Fiduciary Income Tax Flashcards
(45 cards)
What are the grantor trust rules?
IRC §§671-679.
Simply put, if the grantor,or another individual, has too much control over a trust, then that trust is not considered a separate taxable entity.
Common one that makes it a grantor trust - Power to Revoke
Who is a related or subordinate party under grantor trust rules?
Under IRC §672(c) the term related or subordinate party includes any nonadverse party who is
(1) the grantor’s spouse if living with the grantor;
(2) the grantor’s father, mother, issue, brother, sister, an employee of the grantor (among others).
How is income reported under grantor trust rules?
Option 1:
The trustee does not need to obtain an EIN for the trust. The grantor must provide a signed W-9 to the trustee.
Options 2 and 3: The trustee obtains an EIN for the trust.
◦ The trustee provides the EIN to the payors of income.
◦ The trustee issues 1099s to the grantor(s).
◦ The trustee does not file a Grantor 1041 for the trust.
The difference between Option 2 and 3 is that Option 2 is when the trust is owned by one Grantor and Option 3 is when the trust is owned by more than one Grantor.
What type of grantor trust can’t use 1099 income tax reporting?
Not all grantor trusts can use 1099 reporting, for example a trust that has any assets located outside the United States or a qualified subchapter S trust.
What are the grantor trust rules?
Trusts over which Grantor has a reversionary interest exceeding 5%.
This can be a partial interest, such as a fractional interest in the trust or a reversionary interest over a specific asset.
- A trust for which the grantor or a non-adverse party holds the power to determine who will receive the corpus or income without the consent or approval of any adverse party.
- A trust with which the grantor or a non-adverse party has the power to deal for less than full and adequate consideration, or to borrow without adequate interest or security.
- A trust that the grantor can revoke.
- A trust whose income may be distributed or held for future distribution to the grantor or grantor’s spouse or be used for the payment of life insurance premiums on policies of insurance on the life of the grantor or grantor’s spouse. [ILITS specifically bar this to preclude being a grantor trust]
Who is an “adverse party” under 672?
Under IRC §672(a) an adverse party is any person having a substantial beneficial interest in the trust which would be adversely affected by the exercise or non-exercise of the power which he possesses respecting the trust.
A person having a general power of appointment over the trust property shall be deemed to have a beneficial interest.
How might a beneficiary be deemed a partial grantor under 678?
Crummey notice right to withdraw as to that asset
5x5 power as to that right to withdraw.
Settlor could retain a partial ownership - eg, right to withdraw one-half of trust; or income only.
**Even if beneficiary does not exercise right to withdraw, he will be treated as grantor for that asset.
What is IDGT?
Grantor trust for income tax purposes.
But completed gift for FET purposes (not included in ht estate)
What is Income in Respect of a Decedent?
Items of income in respect of a decedent (“IRD”) are taxed twice in a relatively short period of time, IF a FET is owed.
Treated as principal of the estate.
B/c of this, the estate or trust gets to take a deduction on 1041 of the amount FET attributable to the IRD.
Remember: if there is no FET paid, there will be no
IRD deduction!
What deductions are allowed on a 1041?
Reg. 1.641(b)-1 states that generally the deductions and
credits allowed to individuals are also allowed to estates and trusts.
What is the TCJA?
Tax Cuts and Jobs Act - 2017
Is FET deductible on 1041?
No
What taxes are deductible on 1041?
◦ State fiduciary income taxes (subject to the limitations
imposed by the TCJA)
◦ Real estate taxes not deducted elsewhere (such as on
Schedule E)
What are the exemptions on 1041?
$600 for estate
$300 for simple trust
$100 for complex trust
What is the distribution deduction on 1041?
Fiduciary return takes a deduction for the amounts passed out to the beneficiaries - k-1
What is the effect of TCJA?
Under the TCJA (2017) the deduction for miscellaneous itemized deductions was eliminated.
This may result in taxes being owed even when all net income is distributed, because the items are still deducted in calculating net income even though they are not deductible for income tax purposes.
◦ The elimination of a deduction for investment advisory fees, and
◦ The limitation on the amount that can be deducted for state and local taxes, “SALT” to $10,000.
What is the special basis rule for transfer of an asset to a trust where the basis is less than FMV at time of transfer?
If at the time of the transfer the property’s FMV is LESS than the donor’s basis, then the trust’s basis for determining loss is the fair market value, but for determining gain it is the donor’s basis.
What happens to basis if donor pays gift tax at time of transfer of asset to trust?
If there is gift tax paid on the gift, then the trust’s basis is
increased by the portion of the gift taxes attributable to the “net appreciation” – with “net appreciation” being the
difference between the fair market value and the transferor’s cost basis.
What is the basis for a gift to trust?
Carry-over basis. Generally there is a carryover of basis and holding period from the transferor to the trust receiving the property.
cf. Gift tax is paid on the FMV
What is FMV?
Fair market value is what a willing seller will pay a
willing buyer when neither is under a compulsion
to or sell and both are fully apprised of the relevant
facts.
If there are no trades on the date of death (for example, the decedent died on a weekend), then the value is determined by taking a weighted average of the means between the highest and lowest sales on the nearest date before and the nearest date after the date of death
What is FMV of marketable securities?
The average of the highest and lowest trading price on the date of death. It is not the closing value.
Can you use AVD if there is no FET due?
No. Have to be required to pay tax in order to use AVD.
How is the gain/loss from sale of an asset rec’d from a decedent categorized, even if sale occurs w/in one year of death?
Gain or loss from the sales of an asset received from a decedent is treated as long term gain/loss, even if the sale occurs within one year of the date of death.
Often the sales price of real estate, if it occurs within a reasonable amount of time after the decedent’s date of death establishes the cost basis (i.e. willing seller, willing buyer…)
What is the difference b/n simple and complex trusts?
A simple trust is one which is REQUIRED to distribute all its net income currently, does NOT make any principal distributions, and does not provide that any amounts are to be paid, permanently set aside, or used for charitable purposes.
A complex trust that is required to distribute all its income currently, but which makes principal distributions during the year receives the $300 exemption.
