Estates, Trusts & Gift Taxes

Life insurance proceeds are includible in the gross estate of the decedent if either of two conditions are met

(1) the proceeds are paid directly to the estate, or (2) the decedent retained the power of ownership of the policy with the ability to name or rename the beneficiary. Where neither of these conditions applies, the proceeds are excluded from the estate.

Which of the following is an attribute of a complex trust?

A complex trust is like a simple trust except it may make more complicated distributions that are: less than Distributable Net Income, make distributions that are more than Distributable Net Income, make charitable contributions, and distribute corpus. A complex trust also may pay tax on undistributed income and has a personal exemption of only $100. In this case, distributing corpus is an attribute of a complex trust.

Unified Rate Schedule - General Recap of Trusts

A lifetime credit is available against the gross estate tax. Since the gift and estate taxes were unified after 1976, gift taxes paid are treated as a payment of a part of the net estate tax rather than a credit against it.

Filling Requirement

A trust or estate is required to file a fiduciary income tax return, Form 1041, if it has gross income of $600 or more.

required to use the calendar year as their taxable period for income tax purposes?

An estate's initial tax period may be either a calendar year or a fiscal year beginning with the date of the decedent's death. Trusts subject to income taxation are required to adopt a calendar year.

Length of Term

An irrevocable trust will continue until the end of its term, whether that is a length of time, such as the 15 year term in this case, the occurrence of an event like death, or the purpose of the trust being accomplished. This trust has been setup to pay income for 15 years; thus, the trust will continue through the 15 year term of the trust and will not end early at the death of the trustee. If the donor or beneficiary had died before the end of the 15 year term, their respective interests would pass on to their estates.

Complex Trust

Any Trust that fails to meet the criteria for a simple trust Personal Exemption $100. Often Pays taxes on undistributed income Less than DNI is distributed and some of current income is retained within the trust. Amounts are permanently set aside for charitable gifts

B R A T S

Beneficiary - receive principal of the trust when terms Reasonable Intent - separate control from the benefic. Assets - trust must remain some corpus or property Trustee - Does not have to be named - have process Specified Life - have a certain term life -Private Trust=cannot live forever-lives until purpose - plus (21) years rich kids at 21 --Charitable Remainder Trust = Lives forever (perpetuity)

Exclude Gains allocable to corpus

Distributable net income (DNI) will include the taxable interest of $65,000 but will exclude the long-term capital gains that are allocable to corpus.

A Per Capita

Each beneficiary gets an equal amout

The maximum amount of the distribution to be included in the beneficiary's gross income is limited to the estate'

Each year, an estate or trust will compute its distributable net income (DNI), which generally doesn't include capital gains and losses and other items allocable to the principal (corpus). This amount will be the required distribution for a simple trust, and will be the maximum amount of the distribution that will be taxable to the beneficiary and deductible by an estate or complex trust on the relevant income tax returns, the excess being treated as principal distributions.

Estates and Trusts Overview

Fiduciary Income Tax Return (Form 1041)

Simple Trust

Form 1041 is filled Taxable income normally reduced to $0 by distributions -Net Capital Gains can result in retained income -Personal Exemption is $300 Distribution may exceed DNI -Only amount up to DNI is included in beneficiary's gross income -Multiple beneficiaries share in DNI proportionately when distribution exceeds DNI

The charitable contribution deduction on an estate's fiduciary income tax return is allowable

Only if the decedent's will specifically provides for the contribution.

Exemptions

Simple: = $300 Complex = $100 Estates = $600

What is the order when you die without a will

Spouse Decedent (Children/Grandchildren) Ascendant(Parent/Grandparents) Collaterals (Brothers/Sisters)

Grantor (Revocable) Trust

Tax Code ignores this trust - pays tax on 1040

What is the due date of a federal estate tax return (Form 706

The due date for an estate tax return (Form 706) is exactly 9 months after the date of death, assuming that an extension is not filed.

For income tax purposes, the estate's initial taxable period for a decedent who died on October 24

The executor of an estate is able to choose the estate's initial taxable period for income tax purposes. The executor has two options: a calendar year or a fiscal year beginning on the date of the decedent's death

Operation of Trusts & Estates

The proceeds from the sale of corpus are allocated entirely to corpus, so that gains and losses on asset sales are not income

donor to file a gift tax return

Transfers to spouses, transfers to charitable organizations, political contributions, and payments of medical expenses or tuition of another (the payment must be made directly to the health care or education provider) are not considered gifts.

Trusts

Trust are typically established for the purpose of benefiting specific individuals or charities without giving them current control of the principal (corpus) of the trust

Income Taxation of Trusts and Estates (1041) Exceptions (3)

Trustee Management Fees (Fiduciary Fees) --(%) of taxable income Charity:Can give 100% away (trust) individuals (50%)=AGI Income Distribution Deduction: Taxed once and only once! NO Double Taxation: Either stays or gets distributed to K-1

Under the unified rate schedule

Under provisions of the unified transfer tax, lifetime taxable gifts and the taxable estate at the time of death are taxed on a cumulative basis using a single schedule of rates, with the payment of the tax beginning as soon as the cumulative reported amounts have exceeded the amount that can be eliminated by the lifetime unified transfer tax credit

Testate

When someone dies with a Will

Interstate

When someone dies without a written Will

A per stirpes

allocation of each group 1/3-1/3-(1/9 to 1/9 to 1/9)

Marital Deduction & Lifetime Exclusion

reduced by the marital deduction, which will be the entire $3,400,000 bequeathed to the surviving spouse, and the lifetime exclusion of $5,450,000