpayer
- Amounts not received
- Accrual method taxpayer
- Amounts not properly accrued
IRD
Is IRD stepped up to FMV on date of death as in the case of property?
No
IRD
What basis does right to receive IRD have?
transferred basis
IRD
What are IRD deductions?
- Expenses accrued before death but not deductible on final return b/c decedent used cash method
- Deductible on both estate and fiduciary income tax return
Estate Tax Deductions
What are estate tax deductions?
- tax attributable to IRD
- administrative expenses
- debts of decedent
Estate Tax Deductions
Are estate tax deductions deductible on both Form 706 and Form 1041
No - double deductions are not allowed
- Right to deduct on Form 706 must be waived in order to deduct on Form 1041
How much is net investment income tax or NIIT?
3.8%
What amount of net investment income tax are estates and trusts required to pay?
- 3.8% NIIT on < of:
- Undistributed net investment income for tax year or
- Any excess Fiduciary Taxable Income over the amount at which highest tax bracket for estates & trusts begins for tax year
2016 = $12,400
Calculate undistributed net investment income
Net Investment Income
- Net investment income distributed to beneficiaries
- Net investment income paid or set aside for charity
= Undistributed Net Investment Income
Define the tax year and accounting method that estates and trusts must use
- Estate
- may adopt any tax year ending within 12 months after death
- Trusts
- must generally adopt calendar year
- Any permissible accounting method may be used
Are estates and trusts required to remit estimated payments?
Yes - but not required to pay estimated tax for its 1st 2 years
How are amounts and due dates of estimated tax payments determined for estates and trusts?
in same manner for individuals
Describe depreciation treatment in a trust
- Deductible only to the extent a reserve is required or permitted under the trust instrument or local law
- And income is set aside for the reserve & actually remains in the trust
- If instrument silent;
- Allocate = proportion as income
