T3-M4 Trust Taxation Flashcards
what is a trust?
- 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
what are types of trusts?
- 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 - 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
what is the taxation of non-grantor trust income?
- 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)
what is trust accounting income (TAI)?
- 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
what are trust exemptions?
- simple trust: $300 exemption
- complex trust: $100 exemption
how to calculate taxable income before distribution deduction?
+ trust taxable gross income (including capital gains)
- deductible trust expenses
= adjusted total income
- exemption amount
= trust taxable income before distribution deduction
what is distributable net income (DNI) and its taxation?
- 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
what is trust taxable income?
+ 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