Estate Trust Taxation

Question 1

How is Gift taxation different from Estate taxation?

Answer 1

Property transferred while taxpayer is living

Question 2

What is the annual exclusion amount for a taxpayer’s Gift taxation? What is required to get the exclusion?

Answer 2

$14,000 per year per spouse to each individual

In order to get the exclusion, the recipient must immediately acquire a present interest in the property and get unrestricted access to the property and all of its benefits

Question 3

If a Gift is an annuity, what value is used for the Gift?

Answer 3

If the Gift is an annuity, use Present Value to determine the gross Gift

Question 4

What is the basic Gift tax calculation?

Answer 4

Gross Gifts
- 1/2 of Gifts (treated as given by spouse)
- Total # of donees x $14,000 exclusion
= Taxable Gift

Question 5

How is a Gift taxed if a recipient gains a future ownership in the Gifted property?

Answer 5

Recipient must gain ownership and all rights to property to get the annual exclusion. If recipient merely gains a future ownership, then the present value of the Gift is 100% taxable to donor and cannot exclude from Gift tax calc

Question 6

What are the deductions for Gift tax, besides the annual exclusion?

Answer 6

Tuition and medical expenses paid directly to the provider organization (note: NOT books or dorm fees)

Political contributions

Charitable Gifts

Unlimited Gifts to spouse

Question 7

What is the basis of Gifted property for the recipient?

Answer 7

If a loss on sale, basis is FMV on the date of the Gift

If a gain on sale, basis is same as donor’s basis

No G/L if donor basis is less than sales price, and sales price is less than FMV @ Gift date

Question 8

How/when are Gift Tax returns filed?

Answer 8

Calendar-year basis only

Due April 15

Question 9

What are the basic characteristics of complex Trust?

Answer 9

Does NOT distribute all income currently
Accumulation of income ok
Charitable contributions ok
Contributions using tax-exempt income are not deductible
Allowed personal exemption of $100

Key Point: Distribution of Trust corpus (principal) ok

Question 10

What are the basic characteristics of a Simple Trust?

Answer 10

Must distribute all income currently
(Accumulation of income disallowed)
No charitable contributions
Distribution of Trust corpus DISALLOWED

Allowed personal exemption of $300

Question 11

How are Net Operating Losses handled in a Trust?

Answer 11

Trusts can have a Net Operating Loss (NOL)

Any unused NOL flows through to the beneficiaries

Question 12

How are expenses and fees related to tax-exempt income handled in a Trust?

Answer 12

Expenses and fees from tax-exempt income are not deductible for either a Complex or Simple Trust

Question 13

When is property transferred in an Estate?

Answer 13

After the death of the donor

Question 14

What amount of a decedent’s Estate is exempt from Estate Tax?

Answer 14

The First $5,340,000 (2014) is exempt with a 40% tax on amount above that

Question 15

How are a decedent’s medical expenses handled with respect to an Estate?

Answer 15

Medical expenses paid after death, but incurred within 1 year of death go on decedents personal tax return

Question 16

How is an Estate’s NOL handled?

Answer 16

Estates can have a Net Operating Loss

Any unused NOL flows through to the beneficiaries

Question 17

What does a gross Estate consist of?

Answer 17

Cash and Property FMV at death, or alternate valuation.

Question 18

What is joint tenancy with respect to an Estate? How is it calculated?

Answer 18

When two non-spouses jointly own property

FMV at death X % Ownership = Amount in Estate

Question 19

What is tenancy by entirety?

Answer 19

1/2 of marital assets go to deceased spouses Estate

Question 20

What is tenancy in common in an Estate?

Answer 20

A, B, and C own property

If A dies, FMV of As share goes to heirs

Question 21

How is Estate tax handled with respect to a beneficiary?

Answer 21

Property received through inheritance is not income to recipient

Property value is FMV at Date-of-Death or 6 months later

If property is sold prior to 6 month date and the alternative date is used, FMV at date of sale is used to value property

Basis in property automatically assumes LT holding period

Question 22

What is distributable net income (DNI)?

Answer 22

DNI = Taxable Income Expenses (from income production)

Trust beneficiaries only pay tax if earnings are distributed

Estate beneficiaries pay tax on DNI, regardless if distributed

Beneficiaries taxed on receipt of distributions (to extent of DNI)

Question 23

When must a tax exempt organization file a 990-T for Unrelated Business Income?

Answer 23

If a tax exempt organization has more than $1,000 of UBI, it must file a Form 990-T

Question 24

What are the requirements for a 501(c)3 organization?

Answer 24

Organized and Operated exclusively for exempt purposes

No earnings can benefit an individual or private shareholder

Can’t attempt to influence legislation as a major part of its activities

Can’t campaign politically

Question 25

What personal exemptions are available for fiduciaries (estates & trusts)?

Answer 25

Estates $600 Simple trusts $300 Complex Trusts: $300 if distribute all income currently $100 for all other Complex trusts

Question 26

What is the calculation for DNI?

Answer 26

``` Taxable Income +Tax-exempt income +personal exemption +net capital loss (if any) -net capital gains allocable to CORPUS = DNI ``` Shortcut: Accounting Income - Net Capital Gains

Question 27

What filing year must estates and trusts use?

Answer 27

Trusts must use Calendar year Estates may choose any year-end Both must file by 15th day of 4th month (April 15) Both get automatic 5 month extension (Trust - tight; Estate - either)

Question 28

Must fiduciaries pay estimated income taxes?

Answer 28

Trusts must always pay estimated taxes Estates only after first 2 years of operation

Question 29

What is IRD?

Answer 29

Income in Respect of a Decedent Income earned by decedent but not included in the decedent's final return Taxed as income to the estate and included on estate tax return and estate income tax return Any estate tax paid on IRD is Misc. Itemized Deduction (NO 2% floor)

Question 30

2014 Annual Exclusion

Answer 30

$14,000 ONLY applies to gifts of a "present" interest Gifts of a future interest, or gifts that don't qualify as gifts (donor retains interest/power to revoke) are NOT eligible for the annual exclusion *i.e.- if a gift is made to a trust but it will not benefit the recipient currently, then there is NO exclusion allowed since it is not a gift of a present interest

Question 31

2014 Unified Credit

Answer 31

* 2014: $5,340,000 | 2013: $5,250,000

Question 32

Gift Splitting rules

Answer 32

Election is available each year Must be married at time of transfer The gift is split and treated as being given equally by both spouses Beneficial because both spouses can then use an annual exclusion for gifts of present interest. (Both will need to file a gift tax return)

Question 33

Marital deduction

Answer 33

Unlimited, for most gifts to a spouse Does NOT include gifts of "terminable interests" Deduction = total gift - any excluded portion (if annual exclusion applies) Does NOT apply if spouse is not a U.S. Citizen, however there is an annual exclusion of $145,000 in this case.

Question 34

Charitable Contribution deduction

Answer 34

Unlimited Defined similarly to income tax *educational, scientific, religious organizations AS WELL AS foreign charities Cemeteries are NOT included

Question 35

Certain exclusions from the Gift Tax *Transfers that are not considered gifts*

Answer 35

Payment of another individual's medical expenses must be paid DIRECTLY to the medical provider Payment of another individual's education expenses (Tuition and Fees ONLY) must be paid directly to the educational institution. Political contributions are NOT gifts Satisfaction of an obligation is NOT a gift

Question 36

Specific inclusions in Gross Estate

Answer 36

Life insurance Jointly Owned property Retained interests Transfers within 3 years of death

Question 37

Specific deductions for the Gross Estate

Answer 37

Marital deduction - unlimited (except for terminable interests and non-citizen spouses) Debts of the estate - mortgages, accrued taxes Final expenses - Funeral and administrative expenses Casualty & theft losses - no floor limitation. losses must be incurred during administration of estate. Charitable contributions - unlimited, same rules as gift tax

Question 38

What is the GST?

Answer 38

Generation Skipping Tax Prevents avoidance of transfer taxes by skipping one generation of recipients *Not applicable if persons in intervening generations are deceased (transfer to grandchild but grandchild's parents are dead)