T3-M4 Trust Taxation Flashcards

1
Q

what is a trust?

A
  • a trust is a separate legal entity created under state law to manage and distribute property for the benefit of one or more beneficiaries named in the trust agreement
  • a trust is created by a grantor, who:
    + transfers property to the trust (trust corpus, or principal)
    + appoints a trustee
    + identified the terms of the trust agreement
  • trustee:
    + manages the trust property for the benefit of the beneficiaries
    + administers the trust according to the terms of the trust agreement
  • on an annual basis, the trust’s corpus (principal) may be used to generate taxable income
  • this income passes through to either the trust’s grantor or beneficiaries for recognition annually
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2
Q

what are types of trusts?

A
  1. Grantor trusts:
    - are trusts in which the grantor retains certain ownership powers or control over the property transferred to the trust
    - a common type of grantor trust is a revocable living trust
    - are NOT required to file separate income tax returns
  2. Non-grantor trusts
    - are separate taxpaying entities
    - trust income is taxable either to trust or to beneficiaries, depending on the amount of distributions to beneficiaries, type of income, and type of trusts
    - 2 types:
    + Simple trusts: 3 requirements
    - they are required to distribute all of their income to beneficiaries annually
    - they cannot make distributions from trust principal (corpus)
    - they cannot make distributions (contributions) to charitable organizations
    + Complex trusts:
    - non-grantor trusts that do not meet all 3 requirements of simple trusts
    * a trust may be a simple trust one year and a complex trust another year depending on if the trust meets the 3 requirements every year
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3
Q

what is the taxation of non-grantor trust income?

A
  • file form 1041 and report taxable distributions to beneficiaries on sch K-1s
  • is taxed to either the trust or beneficiaries but not both
    + a trust is taxed on trust taxable income retained by the trust
    + a beneficiary is taxed on trust taxable income distributed to beneficiary (subject to certain limitation)
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4
Q

what is trust accounting income (TAI)?

A
  • is the book income of the trust, which must be calculated in accordance with the terms of the trust agreement and state law
  • is used to determined the amount required to be distributed to beneficiaries each year
  • trust income and expenses are allocated to either principal (corpus) or accounting income
    + most income and expenses (operating income/expenses, taxable and tax-exempt interest, dividends, rents, and royalties => allocated to accounting income
    + capital gains/losses on disposition of trust assets and casualty gain/loss => allocated to principal (corpus)
    + trust administrative expenses such as trustee fees => allocated between corpus and accounting income as stipulated in the trust agreement, or state law if there is no stipulation
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5
Q

what are trust exemptions?

A
  • simple trust: $300 exemption
  • complex trust: $100 exemption
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6
Q

how to calculate taxable income before distribution deduction?

A

+ trust taxable gross income (including capital gains)
- deductible trust expenses
= adjusted total income
- exemption amount
= trust taxable income before distribution deduction

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7
Q

what is distributable net income (DNI) and its taxation?

A
  • is a limitation on both the amount of distributions included in:
    + beneficiaries’ taxable income
    + the amount of the trust’s distribution deduction in calculating trust income
  • includes both taxable and nontaxable income and expenses, including 100% of trust administrative expenses, but excludes capital gain/loss
  • formula:
    + trust taxable income (before distribution deduction)
    + exemption
  • capital gain allocated to corpus
    + capital loss allocated to corpus
    + tax-exempt interest
  • expenses allocated to tax-exempt interest
    = distributable net income
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8
Q

what is trust taxable income?

A

+ trust taxable gross income (including capital gains)
- deductible trust expenses
= adjusted total income
- exempt amount
= trust taxable income before distribution deduction
- income distribution deduction
= trust taxable income

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