STU12 Flashcards
Describe Distributable net income.
Distributable net income is taxable income with tax-exempt interest added and no personal exemption allowed. No deduction is allowed for expenses attributable to the production of tax-exempt income. Also, since the capital gains are not included in the computation of distributable net income, no expenses are allocated to capital gains. Distributable net income (DNI) is the current net accounting income of the estate reduced by any amounts allocated to principal. This is the maximum amount deductible by the estate for distributions and the maximum amount of taxable income recognized by the beneficiary.
What is a distribution deduction?
The distribution deduction is equal to the lesser of the required distribution or the distributable net income (DNI), which is computed without including exempt income. The required distribution is equal to all the income, excluding principal items.
What is the tax year must be adopted by a trust?
All trusts, both new and existing (for the first taxable year beginning after 1986), are required to adopt the calendar year as their tax year. Only tax-exempt trusts and wholly charitable trusts are exceptions from this rule.
What credit may be offset against the gross estate tax to determine the net estate tax of a U.S. citizen?
Only the applicable credit amount is creditable against the gross estate tax. The unified transfer rate schedule has changed several times since 1976. This has resulted in inter vivos and testamentary transfers being taxed at different rates. In order to subject both types of transfers to the same rate, post-1976 gifts must be added back to the taxable estate to arrive at the decedent’s estate tax base. The Code provides for a credit against the tentative estate tax (the tax calculated using the estate tax base) for gift taxes actually paid on post-1976 taxable gifts (at the time of the gift). The result of this credit against the tentative estate tax is the gross estate tax. Therefore, the credit for the gift taxes paid on post-1976 gifts has already been taken and so cannot be offset against the gross estate tax.
What tax year may an estate adopt?
An estate may adopt either a calendar tax year or any fiscal year ending not more than 12 months after death. All trusts, other than tax-exempt and wholly charitable trusts, must use a calendar tax year.
For income tax purposes, what is the estate’s initial taxable period for a decedent?
An estate as a legal entity comes into existence upon the death of an individual. The estate may choose a taxable year ending within 12 months after the date of the decedent’s death. The taxable year may be either a calendar year or fiscal year.
In preparing a estate tax return, Form 706, what is included in the gross estate?
A decedent’s gross estate includes the FMV of all property, real or personal, tangible or intangible, wherever situated, to the extent the decedent owned a beneficial interest at the time of death. Special tax-avoidance rules are established for U.S. citizens or residents who surrender their U.S. citizenship or long-term U.S. residency. Included in the GE are items such as cash, personal residence and effects, securities, other investments (e.g., real estate, collector items), other personal assets such as notes and claims (e.g., dividends declared prior to death if the record date had passed), and business interests (e.g., in a sole proprietorship, partnership interest). The GE includes the value of the surviving spouse’s interest in property as dower or curtesy.
Are ordinary and necessary administration expenses paid by the fiduciary of an estate deductible?
On the fiduciary income tax return only if the estate tax deduction is waived for these expenses. Administration expenses (and debts of a decedent) are deductible on the estate tax return, and some may also qualify as deductions for income tax purposes on the estate’s income tax return. Double deductions are disallowed. A waiver of the right to deduct them on Form 706 is required in order to claim them on Form 1041.
The Revised Uniform Principal and Income Act, with some modifications, has been adopted by many states to establish the definitions of the principal and income of a trust or estate for federal income tax purposes. In general, what is considered income to a trust or estate?
The distinction between trust or estate income and principal is an important one. Tax is imposed on the taxable income (TI) of trusts or estates, but not on items treated as fiduciary principal. The Revised Uniform Principal and Income Act specifies that certain items, including business income, interest, rents, and taxable dividends, are to be treated as income to the trust or estate. The act also lists certain items to be treated as principal, including consideration for property (e.g., gain on sale), stock splits, stock rights, and liquidating dividends.
Are expenses of administering and settling the estate and state inheritance or estate tax allowable deductions from a decedent’s gross estate?
Expenses for administering and settling the estate are an allowable deduction and state inheritance or estate taxes are deductions instead of credits against a decedent’s gross estate.
Are the proceeds of a life insurance policy payable to the estate’s executor included in the decedent’s gross estate?
The gross estate includes amounts receivable by all beneficiaries from insurance under policies on the life of the decedent with respect to which the proceeds are receivable by or for the benefit of the estate. If they are payable to the executor, they are receivable for the benefit of the estate and are always included in the decedent’s gross estate.
An executor of a decedent’s estate that has only U.S. citizens as beneficiaries is required to file a fiduciary income tax return if the estate’s gross income for the year is at least
An estate (or trust) with gross income ≥ $600 is required to file Form 1041, Fiduciary Income Tax Return, no later than the 15th day of the 4th month following the close of the entity’s tax year.
