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Taxation of estates
Income tax- income earned during the year while the estate is in existence
Estate tax- one-time only transfer tax based on the value of estate
Gifts of $14,000 or less per year/per donor are excluded
Income taxation rules for estates and trusts
Distributable net income (DNI):
Limitation on the amount the trust or estate can deduct
Estate (trust) gross income-->includes all capital gains
Minus estate (trust) deductions
Equals adj total income (form 1041)
Plus adj tax-exempt interest
Minus capital gains (attributable to corpus)
Equals DNI
Note: deductions include charitable contributions (unlimited)
Income distribution deduction equals the lesser of:
1. Actual distribution to beneficiary
2. DNI (less adj tax-exempt interest)
Annual estate income tax (form
1041):
Required when annual income exceeds $600
Exempt from making estimated tax payments for first two tax years
Tax year is calendar year or fiscal year (you can die anytime)
Annual trust income tax return (form 1041):
Calendar year (I trust you will remember 12-31 is year end)
May deduct amounts distributed to beneficiaries up to the DNI
Simple trusts: only make distributions out of current income (cannot make distributions from the trust corpus or principal), required to distribute all of its income currently, no charitable contribution, $300 exemption
Grantor trusts: grantor retains control over trust assets, any taxable income or deduction is reported on income tax return of grantor
Complex trusts: may distribute corpus or principal, may deduct charitable contributions, $100 exemption
The Estate Tax (form 706):
GR- taxable at FMV
Transfer tax
Filing req: value exceeds $5,450,000
Filing deadline: 9 months after death
Gross estate:
1.FMV of property owned at date of death or alternate valuation date (earlier of distribution of property date or six months after date of death)
2.Insurance proceeds- if deceased is the beneficiary or had incidence of ownership at death)
3. Incomplete gifts
4. Revocable transfers
5. All property entitled to be received
Estate transfer tax formula:
FMV assets
(Liabilities)
=net worth
(Transfers)
=remainder
X tax rate
=estate tax
(Credit)
=federal estate tax
Estate deductions:
Medical expenses (income tax or estate return, not both) a 10% limitation
Administrative expenses (income tax or estate return, not both)
Outstanding debts of decedent
Claims against the estate
Funeral costs
Certain taxes
Unlimited charitable deduction
Unlimited marital deduction
Tax rate:
Unified estate and gift credit - $2,125,800, $5,450,000 is deductible
Deceased spouse's unused exclusion (if they don't use it, you get it)
Other credits: foreign death taxes and prior transfer taxes (prior gift taxes paid)
The gift tax (form 709): tax is paid by the person giving the gift
Donor may exclude the first $14,000 of gifts made to each donee
Unlimited exclusion: payments made directly to an educational institution and health care provider for medical care, charitable gifts, marital deduction
Gifts-present vs future interest:
Present interest qualified for annual exclusion (i.e. Outright gifts, frequent distribution, life estates, unrestricted transfers)
Future interest does not qualify for annual exclusion (i.e. Reversions, remainders, accumulation of income)
Gifts-complete vs incomplete gifts:
Complete gifts qualify for annual exclusion
Incomplete gifts (not subject to gift tax but included in gross estate for purposes of computing estate tax):
Conditional and revocable
Recipient (GR: nontaxable = none =NBV)
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