1 chapter 14: income taxation of trusts & estates
TRANSCRIPT
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INCOME TAXATION OF INCOME TAXATION OF TRUSTS & ESTATESTRUSTS & ESTATES (1 of (1 of
2)2)
Fiduciary taxationBasic concepts and definitionsTrust taxable incomeDistributable net income (DNI)Simple trusts
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INCOME TAXATION OF INCOME TAXATION OF TRUSTS & ESTATESTRUSTS & ESTATES (2 of (2 of
2)2)
Complex trustsIncome in respect of a
decedentGrantor Trusts
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Fiduciary TaxationFiduciary TaxationTrusts and estates are separate taxpayersNo double taxation
Deductions permitted for income distributed to beneficiaries
Distributed income from trust retains its character in hands of beneficiary
Limited personal exemption available and no dependency exemptions
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Basic Concepts and Basic Concepts and DefinitionsDefinitions (1 of 5) (1 of 5)
Estate comes into existence upon death of person whose assets are being administered
Trust is a legal entity created while a person is alive or under direction of a will following a person’s death
Testamentary trust receives assets from estate of decedent
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Basic Concepts and Basic Concepts and DefinitionsDefinitions (2 of 5) (2 of 5)
Principal or corpusInitial assets transferred by grantor plus
certain additions/deductions required by provisions of trust instrument
IncomeEarnings derived from principal but certain
gains, losses or deductions may be considered adjustments to principal
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Basic Concepts and Basic Concepts and DefinitionsDefinitions (3 of 5) (3 of 5)
GrantorParty that transfers assets to the trust
TrusteeParty that administers the trust
Income BeneficiaryParty (or parties) who receives income when
distributed by Trustee under provisions of trust instrument
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Basic Concepts and Basic Concepts and DefinitionsDefinitions (4 of 5) (4 of 5)
RemaindermenParty (or parties) who eventually receives
trust principalSame person may receive both income and
principalSimple trust
Must distribute all income annually,Does not distribute any principal ANDMakes no contributions to charities
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Basic Concepts and Basic Concepts and DefinitionsDefinitions (5 of 5) (5 of 5)
Complex trustAny trust that is not a simple trust
Personal exemption$300 if all income required to be
distributed annually$100 if current income may be
retained
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Trust Taxable IncomeTrust Taxable Income
Gross Income- Deductions for expenses- Personal exemption= Taxable income before distribution- Distribution deduction= Trust taxable income
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Distributable Net Distributable Net Income (DNI)Income (DNI) (1 of 2) (1 of 2)
DNI is maximum distribution deduction & income reportable by beneficiaries
No distribution deduction available for portion of distribution deemed to consist of tax-exempt income even though net tax-exempt income included in DNI
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Distributable Net Distributable Net Income (DNI) Income (DNI) (2 of 2)(2 of 2)
Taxable income before distributions+ Personal exemption already deducted- Capital gains added to principal+ Capital losses subtracted from principal+ Tax exempt interest (net of expenses)= Distributable Net IncomeSee Topic Review C14-2
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Simple TrustsSimple Trusts(1 of 3)(1 of 3)
Must distribute all of its net accounting income currently
Aggregate gross income reported by beneficiaries cannot exceed DNI
Income received by beneficiaries retains its character
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Simple TrustsSimple Trusts(2 of 3)(2 of 3)
Allocation of expenses to tax-exempt income
Tax-exempt income
(net of exp. directly
attributable thereto)
X
Accounting income
(net of all direct exp)
=
Indirect expenses allocable to non-taxable income
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Simple TrustsSimple Trusts(3 of 3)(3 of 3)
Tax treatment of beneficiary if trust has > 1 beneficiaryBeneficiary’s share of gross income
if DNI lower than net accounting income is following fraction of DNI
Income required to be distributed to such beneficiaryIncome required to be distributed to all beneficiaries
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Complex TrustsComplex Trusts
Complex trusts permit the following activitiesMaking distributions < current earningsDistributing principalMaking charitable contributions
Complex trust’s DNIImpact on beneficiaries
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Complex Trust’s DNI(1 of 2)
Complex DNI not reduced by charitable contribution deduction when determining maximum distribution for mandatory distributions
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Complex Trust’s DNI(2 of 2)
DNI reduced when calculating deductible discretionary distributions
Distribution deduction is smaller of DNI or sum of mandatory and other amounts properly paid
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Impact on Beneficiaries(1 of 2)
In generalBeneficiary includes distributions as gross income
up to current DNI for the trustAccumulation distribution or throwback rules
attempt to tax individual as if distributions were made annually
Higher trust tax rates make accumulation less desirable
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Impact on Beneficiaries(2 of 2)
Tax treatment of beneficiary if trust has > 1 beneficiaryBeneficiary’s share of gross income
if total income required to be distributed exceeds DNI
Income required to be distributed currently to beneficiary
Aggregate income required to be distributed to all beneficiaries currently
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Income in Respect of a Income in Respect of a Decedent (IRD)Decedent (IRD) (1 of 3) (1 of 3)
Most individuals use cash basisIRD is income constructively received,
but not actually received before deathInterest on CDs, bonds or savingsSalary, commissions or bonusDividends received after date of death
with record date before death
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Income in Respect of a Income in Respect of a Decedent (IRD)Decedent (IRD) (2 of 3) (2 of 3)
IRD must be included As gross income on estate’s
income tax return ANDAs part of the gross estate for
transfer tax purposes
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Income in Respect of a Income in Respect of a Decedent (IRD)Decedent (IRD) (3 of 3) (3 of 3)
Estate may claim an income tax deduction for the extra transfer tax due because these items were counted as part of the estate
No step-up in basis for IRD items
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Grantor TrustsGrantor Trusts(1 of 2)(1 of 2)
Grantor does not give up enough control or economic benefit to be a completed transfer
Grantor taxed on some or all of trusts incomeEven if income distributed to
beneficiaries
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Grantor TrustsGrantor Trusts(2 of 2)(2 of 2)
Types of grantor trustsRevocable trustsClifford TrustsPost-1986 Reversionary interest
trustsSee Topic Review C14-4
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