Estate, Trust & Gift Tax Flashcards
Income Taxation
Fiduciary accounting is used in estates and trusts, and it is centered on the classification of all receipts and disbursements as either principal or income. These rules are generally the same as GAAP.
Distributable Net Income (DNI)
Includes Capital Gains:
Estate (trust) gross income—including capital gains
(ordinary and necessary)
=Adjusted total income
+ Adjusted tax-exempt interest
=DNI
Income Distributed to the Beneficiaries
Income distributed to the beneficiaries on Schedule K-1 (Form 1041) retains the same character as the income had at the fiduciary level.
Income Distribution Deduction
The lesser of (i) total distributions (including income required to be distributed currently) reduced by tax-exempt income (not adjusted tax-exempt interest); or (ii) DNI less adjusted tax-exempt interest.
Annual Estate or Trust Income Tax Return
Form 1041
Trusts
Either grantor, simple, or complex. A simple trust may only make distributions out of current income, is required to distribute all of its income currently, is not allowed a charitable deduction, and has a $300 exemption.
All other trusts (other than grantor trusts) are complex.
Complex trusts are allowed a $100 exemption.
Grantor trusts, where the grantor retains control over the assets, are disregarded for tax purposes.
Estates Must File a return when
annual income exceeds $600. Estates can elect either a calendar year (return is due on 4/15) or a fiscal year (return is due the 15th day of fourth month after the year-end).
The estate tax
is a transfer tax imposed on the value of property transferred by a decedent at death. If the gross estate exceeds 5,340,000 (2014), a Form 706 must be filed.
Estate Transfer Tax formula
Gross estate—FMV property, insurance proceeds, etc.
—medical, administrative, etc.
=Adjusted gross estate
—charity, marital; both unlimited
=Taxable estate
Adjusted taxable gifts—post-1976 gifts that were taxed
= Tentative tax base
x Uniform tax rates
=Tentative estate tax
—on post 1976 gifts
=Gross estate tax
[$2,081,800 credit is equal to the tax otherwise due on a $5,340,000 tentative tax base]
=Estate Tax Due
Gross Estate
FMV of property, insurance proceeds, incomplete gifts, revocable transfers, and income in respect of a decedent.
Estate Deductions
Medical expenses (can be deducted instead on the final individual income tax return); administrative expenses; outstanding debts; claims; funeral costs; and taxes.
Also discretionary expenses—charity and marital—which are both unlimited.
The Gift Tax
The gift tax is a transfer tax paid by certain donors of gifts. Form 706 must be filed by a donor who has made a taxable gift (more than $14,000 or $28,000 married with gift splitting)
Taxable Gifts
Every transfer of money or property for less than adequate consideration is a gift. The 2014 annual exclusion is $14,000 (or $28,000 with gift-splitting) per donee. There are unlimited exclusions for payments made directly to an education institution on behalf of a donee; made directly to a health care provider on behalf of a donee; made to a charity; or made to a spouse.
Calculating Taxable Gifts
The total amount of gifts equals the aggregate value of all gifts made during the calendar year less the annual exclusion.
The Generation-Skipping Transfer Tax
A separate tax that applies in addition to the federal estate and gift tax on any transfer that is two or more generations younger than the donor or transferor. It applies to all lifetime transfers in excess of $5,340,000 ($10,680,000 if married and gift-splitting).
