Unit 8

Question 1

Form 1041

Answer 1

• Estates and trusts must file Form 1041.
• This form is for fiduciary tax returns.

Add one for when you die

Question 2

What would cause an estate to file?

Answer 2

• Estates with gross income of $600 or more must file.
• Also, if there’s a nonresident alien beneficiary, the estate must file.

Question 3

What must happen for a trust to file?

Answer 3

• Trusts must file if they have any taxable income.
• Additionally, trusts with gross income of $600 or more must file.
• If there’s a nonresident alien beneficiary, the trust must file.

Question 4

Do grantor trusts need to file?

Answer 4

Not usually

Question 5

Calendar year tax deadline?

Answer 5

April 15th

Question 6

Fiscal year deadline

Answer 6

15th day of the 4th month following the close of the tax year

Question 7

When does the first tax year start for an estate?

Answer 7

The date of death - can be any period of 12 months

Question 8

When is the tax year chosen for an estate?

Answer 8

When the first return is filed

Question 9

Trusts use what tax year?

Answer 9

Calendar year

Question 10

Capital gains, dividend and interest income that is required to be distributed to the beneficiaries are taxed how

Answer 10

taxed as capital gains and income to the beneficiaries

Question 11

Can a beneficiary be taxed on something that was not actually distributed to them?

Answer 11

Yes, beneficiaries are taxed on all distributions made to them.
They’re also taxed on what was required to be distributed, even if not actually distributed.

Question 12

Income on a grantor trust is taxed to whom?

Answer 12

the grantor

Question 13

Are grantor trusts subject to taxation?

Answer 13

Not usually

Question 14

Grantor Trust Rules:

Answer 14

• Grantor can revoke or alter the trust.
• Grantor keeps beneficial enjoyment.
• Grantor maintains administrative powers or control of beneficial enjoyment.
• Income can be used to pay life insurance premiums for grantor or spouse, except if it’s irrevocably payable to charity.
• Income may be distributed to support the grantor’s children.
• Trust corpus returns to the grantor, even if reversionary interest is just 5% of trust assets.

Question 15

Simple trusts

Answer 15

• Must distribute all current accounting income to beneficiaries in the year earned.
• Cannot distribute principal or have charitable beneficiaries.
• Have a personal exemption of $300.

Question 16

Complex trust

Answer 16

• Not required to make distributions.
• Can accumulate income, have charitable beneficiaries, or distribute principal during the tax year.
• Trust classification can change from simple to complex and vice versa based on distributions.
• Trusts with an option to distribute or accumulate income are always complex.
• Considered complex in their final year as principal must be distributed upon termination.
• Have a personal exemption of $100.

Question 17

Personal exemption for complex trust?

Answer 17

$100

Question 18

Personal exemption for simple trust?

Answer 18

$300

Question 19

When must a simple trust distribute all current accounting income?

Answer 19

Must distribute all current accounting income to beneficiaries in the year earned

Question 20

Can a simple trust distribute principal?

Answer 20

No

Question 21

What if I want my simple trust to have a charitable beneficiary?

Answer 21

You can’t

Question 22

When/how would trust classification change?

Answer 22

Trust classification can change from simple to complex and vice versa based on distributions.

Question 23

Can a simple trust turn into a complex trust?

Answer 23

Yes and vice versa

Question 24

Complex trusts can do what vs simple trusts

Answer 24

Can accumulate income, have charitable beneficiaries, or distribute principal during the tax year.

Question 25

Revocable trust

Answer 25

- Grantor has the right to terminate the trust. - Transferring assets into a revocable trust isn't considered a completed gift for gift tax purposes. - Treated as a grantor-type trust for income tax purposes. - Assets in the trust are subject to estate tax upon the grantor's death.

Question 26

Trusts that can distribute or accumulate income are always what

Answer 26

complex

Question 27

A revocable trust is treated as what type of trust for tax purposes?

Answer 27

Grantor

Question 28

Who has the right to terminate a revocable trust?

Answer 28

Grantor

Question 29

Irrevocable Trusts

Answer 29

- Cannot be revoked once created. - Transferring assets into these trusts is typically considered a completed gift subject to gift taxes.

Question 30

A completed gift is made when transferring to what type of trust?

Answer 30

Irrevocable

Question 31

Trust accounting income

Answer 31

the items of income and expense that are used to determine the amount the income beneficiaries are entitled to receive from the trust each year

Question 32

Trust document says what re: accounting income

Answer 32

specify what the accounting income is, and how capital gains and expenses are allocated to income or principal

Question 33

Finding trust taxable income

Answer 33

- Calculated by subtracting deductions for distributions, charitable contributions, and investment advisor fees from total income. - Applicable personal exemption is then deducted to determine taxable income.

Question 34

Distributable Net Income DNI

Answer 34

- Allocates taxable income between beneficiaries and the trust. - It's the maximum amount taxable to beneficiaries. - Excess distributions over DNI are non-taxable return of principal. - Beneficiaries are taxed on the lesser of the DNI allocation or the amount required to be distributed per the trust document.

Question 35

Excess distributions over DNI are what

Answer 35

Taxable return of principal

Question 36

Trust beneficiaries are taxed on what re: DNI

Answer 36

Beneficiaries are taxed on the lesser of the DNI allocation or the amount required to be distributed per the trust document.

Question 37

Estate Income Tax:

Answer 37

- Estates file and pay taxes while assets are collected and debts settled. - Income tax for an estate resembles that of a complex trust. - Personal exemption is raised to $600.

Question 38

Estate personal exemption

Answer 38

$600

Question 39

Income tax for an estate resembles what kind of trust

Answer 39

Complex