Income tax planning for trust and estate distributions.Reducing Overall Taxes Through Established Planning Techniques
The tax adviser to a trust or an estate is in an excellent position to offer more than tax compliance services to its fiduciaries and beneficiaries. He will often be able to reduce the overall income taxes payable by the trust or estate and its beneficiaries by providing timely advice as to when, how and to whom income and/or and/or
Used to indicate that either or both of the items connected by it are involved.
Usage Note: And/or is widely used in legal and business writing. principal should be distributed. These tax savings often substantially exceed the tax adviser's total fee, including the portion attributable attributable
emanating from or pertaining to attribute.
see attributable risk (below).
attributable risk to compliance services.
This article will review many of the established planning tools and techniques, in order to alert tax professionals to, or remind them of, income tax planning Tax planning
Devising strategies throughout the year in order to minimize tax liability, for example, by choosing a tax filing status that is most beneficial to the taxpayer. tools that will be useful to their fiduciary fiduciary (fĭd`shēĕ'rē), in law, a person who is obliged to discharge faithfully a responsibility of trust toward another. clients during trust and estate administration.
To use these techniques effectively, the tax adviser must have a good working knowledge of the basic rules governing gov·ern
v. gov·erned, gov·ern·ing, gov·erns
1. To make and administer the public policy and affairs of; exercise sovereign authority in.
2. the income tax treatment of distributions made by trusts and estates. Therefore, before discussing planning techniques, the basic rules of taxation, which are set out in subchapter J of the Code (Secs. 641-692, governing the taxation of estates, trusts and beneficiaries) and the related regulations, will be reviewed.
It should be noted that a tax adviser cannot properly prepare a fiduciary income tax return, much less engage in tax planning for a trust or an estate, unless he is familiar with fiduciary accounting principles and the applicable state law. The latter requirement makes it essential for a tax accountant to establish a consulting arrangement with a lawyer who is especially competent in the field of trusts and estates.
The principles of the income taxation of trusts and estates and the related tax planning techniques will be broken down into the following 25 parts. Parts 1 through 13 are covered in this installment; parts 14 through 25 will be published in March.
1. General scheme for taxation of fiduciary income.
2. How simple trusts are taxed.
3. Tax character of distributions.
4. When beneficiary beneficiary
Person or entity (e.g., a charity or estate) that receives a benefit from something (e.g., a trust, life-insurance policy, or contract). A primary beneficiary receives proceeds from a trust or insurance policy before any other. must report distribution.
5. Current distributions of complex trusts and
6. Charitable contributions charitable contribution n. in taxation, a contribution to an organization which is officially created for charitable, religious, educational, scientific, artistic, literary, or other good works. .
7. Taxability of distributions of principal.
8. Taxation of current year's capital gains to beneficiary.
9. Treatment of net capital losses.
10. The "sixty-five day" rule.
11. The "separate share" rule.
12. The distributions deduction deduction, in logic, form of inference such that the conclusion must be true if the premises are true. For example, if we know that all men have two legs and that John is a man, it is then logical to deduce that John has two legs. for alternative
13. Funding bequests with property in kind.
14. Distributions of interests in passive activities.
15. Distributions of income in respect of a decedent An individual who has died. The term literally means "one who is dying," but it is commonly used in the law to denote one who has died, particularly someone who has recently passed away. .
16. Phantom fiduciary taxable income Under the federal tax law, gross income reduced by adjustments and allowable deductions. It is the income against which tax rates are applied to compute an individual or entity's tax liability. The essence of taxable income is the accrual of some gain, profit, or benefit to a taxpayer. .
17. Reducing and deferring taxes by distributing
18. Planning through distributions of principal.
19. Planning terminating distributions.
20. Distributions by complex trusts from accumulated ac·cu·mu·late
v. ac·cu·mu·lat·ed, ac·cu·mu·lat·ing, ac·cu·mu·lates
To gather or pile up; amass. See Synonyms at gather.
To mount up; increase.
21. Taxation of multiple trusts.
22. Distributions of charitable remainder trusts charitable remainder trust (Charitable Remainder Irrevocable Unitrust) n. a form of trust in which the donor (trustor or settlor) places substantial funds or assets into an irrevocable trust (a trust in which the basic terms cannot be changed or the gift withdrawn) .
23. Grantor trust Grantor trust
A mechanism of issuing MBS wherein the mortgages' collateral is deposited with a trustee under a custodial or trust agreement. taxation.
24. Distributions from foreign trusts.
In addition, since one example is often worth many words of explanation, the discussion will be illustrated with numerous examples.
1. General Scheme for Taxation
of Fiduciary Income
Estates and trusts are separate taxable entities. In general, income is initially taxed to either the estate/trust or to the beneficiaries, depending on the terms of the governing instrument and local law. To the extent income is distributed or distributable and the beneficiaries are taxed, the estate/trust is generally considered to be a conduit conduit /con·du·it/ (kon´doo-it) channel.
ileal conduit the surgical anastomosis of the ureters to one end of a detached segment of ileum, the other end being used to form a stoma on the . To accomplish this result, the fiduciary is permitted to deduct de·duct
v. de·duct·ed, de·duct·ing, de·ducts
1. To take away (a quantity) from another; subtract.
2. To derive by deduction; deduce.
v.intr. the amount of distributed or distributable income and the beneficiary is required to include a corresponding amount in his gross income.
Ordinary trust income that is accumulated and is not initially taxed to the beneficiaries is, under present law, taxed to them on ultimate distribution (but see Part 20 in March).
2. How Simple Trusts Are Taxed
The regulations divide all trusts into two types - "simple" or "complex."(1) A simple trust is one that, under the terms of its governing instrument, is required to distribute all of its "income" currently and makes no distributions from principal or to charities.
The term "income," without modifications,(2) is defined in accordance Accordance is Bible Study Software for Macintosh developed by OakTree Software, Inc.
As well as a standalone program, it is the base software packaged by Zondervan in their Bible Study suites for Macintosh. with local trust law. For trust (and estate) accounting purposes, "income" receipts and payments are distinguished from those allocable al·lo·ca·ble
Capable of being allocated.
Adj. 1. allocable - capable of being distributed
distributive - serving to distribute or allot or disperse to "principal." Thus, "income" normally consists of dividends, interest and other types of income earned as the result of the investment of trust principal. Gains realized on the sale of principal assets, however, generally constitute "principal" under local law.
In computing computing - computer its taxable income, a simple trust is allowed a deduction for distributions to beneficiaries limited to the lower of - the amount of "income" required (under local law) to be distributed currently (IRDC IRDC Infrared Dark Cloud (astronomy)
IRDC International Development Research Center (Canada)
IRDC International Race Drivers Club
IRDC I Really Don't Care
IRDC Intelligence Research & Development Council ), or - the amount of "distributable net income" (DNI See Do Not Increase. ).(3)
DNI is the trust's taxable income, with certain modifications specified in Sec. 643(a): * The personal exemption Personal exemption
Amount of money a taxpayer can exclude from personal income for each member of the household in calculation of a tax obligation.
See exemption. ($300 for a simple trust, $100 for a complex trust and $600 for an estate) is not allowed. * The deduction otherwise allowable for distributions to beneficiaries is not allowed. * Undistributed Adj. 1. undistributed - (of investments) not distributed among a variety of securities
undiversified - not diversified capital gains or losses capital gains or losses n. particularly when calculating the tax liability of an individual or business, this is the difference between the original cost plus the cost of capital improvements, excluding maintenance, called "basis" and the sales price. allocated to principal are excluded. * Undistributed extraordinary dividends and taxable stock dividends allocated in good faith to principal are excluded.
Example 1: A simple trust, created on Feb. 17,19XX, realized the following income and expenses during its year ended Dec. 31, 19XX. Trust accounting Tax Income Principal Total Dividends $40,000 $ - $40,000 Interest 10,000 - 10,000 Capital gains 20,200 20,200 50,000 20,200 70,200 Trustee's commissions 5,000 3,000 8,000 Net $45,000 $17,200 $62,200 The deduction for distributions is $42,000, computed as follows: Lesser of: IRDC - required distributable income for trust accounting purposes $45,000 or DNI - $62,200 $20,200 capital gains $42,000 Note: The result of this computation is that principal expenses inure to the benefit of the income beneficiary.
Items that are not included in gross income are not eligible for the distributions deduction. Thus, in computing the actual distributions deduction, both IRDC and DNI are reduced by net tax-exempt income Tax-exempt income
Dividends and interest not subject to federal and, in some cases, state and local income taxes. .
3. Tax Character of Distributions
Under the conduit approach, the trust beneficiary must include in gross income the amount the trust is allowed as a deduction for distributions.(4) The amount of the distributions deduction allowed to a simple trust will be taxed to the beneficiary whether or not the amount was actually distributed to him because the income was required to be distributed.
When reported on the beneficiary's tax return, the trust income retains the same character it had in the hands of the trust (e.g., dividend income, interest income, etc.).(5) Because the computation Computation is a general term for any type of information processing that can be represented mathematically. This includes phenomena ranging from simple calculations to human thinking. of DNI begins with the trust's taxable income, however, all deductions - including those chargeable to principal - are automatically taken into account and only the net amount is reportable by the beneficiary.
In determining the character of the components of "net" income, how are trust deductions allocated against the various components of "gross" income? The regulations provide specific rules for making the allocation The apportionment or designation of an item for a specific purpose or to a particular place.
In the law of trusts, the allocation of cash dividends earned by a stock that makes up the principal of a trust for a beneficiary usually means that the dividends will be treated as : * Deductions directly related to specific types of income reduce the applicable income. For example, real estate taxes and mortgage interest are offset against rental income Noun 1. rental income - income received from rental properties
income - the financial gain (earned or unearned) accruing over a given period of time . * Any deduction not specifically related to a particular type of income is allocated among the various classes of income in any manner chosen by the trustee.(6)
Example 2: In Example 1, the income beneficiary Income beneficiary
One who receives income from a trust. should report $42,000 as income from the trust on his return. At the election of the trustee, the beneficiary may reflect $40,000 of dividend income and $2,000 ($10,000 - deductions of $8,000) of other income. The deductions allowed to the trust can be apportioned ap·por·tion
tr.v. ap·por·tioned, ap·por·tion·ing, ap·por·tions
To divide and assign according to a plan; allot: "The tendency persists to apportion blame as suits the circumstances" between the dividend and interest income in any manner (for example, in proportion to the amounts of gross income), at the trustee's option.
As a result of the DNI concept, the income beneficiary will usually receive the entire benefit of deductions paid from principal. To the extent that deductible That which may be taken away or subtracted. In taxation, an item that may be subtracted from gross income or adjusted gross income in determining taxable income (e.g., interest expenses, charitable contributions, certain taxes). principal disbursements are made for a tax year, he will receive income free of tax.
Example 3: The beneficiary in Example 1 is entitled en·ti·tle
tr.v. en·ti·tled, en·ti·tling, en·ti·tles
1. To give a name or title to.
2. To furnish with a right or claim to something: to $45,000 of income (the amount of IRDC) for the year ended Dec. 31, 19XX. However, he will be taxed on only $42,000 - the amount of the distributions deduction allowed to the trust. The $3,000 difference represents the trustee's commissions chargeable to principal. It is because of the DNI concept that the income beneficiary receives the benefit of this principal deduction.
To the extent that they constitute taxable income, receipts that are allocable to principal for fiduciary accounting purposes are normally taxed to the trust or estate. For example, capital gains realized on principal investments are ordinarily or·di·nar·i·ly
1. As a general rule; usually: ordinarily home by six.
2. In the commonplace or usual manner: ordinarily dressed pedestrians on the street. taxed to the trust or estate.
Example 4: The $20,200 capital gain realized by the trust in Example 1 will be taxed to the trust. Although the capital gain constitutes a principal receipt, the expenses paid out of principal (trustee's commissions) do not reduce the amount of the capital gain that will be taxed to the trust. Instead, as shown in Example 3, these deductions inure To result; to take effect; to be of use, benefit, or advantage to an individual.
For example, when a will makes the provision that all Personal Property is to inure to the benefit of a certain individual, such an individual is given the right to receive all the personal to the benefit of the income beneficiary.
Under the conduit principle of fiduciary income taxation, other items flow through the trust or estate to the beneficiary. For example, depreciation and depletion depletion n. when a natural resource (particularly oil) is being used up. The annual amount of depletion may, ironically, provide a tax deduction for the company exploiting the resource because if the resource they are exploiting runs out, they will no longer be able deductions(7) are generally not allowed to the fiduciary of the property; instead, these deductions pass through to the beneficiary who is taxed on the income to which the deductions are attributable. Foreign income received by the trust or estate retains its character as foreign income in the hands of the beneficiary-distributee and he, not the fiduciary, is entitled to any credit allowable for foreign tax paid on such income.
4. When Beneficiary Must Report
If a trust or estate and its beneficiary use the same tax year, the beneficiary reports his taxable share of income in the same year that the fiduciary deducts the amount. When, however, an executor executor n. the person appointed to administer the estate of a person who has died leaving a will which nominates that person. Unless there is a valid objection, the judge will appoint the person named in the will to be executor. and the beneficiary use different tax accounting periods, however, the beneficiary includes in his gross income the amount of income taxable to him for the tax year(s) of the estate ending with or within his tax year.(8) In effect, the amounts reported on the fiduciary income tax return as taxable to the beneficiary are deemed distributed as of the last day of the trust's tax year.
There is a once-in-a-lifetime exception to this general rule. In the year of a beneficiary's death, any income actually received by him from a trust or estate up to and including the date of his death (limited, of course, to the DNI) is includible on his final income tax return.(9) In other words Adv. 1. in other words - otherwise stated; "in other words, we are broke"
put differently , the income of the trust or estate is not treated as distributed to the deceased deceased 1) adj. dead. 2) n. the person who has died, as used in the handling of his/her estate, probate of will and other proceedings after death, or in reference to the victim of a homicide (as: "The deceased had been shot three times. beneficiary on the last day of the trust's or estate's year, but instead, to the extent paid to him before death, it is treated as distributed to him as actually paid.
Example 5: The income beneficiary of a calendar-year simple trust died on Nov. 11, 19XX. The trust received net income of $3,000 each month. Since each month's income was distributed to the income beneficiary on the tenth day of the month following receipt, $30,000 (10 months) of the 19XX net income was distributed to the beneficiary before his death.
Even though the beneficiary did not live until Dec. 31, 19XX (the last day of the trust's 19XX year), he will be taxed on all of the year's income that he actually received during the period he was alive - Jan. 1 to Nov. 11, 19XX. The decedent beneficiary's final income tax return will, therefore, include $30,000 of income from the trust.
Note that $3,000 received by the beneficiary on Jan. 10, 19XX, representing the trust's income for December December: see month. of the prior year, was reported on his prior year's return since all the trust income was required to be distributed currently.
The income distributable to the deceased beneficiary for the period Nov. 1 to 11, 19XX, which was paid to his estate on Dec. 10, 19XX, represents. "income in respect of a decedent" under Sec. 691(a), and will be taxed to the estate.
5. Current Distributions of Complex
Trusts and Estates
By definition, all trusts that are not "simple" trusts are designated as "complex" trusts. Complex trusts include: * Trusts that are required to accumulate Accumulate
Broker/analyst recommendation that could mean slightly different things depending on the broker/analyst. In general, it means to increase the number of shares of a particular security over the near term, but not to liquidate other parts of the portfolio to buy a security income. * Trusts that, under the governing instrument, may accumulate or distribute income at the discretion of the trustee. * Trusts that make a distribution from principal or make charitable contributions from income during the year, even though they are required to distribute all income currently.
In the year of termination, a simple trust is transformed into a complex trust, since terminating principal distributions are made. The general rules applicable to complex trusts also govern the taxation of estates.
The amount of the deduction for distributions allowed to a complex trust or an estate is limited to the lower of - the aggregate of IRDC and OAPC OAPC Ordinance on Air Pollution Control (Switzerland) (other amounts paid or credited or required to be distributed), or - the amount of DNI.(10)
As in the case of simple trusts, beneficiaries of complex trusts and estates must include in their gross income the amounts for which the trust or estate received a deduction for distributions.(11) However, complex trusts and estates may make distributions to more than one beneficiary during a particular tax year, and some beneficiaries' rights to income may take precedence The order in which an expression is processed. Mathematical precedence is normally:
1. unary + and - signs
3. multiplication and division
4. over others. Therefore, to provide priorities of taxability, the distribution rules establish what is known as the "tier" system.(12)
Under the tier system, the aggregate income that must be reported by the beneficiaries is allocated first to the beneficiaries who have rights to current income - that is, those beneficiaries to whom income is to be distributed currently under the terms of the governing instrument. The amount taxed to the first-tier beneficiary(ies) is the amount of IRDC, limited to DNI (computed without a charitable deduction). Such distributions are taxed to beneficiaries in the year required to be distributed.(13)
After allocating distributable income among the first-tier beneficiaries, any remaining amount of DNI is allocated among the "second-tier" beneficiaries. This tier consists of those beneficiaries who are paid or credited with OAPC for the tax year. Again, the amounts taxed to the second-tier beneficiaries cannot exceed the DNI, as reduced by first-tier distributions. Thus, charitable contributions inure to the benefit of second-tier beneficiaries. Second-tier distributions are taxed to the beneficiaries for the trust's or estate's year in which the distributions were made. Second-tier distributions include discretionary distributions of income and distributions of principal.
Under the conduit theory Conduit Theory
A theory stating that an investment firm passing all capital gains, interest, and dividends onto their customers/shareholders shouldn't be levied at the corporate level like most regular companies are. , discussed above, the income items of complex trusts and estates retain the same character in the hands of the beneficiaries as they had in the hands of the trust or estate.(14) When there is more than one beneficiary, the income is allocated pro rata [Latin, Proportionately.] A phrase that describes a division made according to a certain rate, percentage, or share.
In a Bankruptcy case, when the debtor is insolvent, creditors generally agree to accept a pro rata share of what is owed to them. among the beneficiaries in each tier. And, like simple trusts, the beneficiaries of complex trusts and estates include in their gross income the amounts distributed or distributable to them by the trust for the tax year(s) ending with or within the beneficiary's tax year.(15) The special rule governing the taxation of distributions received by a deceased beneficiary of a simple trust in the year of death also applies to beneficiaries of complex trusts and estates.(16)
Example 6: H's will provided that the residue of his estate be divided equally between his widow and his children. The will further provided that $100,000 of income was required to be distributed currently each year to the widow. During 19XX the estate had net income (DNI) of $800,000. In 19XX the executor made the following distributions: Widow Children Income: Required $ 100,000 $ 0 Discretionary 300,000 400,000 Principal 27,000,000 8,000,000 Total $27 400 000 $8 400 000 The reduced principal distribution to the children resulted from the charge to their share of estate taxes paid of $19,000,000. How should the $800,000 DNI be allocated between the beneficiaries? The distributions would be taxed as follows: Total Widow Children (thousands omitted) 1st tier (IRDC) $ 100 $ 100 $ 0 2d tier - lower of: Distributions (OAPC) 35,700 27,300 8,400 DNI (76 1/2%/ 23 1/2%) 700 535 165 Taxable - 2d tier 700 535 165 Total taxable $ 800 $ 635 $ 165
Mrs. H argued that the result was inequitable and that, although she received only 50% of the estate's $800,000 income for the year, she was taxed on almost 80% (part of which actually had been distributed to her children).
The Court of Claims in Harkness Harkness is a Scottish surname. Its etymology is probably from the Old English personal name Hereca (a derivative of the various compound names with the first element here army) plus the Old English næss headland, cape (17) (on which this example is roughly based) concluded that in so taxing the beneficiaries, the IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. had properly interpreted the two-tier rules of Secs. 661 and 662.
6. Charitable Contributions
Separate rules govern trust and estate distributions to charitable organizations This article is about charitable organizations. For other uses of the word charity, see Charity.
A charitable organization (also known as a charity) is an organization with charitable purposes only. . Such distributions are not considered to be distributions to beneficiaries.(18) Normally, a trust or an estate can take a deduction for amounts paid to a charity if the governing instrument so provides.(19) There is no percentage limitation on the amount, as in the case of individual contributions to charity.
The deduction for charitable contributions is not limited to U.S. charities.(20) In addition, amounts permanently set aside for charitable organizations are allowable as deductions only in the case of an estate, or a trust that was created before Oct. 9, 1969.(21)
Example 7: Under the terms of a trust instrument dated 1967, the income must be distributed currently, 60% to a public charity and 40% to the grantor's son. In the year 2000, the trust is to terminate and the principal is to be distributed to the public charity. During its 19XX calendar year, the trust reported the following on its return: Dividend income $50,000 Capital gain 10,000 $60,000 The trust's 19XX charitable contribution deduction is $40,000, computed as follows: Income paid to charity (60% of $50,000) $30,000 Amount permanently set aside for charity (increase realized in trust principal) 10,000 $40,000
Of course, if the trust had been set up after Oct. 8, 1969, it could not deduct the $10,000 permanently set aside for charity. This gain would be taxed to the trust. In contrast, an estate is entitled to a charitable contribution deduction charitable contribution deduction
An itemized income-tax deduction for donations of assets to Internal Revenue Service-designated organizations. Certain qualifications on this deduction apply, such as a contribution limit of 50% of a taxpayer's adjusted for amounts set aside regardless of the date of creation.
7. Taxability of Distributions of Principal
As discussed in Part 5, a complex trust or estate is entitled to a deduction for both IRDC to beneficiaries and for OAPC. Thus, items of principal that are paid or credited or required to be distributed can, under certain circumstances CIRCUMSTANCES, evidence. The particulars which accompany a fact.
2. The facts proved are either possible or impossible, ordinary and probable, or extraordinary and improbable, recent or ancient; they may have happened near us, or afar off; they are public or , carry with them income tax consequences.
Not all distributions of principal to beneficiaries will result in taxable income. Sec. 663(a)(1) specifically provides that any amount of principal that, under the terms of the governing instrument, is properly paid or credited as a gift or bequest bequest: see legacy. of specific property or a specific sum of money (which is payable in not more than three installments) is not deductible by the trust or taxed to the beneficiary. If the will or other governing instrument does not specify a time for the payment of the gift or bequest, any payments are treated as required to be paid in a single installment.(22)
Example 8: A will provides for the distribution of a specific bequest specific bequest n. the gift in a will of a certain article to a certain person or persons. Example: "I give my diamond engagement ring to my niece, Sophie." (See: will, bequest) of principal securities to a legatee A person who receives Personal Property through a will.
The term legatee is often used to denote those who inherit under a will without any distinction between real property and personal property, but technically, a devisee . The distribution of the specified securities would not involve any tax consequences.
Similarly, the payment, pursuant to a trust instrument, of $10,000 of principal in one lump sum Lump sum
A large one-time payment of money. when a beneficiary, for example, reaches age 21, will come within the exception and will be neither deductible by the trust nor taxed to the beneficiary.
In order to qualify under this exception, however, the identity of the specific property or the amount of the specific sum of money "must be ascertainable as·cer·tain
tr.v. as·cer·tained, as·cer·tain·ing, as·cer·tains
1. To discover with certainty, as through examination or experimentation. See Synonyms at discover.
2. under the terms of a testator's will as of the date of his death, or under the terms of an inter vivos trust inter vivos trust n. a trust created by a writing (declaration of trust) which commences at that time, while the creator (called a trustor or settlor) is alive, sometimes called a "living trust. instrument as of the date of the inception of the trust."(23)
Example 9: A trust instrument requires income to be distributed currently to daughter D. She is also to receive distributions of $10,000 of principal at age 21, $10,000 at age 35 and $40,000 at age 40. When D reaches 40, the remaining principal is to be paid to son S and the trust is to terminate Terminate (terminat.exe) was a shareware modem terminal and host program for MS-DOS and compatible operating systems developed from the early to the late 1990s by the Dane Bo Bendtsen. The last release (5. .
Only the payments of principal to D will not carry tax consequences. Although the principal payable to S might be considered a specific sum of money, it was not ascertainable when the trust was created since it will consist of a residual Residual
See:Residual value amount that cannot be predetermined pre·de·ter·mine
v. pre·de·ter·mined, pre·de·ter·min·ing, pre·de·ter·mines
1. To determine, decide, or establish in advance: .
Part 18, in March, will point out how planning for the distributions of principal can result in substantial tax savings. Part 13, below, will discuss the often unusual income tax consequences of funding gifts and bequests with property in kind.
8. Taxation of Current Year's
Capital Gains to Beneficiary
Gains from the sale or exchange of capital assets capital assets n. equipment, property, and funds owned by a business. (See: capital, capital account) realized by a trust or an estate are ordinarily excluded from DNI. In addition, capital gains are not ordinarily treated as included in any payment or distribution to any beneficiary. There are three exceptions to this general rule.(24) 1. When capital gains are allocated to income (rather than principal) under the terms of the governing instrument or local law and are allocated by the fiduciary on its books or by notice to the beneficiary. 2. When, pursuant to the practice followed by the fiduciary, capital gains are allocated to principal and actually distributed to the beneficiaries during the tax year.(25) 3. When capital gain is used (pursuant to the terms of the governing instrument or the practice followed by the trustee) in determining the amount that is distributed or required to be distributed.
Example 10: A trustee has a discretionary power under the trust instrument to invade in·vade
v. in·vad·ed, in·vad·ing, in·vades
1. To enter by force in order to conquer or pillage.
2. principal for the benefit of the income beneficiary. During the tax year the trust realizes a $10,000 capital gain. The trustee does not allocate To reserve a resource such as memory or disk. See memory allocation. the gain to the beneficiary on the trust's books. However, the trustee follows a regular practice of distributing the exact net proceeds Net Proceeds
The amount received after all costs are deducted from the sale of a piece of property or security.
In the case of an investor selling a security, net proceeds represent the proceeds from the sale minus any trading costs (i.e. commissions). of the sale of trust property to the beneficiary each year. Therefore, the capital gain would be includible in DNI; the trust would get a deduction for the distribution; and the beneficiary would be taxable on the current year's capital gains.
9. Treatment of Net Capital Losses
A net capital loss realized by a trust or an estate in a year other than the year of termination(26) cannot be "distributed" to a beneficiary during that year. As in the case of individuals, a net capital loss is deductible against ordinary income to the extent of a maximum of $3,000 (limited of course to taxable income). The excess net capital loss is then available as a carryforward carryforward
1. A business operating loss that, for tax purposes, may be claimed a certain number of years in the future, often up to 15 years. to subsequent years, and can be used to offset future capital gains. To the extent that the carryforward is not so used, it is deductible annually against ordinary income up to a maximum amount of $3,000 each year.
Example 11: A complex trust reports the following 19XX transactions: Ordinary income (net of deductions) $20,000 Short-term capital loss 5,000 Discretionary distributions of income to beneficiary 19,400
The trust's 19XX taxable income, before the deductions for the capital loss and its exemption, is $600 ($20,000 - $19,400 deduction for distributions to beneficiary); $600 of the capital loss is therefore deductible in 19XX, reducing taxable income to zero. (The maximum capital loss deduction allowable in any year is $3,000.) The unused $4,400 will be available as a short-term Short-term
Any investments with a maturity of one year or less.
1. Of or relating to a gain or loss on the value of an asset that has been held less than a specified period of time. capital loss carryover carryover n. in taxation accounting, using a tax year's deductions, business losses or credits to apply to the following year's tax return to reduce the tax liability. (See: carryback) in 19XY and later years to offset future capital gains or ordinary income.
It does not matter whether the capital loss is sustained on the sale of income property or principal assets. A net capital loss in any year is always allocated to the entity; it cannot pass through to the beneficiary except in the year of termination of the trust or estate (see Part 19 in March).
10. The "Sixty-Five Day" Rule
Generally, for a complex trust to take a distributions deduction for OAPC, the amount must be paid or credited to the beneficiary during the trust's tax year. A trustee may elect, however, to treat any portion of a distribution to a beneficiary made within the first 65 days of the trust's tax year as if it had been paid or credited to the beneficiary on the last day of the preceding tax year.(27) This election,(28) which must be attached to the fiduciary income tax return, is made on an annual basis, and becomes irrevocable Unable to cancel or recall; that which is unalterable or irreversible.
IRREVOCABLE. That which cannot be revoked.
2. A will may at all times be revoked by the same person who made it, he having a disposing mind; but the moment the testator is after the due date of the return, including extensions. The "sixty-five day" rule does not apply to estates or to simple trusts.
The election can be valuable, for example, when a trustee has the discretion to distribute or accumulate income and wishes to distribute all of the trust's income for a particular year. As a practical matter, however, it may be difficult to determine the trust's total income until after year-end year-end also year·end
The end of a year.
Occurring or done at the end of the year: a year-end audit.
Noun 1. when the books can be closed. Thus, the trustee can use the election to distribute "retroactively ret·ro·ac·tive
Influencing or applying to a period prior to enactment: a retroactive pay increase.
[French rétroactif, from Latin " the undistributed balance of income for a preceding year by treating the first payments made (within 65 days) in a trust's tax year as the preceding year's income.
11. The "Separate Share" Rule
For certain purposes, the substantially separate and independent shares of different beneficiaries of a trust are treated as separate trusts.(29) This "separate share" rule applies to both simple and complex trusts. Although most of the income tax provisions applicable to complex trusts also govern the taxation of estates, there is no similar separate share rule for estates. The following example demonstrates the purpose of this separate share rule.
Example 12: M creates a trust for her two children, S and D. Each has a 50% separate interest in the trust. The trust instrument provides that income is to be accumulated until each beneficiary reaches age 21. when each child reaches that age, the accumulated income is to distributed and, thereafter, income is required to be distributed currently.
In 19XX, S becomes 21 while D is still under 21. The trust income accumulated before S reaches age 21 totals $40,000. The trust's DNI for 19XX totals $4,000.
Under the separate share rule, S is taxed on only $2,000 of the trust's 19XX income, the DNI applicable to his separate share. The remaining $2,000, which represents D's one-half share, must be accumulated for her benefit. Without the separate share rule, S would be taxed on the full $4,000 of the current year's income.
Under the separate share rule, the DNI is computed separately for each share. This rule is not elective elective
non-urgent; at an elected time, e.g. of surgery.
elective adjective Referring to that which is planned or undertaken by choice and without urgency, as in elective surgery, see there noun Graduate education noun ;(30) if separate shares exist, the rule must be applied. Moreover, application of the rule does not depend on whether the trust's books are maintained separately and the assets are actually segregated.(31)
12. The Distributions Deduction for AMT See vPro.
Estates and trusts have to compute To perform mathematical operations or general computer processing. For an explanation of "The 3 C's," or how the computer processes data, see computer. DNI and the distributions deduction twice - once under the regular income tax rules and again by applying the provisions of the alternative minimum tax (AMT).(32) In order to compute the income distributions deduction for AMT purposes, the fiduciary must first compute the estate's or trust's "distributable net alternative minimum taxable income" (DNAMTI DNAMTI Distributable Net Alternative Minimum Taxable Income ).(33)
The fiduciary's DNAMTI concept and the DNAMTI income distributions deduction calculation for AMT purposes are the analogs of the distributable net income (DNI) concept and income distributions deduction computation needed to determine the amount of the estate's or trust's regular income tax liability. The concept constitutes the essence of the conduit principle underlying the income taxation of estates and trusts.
DNI will often differ from DNAMTI for reasons unrelated to AMT preference items. And since the fiduciary's AMT income distributions deduction must be calculated on Schedule H of Form 1041, U.S. Fiduciary Income Tax Return, and the beneficiaries' shares of DNAMTI must be entered on their Schedules K-1 (Form 1041), many estates and trusts that have no AMT tax preference items (but only adjustment items) will nevertheless have to prepare Schedule H of Form 1041.
Examples of items that are not technically AMT preference items (i.e., adjustment items), but which will cause a beneficiary's share of DNAMTI to vary from the amount of his share of DNI, include a variety of deductions and losses allowed for regular tax purposes, but not for AMT purposes. These include state and local income and property taxes,(34) "miscellaneous itemized deductions Itemized Deduction
A deduction from a taxpayer's taxable adjusted gross income that is made up of deductions for money spent on certain goods and services throughout the year. " in excess of 2% of adjusted gross income (AGI (Artificial General Intelligence) A machine intelligence that resembles that of a human being. Considered impossible by many, most artificial intelligence (AI) research, projects and products deal with specific applications such as industrial robots, playing chess, ),(35) any allowed portion of excess investment interest and "personal" interest cost36 and any passive activity losses(37) allowed in computing the fiduciary's regular income tax. And, of course, any AMT preference or other adjustment item incurred by the fiduciary would also cause DNI and DNAMTI to differ.
As previously discussed, in order to compute the income distributions deduction for regular income tax purposes, the trustee of a simple trust must determine (1) the amount of IRDC and (2) DNI. The trustee's distributions deduction(38) is equal to the lower of these two amounts.
On the other hand, the fiduciary of a complex trust or an estate calculates the allowable regular income tax deduction Tax deduction
An expense that a taxpayer is allowed to deduct from taxable income.
See deduction. for distributions to beneficiaries(39) as the lower of (1) the aggregate of IRDC and OAPC or (2) DNI. These computations should be made on Schedule B on page 2 of Form 1041.
For AMT purposes, the formulas required to determine the amount of the distributions deductions (and the beneficiary's share of income(40)) are similar, except that the applicable amount of DNAMTI should be substituted for the amount of DNI. For example, the AMT formula to calculate the allowable distributions deductions for a simple trust would be the lower of IRDC or DNAMTI, and for a complex trust or estate the lower of the aggregate of IRDC and OAPC or DNAMTI. Note: the amounts of "income required to be distributed currently" and "other amounts paid or credited," as concepts under local law - not tax law, are generally identical(41) whether the distributions deduction is being determined for regular tax or AMT purposes. It is the amounts of DNI and DNAMTI that will normally differ.
These computations are made on Part II of Schedule H on page 4 of Form 1041.
Example 13: A simple trust having one beneficiary reports the following income and deductions for 19XX: Dividend income $100,000 Deductions: Trustee's income commissions $ 5,000 State income taxes paid on capital gains (charged to principal) 35,000 $40,000 How should the trust's DNI, DNAMTI and the related income distribution deductions for 19XX be computed? The deductions would be calculated as follows: Regular income tax AMT Dividend income $100,000 $100,000 Deductions for expenses and taxes 40,000 5,000 DNI/DNAMTI 60,000 95,000 IRDC 95,000 95,000 Distributions deduction - lower $ 60,000 $ 95,000
Note: The result would be the same if aggregate AMT preference items replaced the amount of state income tax payments, as would the substitution Substitution
put her own son in place of Orestes; her son was killed and Orestes was saved. [Gk. Myth.: Zimmerman, 32]
robber freed in Christ’s stead. [N.T.: Matthew 27:15–18; Swed. Lit. of other deductions disallowed for AMT purposes such as passive activity losses, personal and excess investment interest, "miscellaneous itemized deductions" exceeding 2% of AGI, etc.
The amounts of the fiduciary's income distributions deductions allowed under Secs. 651 and 661 for both regular income tax and AMT purposes are the identical amounts that must be reported as gross income under Secs. 652 and 662 by the beneficiary of the estate or trust. When there is more than one beneficiary, DNAMTI is allocable among them in the same manner as income was allocated for regular income tax DNII purposes. Each beneficiary's share of both DNI and DNAMTI must be shown on the Schedule K-1 (Form 1041).
Example 14: The beneficiary of the simple trust in Example 13 would receive a 19XX Schedule K-1 (Form 1041) from the trustee that would reflect the following: Income for minimum tax purposes $95,000 Income for regular tax purposes 60,000 Adjustment for minimum tax purposes 35,000
The difference between these two amounts is reportable by the beneficiary as an adjustment for computing his 19XX AMT on Form 6251, Alternative Minimum Tax - Individuals (or on Schedule H of Form 1041, if the beneficiary is an estate or another trust).
13. Funding Bequests With Property In Kind
For income tax purposes, all gifts and bequests can be categorized cat·e·go·rize
tr.v. cat·e·go·rized, cat·e·go·riz·ing, cat·e·go·riz·es
To put into a category or categories; classify.
cat into the following types: 1. Gifts and bequests of specific property. 2. Pecuniary Monetary; relating to money; financial; consisting of money or that which can be valued in money.
pecuniary adj. relating to money, as in "pecuniary loss. (fixed-dollar) gifts and bequests:
a. simple (nonformula) pecuniary, or
b. formula pecuniary. 3. Fractional fractional
size expressed as a relative part of a unit.
fractional catabolic rate
the percentage of an available pool of body component, e.g. protein, iron, which is replaced, transferred or lost per unit of time. and residuary LEGACY, RESIDUARY. That which is of the remainder of an estate after the payment of all the debts and other legacies. Madd. Ch. P. 284. gifts and bequests.
The income tax consequences of funding each of these types of gifts and bequests with appreciated (or depreciated Depreciated may refer to:
A scheduled increase in the exercise or conversion price at which a warrant, an option, or a convertible security may be used to acquire shares of common stock. (or step-down) in the adjusted basis of the property in the hands of the beneficiary to its FMV on distribution.
This part will discuss and illustrate the general income tax consequences of funding gifts and bequests with stocks and other types of securities and capital assets. The income tax consequences of funding bequests with interests in passive activities (Part 14) and with income in respect of a decedent (Part 15) will be covered in March.
* Funding specific bequests
No gain or loss is triggered when the specific property is transferred, even though the value of the property on the distribution date is higher or lower than its adjusted basis. The estate or trust cannot claim a deduction for the distribution - it is a gift or bequest of specific property excluded under Sec. 663(a)(1). The recipient succeeds to the estate's or trust's income tax basis for the property.(42)
Example 15: In 19XX, an executor distributed stock having an income tax basis of $175,000 in partial satisfaction of a specific bequest to the surviving widower. The value of the stock on the distribution date was $230,000. No other distributions were made to other beneficiaries during the year. During 19XX the estate's only income consisted of $80,000 of dividends received and it had paid no deductible expenses. The executor (or his accountant) must determine the estate's taxable income for 19XX, the income reportable by the widower and the income tax basis of the stock distributed in the hands of the surviving spouse. The estate's 19XX fiduciary income tax return would show: Dividend income $80,000 Total income 80,000 Less deduction for distributions, lower of: DNI $80,000 Distribution 0 Lower 0 80,000 Less personal exemption 600 Taxable income $79,400
The surviving spouse spouse A legal marriage partner as defined by state law would report no income from the estate for 19XX. The income tax basis of the stock distributed in the widower's hands would be $175,000, its basis to the estate.
* Funding pecuniary bequests
The inclusion in a will or trust instrument of a bequest or gift of a flat fixed-dollar (pecuniary) amount, in trust or otherwise (for example, a bequest to a surviving spouse of $1 million, or a bequest in trust to children for $600,000 to "sop up" the unified credit unified credit
A credit used against federal taxes due on estates and large gifts. Under current law, the unified credit is sufficient to offset taxes on values of approximately $1 million in estates and large gifts. ), may not be advisable ad·vis·a·ble
Worthy of being recommended or suggested; prudent.
ad·visa·bil for a number of obvious tax and nontax reasons. Nevertheless, this type of gift or legacy may be encountered.
Whether the funding of such a gift or bequest with cash will result in a deduction to the estate, and income to the beneficiary, depends on whether the bequest qualifies as "a gift or bequest of a specific sum of money or of specific property" under Sec. 663(a)(1): 1. If under the terms of the governing instrument it is to be paid in three or fewer installments, any payment to the legatee will not constitute an "other amount paid or credited" (OAPC), which will carry out DNI. 2. If under the terms of the will or other instrument it is to be paid in four or more installments, each payment (even if in fact it is paid in a lump sum) will be deemed OAPC and will carry out DNI to the legatee.(43) 3. If under the terms of the will, "no time of payment ... is specified.... [it is] considered as required to be paid or credited in a single installment."(44)
The funding of such a fixed dollar gift or bequest with appreciated (or depreciated) capital asset property valued at the date of distribution will result in the realization by the trust or estate of a capital gain (or loss).(45) Such a bequest is treated as a cash bequest equal to the property's FMV, followed by a deemed sale of the property to the beneficiary for cash.
The beneficiary will receive a stepped-up stepped-up
Increased in pace or intensity; heightened: a stepped-up political campaign. basis equal to the property's FMV on the transfer date.(46)
If ordinary income property is distributed to satisfy a fixed-dollar obligation, ordinary income will be triggered. For example, the distribution of the right to receive future Sec. 691 income in respect of a decedent (IRD IRD Institut de Recherche pour le Développement (French)
IRD Inland Revenue Department (New Zealand's tax revenue collection department)
IRD Integrated Receiver Decoder ) in satisfaction of a pecuniary bequest will trigger a capital gain or ordinary income to the estate, depending on the type of IRD.(47) Depreciation recaptured depreciation recapture
See recapture of depreciation. under Sec. 1245 or 1250 will also result in a distribution of ordinary income.
Example 16: Assume the same facts as in Example 15, except that the stock distributed was in partial satisfaction of a non-formula (simple) pecuniary marital bequest, rather than a specific bequest. No number of payments was specified in the will. The will provided that the pecuniary amount of the bequest was to be satisfied with cash or property valued at the date of distribution (the so-called true worth funding approach). The estate's 19XX fiduciary income tax return would show: Dividend income $ 80,000 Capital gain realized on the distribution ($230,000 - $175,000) 55,000 Total income 135,000 Less deduction for distributions, lower of: DNI $80,000 Distribution 0 Lower 0 135,000 Less personal exemption 600 Taxable income $134,400
The widower widower n. a man whose wife died while he was married to her and has not remarried.
WIDOWER. A man whose wife is dead. A widower has a right to administer to his wife's separate estate, and as her administrator to collect debts due to her, generally for would report no income from the estate for 19XX. The income tax basis of the stock distributed to him would be $230,000, its FMV on distribution.
If, however, the will provided that the simple pecuniary bequest was to be satisfied in four or more installments, the surviving spouse would be taxed on $80,000 of estate income for 19XX, the estate's distributions deduction (and the surviving spouse's reportable income) would be limited to the estate's $80,000 of DNI. The tax basis of the stock distributed would still be $230,000 in the hands of the widower.
The provisions of the governing instrument will determine the income tax consequences of funding formula pecuniary gifts and bequests. * In a true worth pecuniary gift or bequest, property distributed in kind is valued at the distribution date. This is the most commonly used funding approach. State law generally provides that the FMV of the property on the distribution date is used to measure the extent to which a distribution satisfies the pecuniary amount, absent a specific valuation provision in the governing instrument.(48) Unless specifically noted, the discussion in this article, and the examples used, presume pre·sume
v. pre·sumed, pre·sum·ing, pre·sumes
1. To take for granted as being true in the absence of proof to the contrary: We presumed she was innocent. that the pecuniary bequest is funded with property valued at the date of transfer - the true worth pecuniary gift or bequest. * In 1964, the IRS issued Rev. Proc. 64-19,(49) which effectively outlawed the use of the adjusted income tax basis of property distributed in kind to measure the funding of a pecuniary bequest by denying the estate tax marital deduction marital deduction n. when one spouse dies, the survivor may take a tax deduction of half of the value of the estate of the dying spouse. Thus, the minimum value of the estate before there is a possible federal estate tax rises from $600,000 to $1,200,000 at the death for such a bequest. The ruling did, however, give rise to two permitted alternatives to the true worth funding approach: 1. A fairly representative pecuniary gift or bequest under which each asset is generally valued for funding purposes at its basis for Federal income tax purposes, provided that the assets used to satisfy the bequest are "fairly representative" of the depreciation or appreciation of the estate's assets as a whole, and 2. A minimum worth pecuniary gift or bequest under which each asset is valued for funding at the lesser of its distribution date value or its Federal income tax basis, if the total value of the assets distributed is equal to the amount of the marital deduction.
When an executor distributes property in kind in satisfaction of a true worth pecuniary gift or bequest: 1. The transfer constitutes a sale or exchange. 2. Gain or loss is recognized by the estate to the extent that the property's FMV on the transfer date exceeds or is less than the amount of the bequest. 3. Since the legatee is considered, in effect, to have purchased the property on the "deemed sale," he gets a stepped-up basis equal to the property's FMV on the transfer date.(50)
Nevertheless, Treasury regulations state that such a fixed dollar pecuniary formula bequest "is neither a bequest of a specific sum of money or of specific property" (emphasis added) within the meaning of Regs. Sec. 1.663(a)-1 because "[t]he identity of the property and the amount of money specified ... are dependent both on the exercise of the executor's discretion and on the payment of administration expenses and other charges, neither of which are facts existing on the date of the decedent's death." In addition, "[i]t is immaterial Not essential or necessary; not important or pertinent; not decisive; of no substantial consequence; without weight; of no material significance.
immaterial adj. that the value of the bequest is determinable Liable to come to an end upon the happening of a certain contingency. Susceptible of being determined, found out, definitely decided upon, or settled.
determinable adj. after the decedent's death before the bequest is satisfied (so that gain or loss may be realized by the estate in the transfer of property in satisfaction of it)."(51)
Therefore, a distribution to fund such a gift or bequest will carry out income to the beneficiary. The amount of the income distribution will be equal to the FMV of the property distributed, limited to DNI.
If the Sec. 2032 alternate valuation election can be made, no gain will be recognized on the distribution of appreciated property to fund bequests within the six-month period.
Example 17: Assume the same facts as in Example 15, except that the stock distributed was in partial satisfaction of a true worth formula pecuniary marital bequest, rather than a specific bequest. The estate's 19XX fiduciary income tax return would show: Dividend income $ 80,000 Capital gain realized on the distribution of property ($230,000 - $175,000) 55,000 Total income 135,000 Less deduction for distributions, lower of: DNI $ 80,000 Distribution 230,000 Lower 80,000 55,000 Less personal exemption 600 Taxable income $ 54,400
The surviving spouse in 19XX would report $80,000 in income from the estate. The income tax basis of the stocks in the hands of the widower would be $230,000, their FMV on distribution.
As previously noted, Examples 16 and 17 were prepared based on a true worth pecuniary funding approach. If either the fairly representative or minimum worth pecuniary approach had been used, the distribution would not have triggered a gain although use of the minimum worth approach could result in a loss. However, these possible income tax benefits must be weighed against the possibility that use of a fairly representative pecuniary gift or bequest tends to overfund or underfund un·der·fund
tr.v. un·der·fund·ed, un·der·fund·ing, un·der·funds
To provide insufficient funding for. the marital deduction, while a minimum worth approach can, under certain circumstances, endanger en·dan·ger
tr.v. en·dan·gered, en·dan·ger·ing, en·dan·gers
1. To expose to harm or danger; imperil.
2. To threaten with extinction. the qualification of the residue residue n. in a will, the assets of the estate of a person who has died with a will (died testate) which are left after all specific gifts have been made. Typical language: "I leave the rest, residue and remainder [or just residue] of my estate to my grandchildren. for the estate tax marital deduction and even the deductibility of a charitable bequest for estate tax purposes.
When an executor transfers depreciated property in satisfaction of a true worth pecuniary formula bequest, the estate realizes a capital loss. The legatee receives a "step-down" in the income tax basis of the property received.
A net capital loss realized by an estate in any tax year (other than the year of termination) cannot be "distributed" or passed through to the beneficiaries in that year.(52) A loss realized on a distribution by a trustee of depreciated property to a trust beneficiary is disallowed under Sec. 267(b)(6). it may not be completely lost, however. If the beneficiary later sells the property at a gain, such gain will not be recognized to the extent of the prior nondeductible non·de·duct·i·ble
Not deductible, especially for income-tax purposes.
Adj. 1. nondeductible - not allowable as a deduction
deductible - acceptable as a deduction (especially as a tax deduction) loss.(53)
* Funding residuary bequests residuary bequest n. in a will, the gift of whatever is left (the residue) after specific gifts are given. It is also called a residuary legacy. (See: residue)
A distribution in satisfaction of a fractional or percentage share formula gift or bequest is a distribution of a portion of the residue and, as such, does not qualify as a gift or bequest of specific property or a specific sum of money.(54) Therefore, such a distribution will always carry out income to the beneficiary (limited to DNI).
The Code essentially provides that when an estate or trust distributes property in kind, a gain or loss is not normally recognized unless the distribution is in satisfaction of a pecuniary (fixed-dollar) gift or bequest. When no gain or loss is recognized, the beneficiary's income tax basis of the property is the estate's or trust's adjusted basis.(55)
The executor or trustee can, however, make an irrevocable affirmative AFFIRMATIVE. Averring a fact to be true; that which is opposed to negative. (q.v.)
2. It is a general rule of evidence that the affirmative of the issue must be proved. Bull. N. P. 298 ; Peake, Ev. 2.
3. election (under Sec. 643(e)(3)) to have the gain or loss recognized on the distribution to the beneficiary of a fractional or residuary gift or bequest, as if the property had been sold to the beneficiary at its FMV on the distribution date.
When property is distributed in kind, the amount to be taken into account in computing the "other amount paid or credited" when the Sec. 643(e)(3) election is not made is the lesser of the basis of the property in the beneficiary's hands or its FMV when distributed When distributed
When issued. . When the election is made, the amount of OAPC is the property's FMV on distribution.(56)
Example 18: Assume the same facts as in Example 15, except that the stock distributed was in partial satisfaction of a residuary (or fractional) marital bequest, rather than of a specific bequest. The determination of the estate's taxable income for 19XX, the income reportable by the widower and the income tax basis of the property distributed in his hands would depend on whether the executor chooses to make a Sec. 643(e) election: Sec. 643(e)(3) election No Yes Dividend income $ 80,000 $ 80,000 Capital gain realized on distribution of stock 0 55,000 Total income 80,000 135,000 Less deduction for distributions, lower of: DNI 80,000 80,000 Distribution 175,000 230,000 Lower 80,000 80,000 0 55,000 Less personal exemption 600 600 Taxable income (600) 54,400 Income taxed to the surviving spouse 80,000 80,000 Widower's income tax basis for stock $175,000 $230,000
The Sec. 643(e)(3) election is an annual election and once made, is revocable rev·o·ca·ble also re·vok·a·ble
That can be revoked: a revocable order; a revocable vote.
Adj. 1. only with IRS consent. The election applies to all distributions made during the estate or trust's tax year; it cannot be made on a separate distribution basis.(57)
If the trustee or executor does not make the Sec. 643(e)(3) election, the holding period of the property in the hands of the trust or estate is "tacked on" to that of the beneficiary.
If a trustee (not an executor) distributes depreciated property, he should not make the election since the loss on the "deemed sale" will be disallowed.(58) Further, when a trust distributes depreciable depreciable
Of, relating to, or being a long-term tangible asset that is subject to depreciation. property, Sec. 1239 denies capital gain treatment to the trust on any gain when the trustee makes a Sec. 643(e)(3) election.
When there are multiple beneficiaries of the residue of an estate, the property of the estate may need to be distributed in fractional (or percentage) shares. Unless the will authorizes the executor to divide or partition A reserved part of disk or memory that is set aside for some purpose. On a PC, new hard disks must be partitioned before they can be formatted for the operating system, and the Fdisk utility is used for this task. the estate's assets in a non-pro rata manner (e.g., all of A Corp. stock to one beneficiary, all of B Corp. stock to another), the IRS has ruled(59) that distributions other than in fractional shares Fractional share
Stocks amounting to less than one full share, usually resulting from splits, acquisitions, exchanges, or dividend reinvestment programs.
Less than one share of stock, that is, one-third or one-half a share. will be treated as taxable exchanges among the beneficiaries.
The Sec. 643(e)(3) election is a very flexible tax planning device. See Part 18 in March for illustrations.
See the chart on page 127 for a summary of the income tax consequences of funding the various types of gifts and bequests with appreciated/depreciated property in kind valued at the date of distribution.
1. Having a plane surface; flat.
2. Organized as a table or list.
3. Calculated by means of a table.
resembling a table. DATA OMITTED]
(1) Subpart Noun 1. subpart - a part of a part
component part, part, portion, component, constituent - something determined in relation to something that includes it; "he wanted to feel a part of something bigger than himself"; "I read a portion of the manuscript"; "the B of subchapter J (Secs. 651 and 652) refers to trusts that distribute income currently. Subpart C (Secs. 661 through 664) refers to estates and trusts that may accumulate income or that distribute principal. The regulations refer to these as "simple trusts" (Regs. Sec. 1.651(a)-1) and "complex trusts" (Regs. Sec. 1.661(a)-1), respectively. (2) Regs. Sec. 1.643(b)-1 defines the term "income," "when not preceded by the words 'taxable', 'distributable net', 'undistributed net', or 'gross', ... [as] the amount of income of ... [a] trust ... determined under the terms of its governing instrument and applicable local law." (3) Sec. 651. (4) Sec. 652. (5) Sec. 652(b); Regs. Sec. 1.652(b)-2; Rev. Rul. 81-244, 1981-2 CB 151. (6) Regs. Sec. 1.652(b)-3. (7) Secs. 167(d) and 611(b)(3). See also Regs. Secs. 1.167(h)-1(b) and 1.611-1(c)(4). (8) Sec. 652(c); Regs. Sec. 1.652(c)-1. The fiduciary must inform the beneficiary of the amount and character of income he should report, using Schedule K-1 of Form 1041, U.S. Fiduciary Income Tax Return. (9) Regs. Sec. 1.652(c)-2. (10) Sec. 661(a). (11) Sec. 662(a). (12) Sec. 662(b). (13) Regs. Sec. 1.662(b)-2. (14) Sec. 662(b). (15) Sec. 662(c). (16) Regs. Sec. 1.662(c)-2. (17) The decision in Rebekah Rebekah
encouraged son Jacob to deceive father for blessing. [O.T.: Genesis 27:5–17]
See : Trickery Harkness, 469 F2d 310 (Ct. Cl. 1972)(30 AFTR AFTR American Federal Tax Reports (Prentice-Hall)
AFTR Americans For Tax Reform
AFTR Air Force Training Ribbon
AFTR Air Force Training Record
AFTR atrophy, fasciculation, tremor, rigidity
AFTR Atomic Frequency Time Reference 2d 72-5754, 72-2 USTC USTC University of Science and Technology of China
USTC United States Tax Cases (Commerce Clearing House)
USTC United States Transportation Command (see USTRANSCOM) [para]9740), specifically upheld the constitutionality of the pertinent PERTINENT, evidence. Those facts which tend to prove the allegations of the party offering them, are called pertinent; those which have no such tendency are called impertinent, 8 Toull. n. 22. By pertinent is also meant that which belongs. Willes, 319. regulations under Secs. 661 and 662. (18) Sec. 663(a)(2). (19) Sec. 642(c)(1). The deduction is normally allowed for charitable contributions paid during the trust's or estate's tax year. However, if the charitable contribution is paid on or before the last day of the trust's or estate's next tax year, the fiduciary can elect to treat the contribution as having been made during the year preceding the year of payment. (20) Sec. 642(c)(1). (21) Sec. 642(c)(2). (22) Regs. Sec. 1.663(a)-1(c)(1)(iii). (23) Regs. Sec. 1.663(a)-1(b). (24) Regs. Sec. 1.643(a)-3(a). (25) But the IRS has ruled that this exception will not apply in the initial year of a trust or estate. IRS Letter Ruling (TAM) 8324002 (2/16/83). (26) The trust remainderman remainderman n. the person who will receive a remainder in real property. (See: remainder) will succeed to the trust's unused net capital loss carryover in the year of termination of the trust. Sec. 642(h). See Part 19 in March. (27) Sec. 663(b). (28) See Regs. Sec. 1.663(b)-2. (29) Sec. 663(c). (30) Regs. Sec. 1.663(c)-1(d). (31) Regs. Sec. 1.663(c)-l(c). (32) Barnett Barnett as a personal name can refer to:
n. pl. ha·rus·pi·ces also a·rus·pi·ces
A priest in ancient Rome who practiced divination by the inspection of the entrails of animals. Needed to Demystify de·mys·ti·fy
tr.v. de·mys·ti·fied, de·mys·ti·fy·ing, de·mys·ti·fies
To make less mysterious; clarify: an autobiography that demystified the career of an eminent physician. the Fiduciary," 24th Annual U. Miami Institute on Estate Planning Estate Planning
The overall planning of a person's wealth, including the preparation of a will and the planning of taxes after the individual's death.
Contrary to popular belief, estate planning involves much more than preparing a will, and it is not only for the , Ch. 5 (1990), for an in-depth in-depth
Detailed; thorough: an in-depth study.
detailed or thorough: an in-depth analysis
discussion of the AMT as it affects estates, trusts and beneficiaries, including planning possibilities. (33) The term "distributable net alternative minimum taxable income" is not in the Code but is used by the IRS on tax forms (e.g., Schedule H of Form 1041, and the Instructions thereto there·to
1. To that, this, or it.
2. Archaic In addition to that; furthermore.
1. to that or it
2. ). For AMT purposes, DNAMTI corresponds to the term "distributable net income" (DNI) used in computing the Sec. 651 and 661 deductions allowed the fiduciary for distributions to beneficiaries for regular income tax purposes. (34) Sec. 56(b)(1)(A)(ii). (35) Sec. 56(b)(1)(a)(i). (36) Sec. 56(b)(1)(c). (37) Sec. 58(b). (38) Sec. 651. (39) Sec. 661. (40) Secs. 652 and 662. (41) Although the amounts of IRDC and OAPC as fiduciary accounting concepts will always be identical for both regular income tax and AMT purposes, each of these items must be reduced by adjusted tax-exempt income when the respective actual income distributions deductions are determined. And since there is one type of municipal bond interest that is exempt from regular income tax, but taxable for AMT purposes (i.e., interest on private activity municipal bonds issued after Aug. 7, 1986), the amount of distributions made to beneficiaries (IRDC and OAPC) will differ for regular tax and AMT purposes. DNI and DNAMTI will also differ by the amount of such interest income since it constitutes an AMT adjustment item under Sec. 57(a)(5). (42) Under Sec. 1014, the uniformity of basis rule. (43) Regs. Sec. 1.663(a)-1(a) and b)(2)(iv). (44) Regs. Sec. 1.663(a)-1(c). (45) Regs. Sec. 1.1014-4(a)(3). (46) Id. (47) See the discussion in Part 15 in March. (48) See Casner, Estate Planning, [Subsections]13.10.1 (5th ed. 1988). (49) Rev. Proc. 64-19, 1964-1 (Part 1) CB 682. (50) Regs. Sec. 1.1014-4(a)(3). (51) Regs. Sec. 1.663(a)-1(b), because the amount is not ascertainable as of the date of death. (52) Sec. 642(h). See the discussion in Part 9, supra A relational DBMS from Cincom Systems, Inc., Cincinnati, OH (www.cincom.com) that runs on IBM mainframes and VAXs. It includes a query language and a program that automates the database design process. . (53) Sec. 267(d). (54) Regs. Sec. 1.663(a)-1(b)(2)(iii). (55) Sec. 643(e)(1). (56) Sec. 643(e)(2). (57) Sec. 643(e)(3). (58) Under Sec. 267(b)(6). (59) Rev. Rul. 69-486, 1969-2 CB 159.