Chapter 27 - Income Taxation of Trusts and Estates

(Subchapter J)

INTRODUCTION

Trusts and Estates - separate taxable entitiesTI similar to individual - 1041 (OH) I.E., Forms, formula, vocabulalryconduit to B: similar to pship, S Corp - K-1 Distrib deduction reduces TI of Trust Dist to B’s taxable based on DNI

Uses of Trusts

Tax planningfinancial goalsasset mngmt

E.g.,Types of Trusts (OH)

life insurance (irrevocable)living (revocable) minors blind QRP Alimony liquidating

This Chap - Ordinary Trusts

(not g’or, spec, alim, bankr, QRP)

Grantor trust: entity ignored for tax - 1 person

G (Grantor), B (Beneficiary), T (Trustee)

Definitions of Trust

7701 reg (not code) = arrangement by

will or inter vivos: transfer

declaration by which T takes title to protect or conserve assets for B’s

Terms – Trust (Vocabulary)

grantor (settlor, donor) (G)trustee (T), beneficiary (B)corpus (assets transferred to trust) income; income interestremainder interest, reversionary interestsimple, complex, can change yr to yr Sprinkling trust

complex - (1) not a simple trust (2) year of termination (because of corpus distribution)

simple = (1) Required to distribute AI (2) no B’s = charitable organization (3) no distributions of corpus

Terms – Estate (more Vocabulary)

Definitions of Estate

purpose - collect & conserve assets, pay liabs distribute assets under will or law (intestacy)

Decedentexecutor (trix) administrator (trix) B’s probate

Form 1041

Who must file Estate: GI> 600 Trust: any TI or, if none, GI>600 & when - 15th day of 4th month

methods - choice periods

estate: choice trust - calendar

(except tax exempt)

rates: compressed; CG, AMT, BIG exemptions

est - 600 tr - 300 (distrib all inc) (not same as

simple trust or tr - 100

Taxable Income

AI = accounting income = “income” in IRC = income inc B eligible to receive

GI - similar to individualBasis - step up/down, c/o, costprop distribs - usually no G or L on distrib,

DNI & DD = lesser of FMV or basis, election

IRD

IRD (Inc in Respect of Decedent) Cash basis - accrued salary, interest, rent etc accrual basis + cash - QRP, deferred

Comp

Ord deducs & losses

Ord deducs & losses: 2% rule (not 2% rule fiduc fees) (AGI used - greater of grantor or trust or estate as if individual)

apportion expenses to tax exempt (TE): TE/AI; AI = TE + GI possibly

cost recov - apportioned – proportionately to inc B’s

Charitable Contribution Deduction

year paid and if paid year following limits: GI for year, apportioned trust or will can specify from what

income (avoid tax exempt)

Losses - CL & NOL

CL - in trust, indiv rules (3000/yr after netting CL & CG) until termination

NOL - in trust, CB & CF (2 & 20), indiv rules, until termination

Deduction for Distrb to B’s (DD) see chart in Chapter (OH)

DNI determines TI b4 distrib = GI &

deducs & exemps modify TI b4 to det

DNI TI - DD = TI after

distrib DD = DNI - TE

Modifications: TI b4 DD to DNI

add back exemp add back net tax exempt incomeadd back net CL subtract net CG allocated to corpus

DNI/AI/DD - Recap

DNI based on TI maybe less than distribs based on AI

DNI = broad definition; economic termAI = measure of that which can be distrib’d

to income B’sDNI = taxability of what B receivesDD = DNI - TE (tax exempt)

Complex Trust (& Estate) v. Simple Trust

with discretionary distributions deduct (DD) lesser of deductible DNI or

amount actually distributed simple trust: assume distribution & deduction in year

required even if not made (ex 19)

Taxation of B’s

TI and character to B’s det’d by DNI; Timing - inclusion

Simple Trust: TI to B lim’d to DNI; DNI incl TE (tax exempt, so TI maybe<DNI)

Ests & Complex Tr (not covered in depth): 2 tiers - 1st: inc req’d to be distrib’d curr; 2nd: all other income

(1) tier 1 only distrib: 1st to B/1st to all x DNI = B DNI

(2) 1st & 2nd, 1st>DNI, same formula, no 2nd taxed

(3) 1st & 2nd, 1st<DNI, 1st & 2nd <DNI; 2nd to B/2nd to all x DNI remg after 1st = B DNI; DNI = max distrib, distrib<DNI then B rec = distrib for DD (ex 25)

Separate share rule (not covered in depth); (DNI alloc’d to sep share & remains there) EX 28) (to prevent inequity in corpus payments)

Character of Income Flow Thru

B DNI / total DNI x total DNI element (e.g., tax exempt)

total distrib/total DNI x DNI element = total DNI element (if only portion of DNI distrib’d) (ex 29)

Losses - Year of Termination

NOL & CL not to B’s (CF) except term yr

at entity level normally, NOL CB 2 & CF 20

CL CF indef (3000/yr) (indiv’s rule)

Throwback Computation

Beyond scope of this courseTo discourage tax minimization by

accumulating trust incomeComputation: what would have owed if

distributed earlier (DNI max)Repealed for domestic trusts (97 new law)

Trust Deductions - Summary

Depreciation - Charitable - 212 - Trustee fees

(1) AI = income which inc B eligible to receive (if CG allocated to corpus, not in AI)

(2) other deducs and deprec can be allocated to corpus or income (by trust, will, or state law) p 27-15 ex 14-15 (2002 text)

(3) but for tax, deprec allocated to inc B’s(4) also not allocated to corpus for tax:

trustee fees & 212 exps p. 27-15(5) Charitable, 212, trustee fees reduced by

tax exempt fraction - p 27-15; (TE/(TE + GI)) x deduc = allowable deduc; where GI + TE = AI

(6) And charitable deduction – will or trust can select income from which donat made (i.e., not tax exempt) to avoid reduction

(7) Adm exps if estate claimed on 706 (cannot be claimed on 1041; but can allocate between 706 & 1041; i.e., no double deduction

(8) but double deduc allowed for exps in respect of a decedent