chapter 27 - income taxation of trusts and estates
DESCRIPTION
Chapter 27 - Income Taxation of Trusts and Estates. (Subchapter J). INTRODUCTION. Trusts and Estates - separate taxable entities TI similar to individual - 1041 (OH) I.E., Forms, formula, vocabulalry conduit to B: similar to pship, S Corp - K-1 Distrib deduction reduces TI of Trust - PowerPoint PPT PresentationTRANSCRIPT
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Chapter 27 - Income Taxation of Trusts and Estates
(Subchapter J)
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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
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Uses of Trusts
Tax planningfinancial goalsasset mngmt
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E.g.,Types of Trusts (OH)
life insurance (irrevocable)living (revocable) minors blind QRP Alimony liquidating
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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)
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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
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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
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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
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Terms – Estate (more Vocabulary)
Definitions of Estate
purpose - collect & conserve assets, pay liabs distribute assets under will or law (intestacy)
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Decedentexecutor (trix) administrator (trix) B’s probate
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Form 1041
Who must file Estate: GI> 600 Trust: any TI or, if none, GI>600 & when - 15th day of 4th month
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methods - choice periods
estate: choice trust - calendar
(except tax exempt)
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rates: compressed; CG, AMT, BIG exemptions
est - 600 tr - 300 (distrib all inc) (not same as
simple trust or tr - 100
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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
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IRD
IRD (Inc in Respect of Decedent) Cash basis - accrued salary, interest, rent etc accrual basis + cash - QRP, deferred
Comp
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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
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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)
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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
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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
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Modifications: TI b4 DD to DNI
add back exemp add back net tax exempt incomeadd back net CL subtract net CG allocated to corpus
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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)
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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)
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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
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(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)
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Separate share rule (not covered in depth); (DNI alloc’d to sep share & remains there) EX 28) (to prevent inequity in corpus payments)
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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)
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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)
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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)
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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)
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(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
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(6) And charitable deduction – will or trust can select income from which donat made (i.e., not tax exempt) to avoid reduction
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(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