Chapter 4 Section 4: Estate, Trust, and Gift Taxation

Question 1

What taxes are estates subject to?

Answer 1

Income tax

Estate tax

Question 2

What is the unified estate and gift tax?

What is excluded?

Answer 2

The estate and gift tax were combined into one
Gifts of $14,000 or less per year/per donee
There is a credit basically undoing any gifts that total less than $5,430,000

Question 3

Define Distributable Net Income (DNI)

Answer 3

A limitation on the amount the trust or estate can deduct with respect to distributions to beneficiaries

Question 4

What is the formula for DNI?

Answer 4

Estate Gross Income
- Estate Deductions
= Adjusted Total Income
\+ Adjusted Tax-Exempt Interest
- Capital Gains (Attributable to Corpus)
= DNI

Question 5

What deductions are allowed for DNI?

Answer 5

Any ordinary and necessary expenses incurred to produce the income
Also charity is unlimited as long as the gift was specified in the will

Question 6

What character does income take on when distributed?

Answer 6

It keeps the same character it had before it was distributed

Question 7

What is the amount of the income distribution deduction?

Answer 7

The lesser of:
Actual distributions to beneficiaries or
DNI less adjusted tax-exempt interest

Question 8

What form does estate (or trust) income tax go on?

Answer 8

1041

Question 9

What is the exemption for an estate?

Do they get a standard deduction?

Answer 9

$600

No

Question 10

What year can an estate elect to have?

Answer 10

Calendar year

Fiscal year - anytime (due 4/15)

Question 11

Does an estate make estimated tax payments?

Answer 11

Not for the first two years

Question 12

What year does a trust have?

Answer 12

Calendar

Question 13

What can a trust deduct in regards to distributions?

Answer 13

Any amount distributed up to the DNI

Question 14

Define Simple Trust

Answer 14

Only makes distributions out of current income, not out of corpus
Must distribute all income currently
Cannot take charitable contribution deduction
Entitled to $300 deduction

Question 15

Define grantor trust

Answer 15

The grantor retains control over the assets
Is a disregarded entity and is reported on the grantor’s 1040
Can be a qualified shareholder of an S Corp

Question 16

Define complex trust

Answer 16

All trusts that are not simple. 
May accumulate current income
May distribute principal
May deduct charitable contributions
Permitted an exemption of $100

Question 17

What form does the estate tax go on?

Answer 17

706

Question 18

What is the filing deadline for the estate tax?

Answer 18

9 months after death

Question 19

What goes into the gross estate?

Answer 19

FMV of property owned (at date of death, date of distribution, or 6 months after death)
Insurance proceeds
Incomplete gifts
Revocable transfers
All property entitled to be received

Question 20

What is the formula for estate tax due?

Answer 20

Gross estate 
- Nondiscretionary deductions
= Adjusted gross estate
- Discretionary deductions
= Taxable estate
\+ Adjusted taxable gifts
= Tentative tax base at death
x Uniform tax rate
= Tentative estate tax
- Gift taxes payable
= Gross estate tax
- Applicable credit
= Estate tax due

Question 21

What goes into nondiscretionary deductions (expenses)

Answer 21

Medical expenses (inc tax return or estate return)
Administrative expenses (inc tax return or estate return)
Outstanding debt of decedent
Claims against the estate
Funeral cost
Certain taxes

Question 22

What goes into discretionary deductions (expense)

Answer 22

Unlimited charitable deduction

Unlimited marital deduction

Question 23

What is the deceased spouse’s unused exclusion?

Answer 23

If your spouse died first and didn’t use the whole $5,430,000, you get the remainder

Question 24

What other credits reduce the gross estate tax?

Answer 24

Foreign death taxes

Prior transfer taxes

Question 25

Who pays the gift tax?

Answer 25

The person giving the tax

Question 26

What form does the gift tax go on?

Answer 26

709

Question 27

What is the exclusion for the gift tax?

Answer 27

$14,000 per year per donee

Question 28

What are the gifts that qualify for the unlimited exclusion from the gift tax?

Answer 28

Payments directly to an educational institution
Payments directly to a health care facility
Charitable gifts
Martial deduction

Question 29

Does a gift have present vs. future interest?

Is it complete or incomplete?

Answer 29

Present

Complete

Question 30

What makes a gift incomplete?

Answer 30

Conditions or revocability

Question 31

What is the formula for tax due on current gifts?

Answer 31

Gross gifts (FMV)
- Exclusion of 14,000 for each donee
- Unlimited marital deduction
- Unlimited charitable deduction
= Taxable gifts
\+ Prior year taxable gifts
= Cumulative lifetime gifts
x Tax rate
= Tax on cumulative lifetime gifts
- Gift tax paid on prior gifts
- Applicable credits
= tax due on current gifts

Question 32

Explain the generation-skipping transfer tax

Answer 32

Prevents an individual from escaping a sort of double taxation if they give their stuff to their kid, and then their kid gives it to the grandchildren, by which time it’s cut in half twice. If you give it straight to your grandchildren, they tax it twice anyway.