Chapter 14: Income Taxation of Trusts

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Chapter 14Income Taxation of Trusts Estates
Chapter 14 Income Taxation of Trust Estates
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INCOME TAXATION OF TRUSTS ESTATES (1 of 2)

• Fiduciary taxation
• Basic concepts and definitions
• Trust taxable income
• Distributable net income (DNI)
• Simple trusts

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INCOME TAXATION OF TRUSTS ESTATES (2 of 2)

• Complex trusts
• Income in respect of a decedent
• Grantor Trusts

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Fiduciary Taxation

• Trusts and estates are separate taxpayers
• No 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 Definitions (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
  persons death
• Testamentary trust receives assets from estate of
  decedent

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Basic Concepts and Definitions (2 of 5)

• Principal or corpus
• Initial assets transferred by grantor plus
  certain additions/deductions required by
  provisions of trust instrument
• Income
• Earnings derived from principal but certain
  gains, losses or deductions may be considered
  adjustments to principal

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Basic Concepts and Definitions (3 of 5)

• Grantor
• Party that transfers assets to the trust
• Trustee
• Party that administers the trust
• Income Beneficiary
• Party (or parties) who receives income when
  distributed by Trustee under provisions of trust
  instrument

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Basic Concepts and Definitions (4 of 5)

• Remaindermen
• Party (or parties) who eventually receives trust
  principal
• Same person may receive both income and principal
• Simple trust
• Must distribute all income annually,
• Does not distribute any principal AND
• Makes no contributions to charities

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Basic Concepts and Definitions (5 of 5)

• Complex trust
• Any 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 Income

• Gross Income
• - Deductions for expenses
• - Personal exemption
• Taxable income before distribution
• - Distribution deduction
• Trust taxable income

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Distributable Net Income (DNI) (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 Income (DNI) (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 Income
• See Topic Review C14-2

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Simple Trusts(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 Trusts(2 of 3)

• Allocation of expenses to tax-exempt income (for
  indirect costs such as trustees fees)

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Complex Trusts

• Complex trusts permit the following activities
• Making distributions lt current earnings
• Distributing principal
• Making charitable contributions
• Complex trusts DNI
• Impact on beneficiaries

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Complex Trusts DNI

• Distribution deduction is smaller of DNI or sum
  of mandatory and other amounts properly paid