Chapter 28 - Income Taxation of Trusts and Estates

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Chapter 28 - Income Taxation of Trusts and Estates

• (Subchapter J)

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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
• Dist to Bs taxable based on DNI

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Uses of Trusts

• Tax planning
• financial goals
• asset 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 gor, 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 Bs

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Terms Trust (Vocabulary)

• grantor (settlor, donor) (G)
• trustee (T), beneficiary (B)
• corpus (assets transferred to trust)
• income income interest
• remainder interest, reversionary interest
• simple, 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 Bs 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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• Decedent
• executor (trix)
• administrator (trix)
• Bs
• probate

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Form 1041

• Who must file
• Estate GIgt 600
• Trust any TI or, if none, GIgt600
• 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 individual
• Basis - step up/down, c/o, cost
• prop 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
  Bs

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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 Bs (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 income
• add 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 term
• AI measure of that which can be distribd to
  income Bs
• DNI taxability of what B receives
• DD 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 Bs

• TI and character to Bs detd by DNI Timing -
  inclusion
• Simple Trust TI to B limd to DNI DNI incl TE
  (tax exempt, so TI maybeltDNI)
• Ests Complex Tr (not covered in depth) 2 tiers
  - 1st inc reqd to be distribd 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, 1stgtDNI, same formula, no 2nd
  taxed
• (3) 1st 2nd, 1stltDNI, 1st 2nd ltDNI 2nd to
  B/2nd to all x DNI remg after 1st B DNI DNI
  max distrib, distribltDNI then B rec distrib for
  DD (ex 25)

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• Separate share rule (not covered in depth) (DNI
  allocd 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 distribd) (ex 29)

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Losses - Year of Termination

• NOL CL not to Bs (CF) except term yr
• at entity level normally, NOL CB 2 CF 20
• CL CF indef (3000/yr) (indivs rule)

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Throwback Computation

• Beyond scope of this course
• To discourage tax minimization by accumulating
  trust income
• Computation 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 Bs
• (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