Chapter 27 - Income Taxation of Trusts and Estates (Subchapter J)
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Transcript of Chapter 27 - Income Taxation of Trusts and Estates (Subchapter J)
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