Estate, Trust, Gift Taxation

Front 1

Taxation of estates

Back 1

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

Front 2

Income taxation rules for estates and trusts

Back 2

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

Front 3

The Estate Tax (form 706):

GR- taxable at FMV

Transfer tax

Back 3

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)

Front 4

The gift tax (form 709): tax is paid by the person giving the gift

Back 4

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)