income and fiduciary tax issues for estate planners, part … · seminar title: income &...

INCOME AND FIDUCIARY TAX ISSUES FOR ESTATE PLANNERS,

PART 1 & PART 2

First Run Broadcast: September 19 & 20, 2018

1:00 p.m. E.T./12:00 p.m. C.T./11:00 a.m. M.T./10:00 a.m. P.T. (60 minutes each day)

Understanding fiduciary income taxation – the taxation of grantor and non-grantor trusts, complex

and simple trusts – is essential to trust planning. It impacts the type of trust chosen, how it’s

structured and administered. Recently changes to federal tax law have added to the complexity of

fiduciary income taxation. The tax treatment of trust income and accounting for distributions and

expenses varies depending on the type of trust involved and how “Distributable Net Income” is

allocated. The 3.8% on distributable net income adds a significant planning consideration when

you advise trusts. This program will provide you with a real-world guide to the essential rules,

timeframes, planning techniques and traps of the taxation of trusts.

Day 1: September 19, 2018:

• Fiduciary income taxation framework and rules for estate and trust planners

• How fiduciary and income tax planning differ from each other

• Planning for fiduciary taxation v. planning for individual and corporate tax purposes

• Types of trusts – simple, complex, grantor – and differing tax rules for each

• Treatment of “Distributable Net Income,” including impact of 3.8% tax

• Understanding “Trust Accounting Income,” and impact of Prudent Investor Rule

Day 2: September 20, 2018:

• Practical income allocation for simple, complex and grantor trusts

• Specific allocation rules for DNI – Tier System, Separate Share Rule, 65 Day Rule,

specific bequests

• Charitable giving – tax treatment and practical impact

• Treatment of depreciation, administrative expenses, and allocation to income

• Trust terminations – capital loss carryover and excess deductions

Speaker:

Jeremiah W. Doyle, IV is senior vice president in the Boston office of BNY Mellon Wealth

Management, where he provides integrated wealth management advice to high net worth

individuals on holding, managing and transferring wealth in a tax-efficient manner. He is the

editor and co-author of “Preparing Fiduciary Income Tax Returns,” a contributing author of

Preparing Estate Tax Returns, and a contributing author of “Understanding and Using Trusts,” all

published by Massachusetts Continuing Legal Education. Mr. Doyle received his B.S. from

Providence College, his J.D. form Hamline University Law School, and his LL.M. in banking from

Boston University Law School.

VT Bar Association Continuing Legal Education Registration Form

Please complete all of the requested information, print this application, and fax with credit info or mail it with payment to: Vermont Bar Association, PO Box 100, Montpelier, VT 05601-0100. Fax: (802) 223-1573 PLEASE USE ONE REGISTRATION FORM PER PERSON. First Name ________________________ Middle Initial____ Last Name__________________________

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Income & Fiduciary Tax Issues for Estate Planners, Part 1 Teleseminar

September 19, 2018 1:00PM – 2:00PM

1.0 MCLE GENERAL CREDITS

PAYMENT METHOD:

Check enclosed (made payable to Vermont Bar Association) Amount: _________ Credit Card (American Express, Discover, Visa or Mastercard) Credit Card # _______________________________________ Exp. Date _______________ Cardholder: __________________________________________________________________

VBA Members $75 Non-VBA Members $115

NO REFUNDS AFTER SEPTEMBER 12, 2018

VT Bar Association Continuing Legal Education Registration Form

Please complete all of the requested information, print this application, and fax with credit info or mail it with payment to: Vermont Bar Association, PO Box 100, Montpelier, VT 05601-0100. Fax: (802) 223-1573 PLEASE USE ONE REGISTRATION FORM PER PERSON. First Name ________________________ Middle Initial____ Last Name__________________________

Firm/Organization _____________________________________________________________________

Address ______________________________________________________________________________

City _________________________________ State ____________ ZIP Code ______________________

Phone # ____________________________Fax # ______________________

E-Mail Address ________________________________________________________________________

Income & Fiduciary Tax Issues for Estate Planners, Part 2 Teleseminar

September 20, 2018 1:00PM – 2:00PM

1.0 MCLE GENERAL CREDITS

PAYMENT METHOD:

Check enclosed (made payable to Vermont Bar Association) Amount: _________ Credit Card (American Express, Discover, Visa or Mastercard) Credit Card # _______________________________________ Exp. Date _______________ Cardholder: __________________________________________________________________

VBA Members $75 Non-VBA Members $115

NO REFUNDS AFTER SEPTEMBER 11, 2018

Vermont Bar Association

CERTIFICATE OF ATTENDANCE

Please note: This form is for your records in the event you are audited Sponsor: Vermont Bar Association Date: September 19, 2018 Seminar Title: Income & Fiduciary Tax Issues for Estate Planners, Part 1 Location: Teleseminar - LIVE Credits: 1.0 MCLE General Credit Program Minutes: 60 General Luncheon addresses, business meetings, receptions are not to be included in the computation of credit. This form denotes full attendance. If you arrive late or leave prior to the program ending time, it is your responsibility to adjust CLE hours accordingly.

Vermont Bar Association

CERTIFICATE OF ATTENDANCE

Please note: This form is for your records in the event you are audited Sponsor: Vermont Bar Association Date: September 20, 2018 Seminar Title: Income & Fiduciary Tax Issues for Estate Planners, Part 2 Location: Teleseminar - LIVE Credits: 1.0 MCLE General Credit Program Minutes: 60 General Luncheon addresses, business meetings, receptions are not to be included in the computation of credit. This form denotes full attendance. If you arrive late or leave prior to the program ending time, it is your responsibility to adjust CLE hours accordingly.

1

Fiduciary Income Taxation Fundamentals

Jeremiah W. Doyle IV

Senior Vice President

BNY Mellon Wealth Management – Boston, MA

(o) (617) 722-7420

[email protected]

©Jeremiah W. Doyle IV

All Rights Reserved

mailto:[email protected]

2

What We’ll Cover – Part I, The Basics

• Structure of Subchapter J

• Basic Rules

• Distributable Net Income (DNI)

• Types of Trusts

• Trust Accounting Income (TAI)

• Taxable Income

• Distribution System – How DNI Gets Allocated

– Tier System

– Separate Share Rule

– 65 Day Rule

– Specific Bequests

• Charitable Deductions

• Depreciation

• Terminations – Capital Loss C/O and Excess Deductions

• Administration Expenses

– Allocating Expenses to Tax Exempt Income

3

Income Taxation of Trusts and Estates

Code Outline

• PART I, SUBCHAPTER J

– Subpart A - Sec. 641-646 - General Rules

– Subpart B - Sec. 651-652 - Simple Trusts

– Subpart C - Sec. 661-664 - Complex Trusts and CRT

– Subpart D - Sec/ 665-668 - Accumulation Distributions

– Subpart E - Sec. 671-678 - Grantor Trusts

– Subpart F - Sec. 681-685 - Misc. Rules

• PART II, SUBCHAPTER J

– Sec. 691-692 - Income in Respect of a Decedent

4


• Separate Taxable Entities

• Taxable Income Computed in Same Manner as Individuals

(Sec. 641(b))

• Own Tax Year and Method of Accounting

• Receive Income/Pay Expenses

• Income Taxed to Entity or Beneficiary

5

2018 Fiduciary Income Tax Rates

Over Not Over

0 2,550 10%

2,550 9,150 24%

9,150 12,500 35%

12,500 37%

6


• Income Taxed to Either Entity or Beneficiary

– If income is accumulated and not deemed distributed, it is

taxed to the trust or estate

– If income distributed:

• Trust gets deduction for amount of distribution

• Beneficiary accounts for income distributed on his own

tax return

7


DNI

• Distributable Net Income (DNI) governs:

– Amount of trust or estate’s distribution deduction

– Amount beneficiary accounts for on his own return

– Character of income in beneficiary’s hands

8


Trust/Estate Beneficiary

DNI acts as ceiling

on entity’s

distribution

deduction

DNI acts as ceiling

on amount

beneficiary

accounts for on his

return

DNI

9

DNI - Sec. 643(a)

• Start With Taxable Income and . . .

– Add back the distribution deduction

– Add back the personal exemption

– Subtract out capital gains/add back capital losses allocable to

principal (except in the year of termination)

– Subtract out extraordinary dividends and taxable stock dividends

– Add back net tax-exempt income

10

DNI - Sec. 643(a)

• Note: capital gains generally taxed to trust or estate

– Exception: year of termination

• Note: The rules regarding DNI and the distribution deduction are applied differently to simple trusts versus complex trusts and estates

• Distributions of principal as well as income will “carry out” DNI

– Exception: Specific bequests under Sec. 663(a)(1)

11

Types of Trusts

• Simple

• Complex

• Grantor

12

Simple Trust

• Required to distribute accounting income annually

• Makes no principal distributions, and

• Makes no distributions to charity

13

Complex Trust

• Accumulates income

• Makes discretionary distributions of income or mandatory or

discretionary distributions of principal, or

• Makes distributions to charity

14

Grantor Trust

• Grantor or beneficiary has one or more “powers” described in

Sec. 673-678

• Result: All income, expenses and credits “flow through” and are

taxed to the Grantor or beneficiary regardless of whether

distributions are made

• Subpart A-D, Subchapter J (rules for taxation of trusts and

estates) do not apply to Grantor trusts

15

Trust Accounting Income (TAI)

• Governs amount of distributions

• Trustee allocates receipts/disbursements between accounting

income and principal

• Accounting income and principal is determined by governing

instrument or, if instrument silent, by state law

– May be governed by UPIA or unitrust statute

16

Trust Accounting Income (TAI)

TAI Taxable Income

Corp Bond Int

Capital Gains

Muni Bond Int

Expenses ? ?

17

Trust Accounting Income - TAI

• BACKGROUND

• Prudent Investor Act

– Modern portfolio theory – invest for total return

Replaces the traditional notions of income and

principal

– Enactment of the Uniform Principal and Income Act

– Enactment of Unitrust statutes

18

Trust Accounting Income - TAI

• TRUST ACCOUNTING INCOME

– Could be TAI defined under:

• Traditional definition of income and principal

• Unitrust statute

– Must be no less than 3%, no more than 5% of FMV of

trust assets

• Uniform Principal and Income Act

– Requirements:

» Trust is managed under the Uniform Prudent

Investor Act

» The beneficiary must be eligible for income

distributions

» The distribution is not favorable to one beneficiary

over another

19

Taxable Income of Trust or Estate

• Computed same as individual

• Exemptions: $600/$300/$100

• Different rules for charitable deductions

• Depreciation deduction allocated between entity and beneficiary

• Distribution deduction

• Administration expenses - some not subject to 2% floor

• AGI - same as individual except (a) personal exemption, (2) distribution deduction and (3) some administration expenses are subtracted “off the top,” i.e. subtracted from taxable income to arrive at AGI

20

Distributions - Simple Trust Beneficiary Taxed on Lower of TAI or DNI

Gains Taxed to Trust

Simple

Trust

Beneficiary

DNI

Gains Trust Gets Distribution

Deduction Equal to DNI

Beneficiary Accounts for DNI

Trust income retains its

character in Beneficiary’s hands

21

Distributions - Complex Trusts and Estates

Complex

Trust DNI

Gains Gains and DNI Taxed to

Trust

Trust/Estate Accumulates Income

22

Distributions - Complex Trusts and Estates

Beneficiary Taxed on Distributions Up to DNI

Gains Taxed to Trust

Complex

Trust

Beneficiary

DNI

Gains Trust Gets Distribution

Deduction Equal to

Distributions up to DNI

Beneficiary Accounts for

Distributions Up to DNI

Trust income retains its

character in Beneficiary’s hands

23

651 661

662 652

Simple Trusts Complex Trusts/

Estates

Distributions - Applicable Code Sections

24

651 661

662 652


Estates


Distribution

Deduction

25

651 661

662 652


Estates


Distribution

Deduction

Amt Bene

Accounts For

26

Allocation of DNI

• FOUR IMPORTANT CONCEPTS:

• Tier System

• Separate Share Rule

• 65 Day Rule (§663(b) election)

• Specific Bequests - §663(a)(1)

27

Complex Trust and Estates

Tier System

• Two tiers:

– First Tier - Distribution of income required to be

distributed currently

– Second Tier - Distribution of all other amounts paid,

credited or required to be distributed

28


Tier System

First Tier Beneficiary

Second Tier Beneficiary

DNI

DNI is taxed first to FTB and any

balance of DNI is taxed to STB

29


Tier System - Example

Facts: $40,000 DNI and TAI

Trust requires A receive 50% of income

Trustee makes discretionary

distributions of $20,000 to each B and C

A is FTB (Gets 50% of $40,000 TAI)

B and C are STB (Discretionary Benes)

30



$40,000 DNI

($20,000) DNI for FTB

$20,000 DNI for STB

2 STB

$10,000 DNI for Each STB

31



$40,000

DNI

A B C

$20,000 DNI

FTB

$10,000 DNI

STB

$10,000 DNI

STB

32

Separate Share Rule

Solely for purposes of computing DNI, substantially separate

and independent shares of different beneficiaries of a trust are

treated as separate trusts.

Effect: Treat multiple beneficiaries of single trust or

estate as if each were the sole beneficiary of a single

trust solely for determining how much DNI each

distribution carries out.

33

Separate Share Rule

Estate has $10,000 DNI for 2013

Two Equal Beneficiaries: A and B

Distributes $10,000 to A in 2013

A taxed on $10,000


Distributes $10,000 to B in 2014

B taxed on $5,000

Same amount paid in 2 different years, different tax result

34

Separate Share Rule


Two Equal Beneficiaries: A and B

Distributes $10,000 to A in 2013

A taxed on $5,000 ($10,000 DNI/2)


Distributes $10,000 to B in 2014

B taxed on $2,500 ($5,000 DNI/2)

DNI computed based on 2 separate shares

35

Separate Share Rule

• Applies to estates and trusts

• DNI computed separately for each share

• Mandatory, not elective

• Only Affects share of DNI

– Doesn’t allow filing multiple returns

– Doesn’t allow separate calculation of tax

36

65 Day Rule aka Sec. 663(b) Election

• Applies to complex trusts and estates

• Allows fiduciary to treat distribution made within 65 days of Y/E as

being made on 12/31 of preceding year

• Election must be made by due date of return

• Election is irrevocable

• Year by year election (e.g. good for 1 year only)

• Limited to > DNI less current year distributions or TAI not

distributed

37


65 Days

12/31

2013 2014

38


65 Days

12/31

2013 2014

Facts: $10,000 DNI for 2013

Distributes $6,000 in 2013, $4,000 in 2014

$6,000

$4,000

39

Specific Bequests - Sec. 663(a)(1)

• Bequest of specific sum of money or specific property do not carry

out DNI

• Requirements:

– Paid all at once, or

– Paid in not more than 3 installments

• Not deductible by trust/estate or taxable to beneficiary

40

Charitable Deduction - Sec. 642(c)

• Requirements:

– Paid from gross income

– Paid pursuant to the governing document

• Unlimited in amount

• No distribution deduction

• Generally, must be actually paid in current year or preceding

year

– Estates and pre- 1969 trusts get charitable deduction if

“permanently set aside”

41

Depreciation - Sec. 642(e)

• Trusts:

– Depreciation apportioned between income beneficiary and

the trust per trust document

– If no provisions in trust, depreciation apportioned on basis of

trust income allocable between bene and trust

• Estates:

– Depreciation allocable on basis of income allocable to bene

and estate

42


Example

• FACTS:

• Trust owns apartment building

• $2,500 depreciation deduction

• Trust pays all income to beneficiary

Beneficiary is entitled to entire $2,500

depreciation deduction

43


Exceptions

• GR: Depreciation allocated based in TAI allocated to

trust/estate and beneficiary

• 2 exceptions - both apply to trusts:

– Trust inst or local law indicates who get depreciation

deduction

– Trustee maintains depreciation reserve, trust gets deduction

to extent trustee transfers income to reserve for depreciation

44


Example

• FACTS:

• Depreciation deduction is $5,000

• TAI is $20,000

• Inst requires trustee to maintain depreciation reserve

• Trustee transfers $5,000 of income for depreciation reserve

• RESULT: Entire $5,000 depreciation deduction is allocated to

trust

45

Termination of Trusts and Estates - Sec. 642(h)/Unused

Loss Carryovers and Excess Deductions

• NOL, capital loss c/o and “excess deductions” pass to the

beneficiary on termination of an estate or trust

• Pass through only in the year of termination

46

Capital Loss C/O

• Unused capital loss c/o passes to beneficiary in year of

termination of trust or estate

• No time limit on beneficiary to use capital loss c/o

47

Capital Loss C/O

Example

• FACTS:

• Trust incurs $30,000 LTCL in 2013.

• Trust terminates in 2014, LTCL c/o still $30,000

• $30,000 LTCL c/o passes to beneficiary on termination

• Beneficiary can use LTCL c/o to offset his own personal

capital gains or, if he has no gains, deduct up to $3,000 each

year against ordinary income

48

“Excess Deductions”

• “Excess deductions” occur where trust/estate expenses exceed

income in year of termination

• “Excess deductions” pass through to beneficiary on termination

of trust/estate

– Beneficiary can deduct on his personal return

• Deductible as miscellaneous itemized deduction subject to 2%

floor

– If beneficiary doesn’t itemize, he can’t use deduction

49

“Excess Deductions”

Example

• FACTS:

• Estate has $30,000 of income and $50,000 executor’s fee

for 2014.

• Estate terminates in 2014

• “Excess deductions” are $20,000 ($30,000 - $50,000)

• Estate reports the $20,000 excess deduction to the

beneficiary on a Form K-1 (“tax letter”)

• Beneficiary can take $20,000 “excess deduction” on his own

personal return as a miscellaneous itemized deduction

subject to the 2% floor

50

Administration Expenses

• Consist of attorney’s fees, accountant’s fees, executor’s

commissions, filing fees, surety bonds premiums, appraisal

fees, etc.

• Deductible on Federal estate tax return (706) or fiduciary

income tax return (1041), but not both

• Fiduciary can elect where to take expenses (706 or 1041) - the

so-called Sec. 642(g) election

• Generally, not subject to 2% floor

– Test: would expenses be uncommon (or unusual or unlikely)

for an individual to incur?

• Generally, claim on return with highest tax rate

51

Non-Deductible Expenses - Sec. 265

• Sec. 265 disallows any deduction attributable to T/E income

• Generally applies to deductions for production of income,

usually trustee’s fees and executor’s fees

• If trust/estate has T/E income, portion of trustee’s and executor’s

fees are nondeductible

• No specific allocation formula

– Fiduciary can use any reasonable method

52

Non-Deductible Expenses - Sec. 265

Example

• FACTS:

• Trust has $30,000 taxable interest and $10,000 T/E interest

• Incurs $20,000 trustee fee

• Portion of trustee fee attributable to T/E income is non-

deductible

$10,000 T/E income

$40,000 Total income

x $20,000 fees = $5,000 non-deductible

53

Example of a 2013 Fiduciary Income Tax Return for

a Complex Trust

54

Facts

• Trust provides that 50% of the income must be paid currently to

Will

• During 2013 the trustee makes the following discretionary

distributions:

– 25% of the income to Cam

– 25% of the income to charity

• No reserve for depreciation is required

Question: What type of trust is this and why?

55

INCOME

Rents 40,000

Tax Int. 30,000

T/E Int 15,000

LTCG 8,000

EXPENSES

Depr/Rental 6,000

R/E Rent Ex 14,000

Tr Fee-Prin 1,000

Tr Fee-Inc 2,000

Char Ded

Exemption

Total

56

Distribution of Income

Required: 50% to Will

Discretionary: 25% to Cam

25% to Charity

57

INCOME TAI

Rents 40,000 40,000

Tax Int. 30,000 30,000

T/E Int 15,000 15,000

LTCG 8,000 -

EXPENSES

Depr/Rental 6,000 -

R/E Rent Ex 14,000 (14,000)

Tr Fee-Prin 1,000 -

Tr Fee-Inc 2,000 (2,000)

Char Ded

Exemption

Total 69,000

58

INCOME TAI

Rents 40,000 40,000

Tax Int. 30,000 30,000

T/E Int 15,000 15,000

LTCG 8,000 -

EXPENSES

Depr/Rental 6,000 -

R/E Rent Ex 14,000 (14,000)

Tr Fee-Prin 1,000 -

Tr Fee-Inc 2,000 (2,000)

Char Ded

Exemption

Total 69,000

59

INCOME TAI

Rents 40,000 40,000

Tax Int. 30,000 30,000

T/E Int 15,000 15,000

LTCG 8,000 -

EXPENSES

Depr/Rental 6,000 -

R/E Rent Ex 14,000 (14,000)

Tr Fee-Prin 1,000 -

Tr Fee-Inc 2,000 (2,000)

Char Ded

Exemption

Total 69,000

Enter on Form

1041, Sch. B,

Line 8

60

Amount of TAI Received by Each Beneficiary

Will: 50% x 69,000 TAI = 34,500

Cam: 25% x 69,000 TAI = 17,250

Charity: 25% x 69,000 TAI = 17,250

Total 69,000

61

INCOME TAI TI

Rents 40,000 40,000 40,000

Tax Int. 30,000 30,000 30,000

T/E Int 15,000 15,000 -

LTCG 8,000 - 8,000

78,000

EXPENSES

Depr/Rental 6,000 - -

R/E Rent Ex 14,000 (14,000) (14,000)

Tr Fee-Prin 1,000 - (2,471)

Tr Fee-Inc 2,000 (2,000) -

Char Ded (14,206)

Exemption (100)

Total 69,000 47,223

62

INCOME TAI TI

Rents 40,000 40,000 40,000

Tax Int. 30,000 30,000 30,000

T/E Int 15,000 15,000 -

LTCG 8,000 - 8,000

78,000

EXPENSES


R/E Rent Ex 14,000 (14,000) (14,000)

Tr Fee-Prin 1,000 - (2,471)

Tr Fee-Inc 2,000 (2,000) -

Char Ded (14,206)

Exemption (100)

Total 69,000 47,223

Enter on

Form

1041,

Page 1,

Line 17

63

INCOME TAI TI

Rents 40,000 40,000 40,000

Tax Int. 30,000 30,000 30,000

T/E Int 15,000 15,000 -

LTCG 8,000 - 8,000

78,000

EXPENSES


R/E Rent Ex 14,000 (14,000) (14,000)

Tr Fee-Prin 1,000 - (2,471)

Tr Fee-Inc 2,000 (2,000) -

Char Ded (14,206)

Exemption (100)

Total 69,000 47,223

64

Depreciation Deduction

• No reserve for depreciation

• Depreciation follows accounting income

• All accounting income is distributed to Will, Cam and the charity

• Therefore, the trust is not entitled to deduct any depreciation

• Beneficiaries are entitled to depreciation deduction

65

INCOME TAI TI

Rents 40,000 40,000 40,000

Tax Int. 30,000 30,000 30,000

T/E Int 15,000 15,000 -

LTCG 8,000 - 8,000

78,000

EXPENSES


R/E Rent Ex 14,000 (14,000) (14,000)

Tr Fee-Prin 1,000 - (2,471)

Tr Fee-Inc 2,000 (2,000) -

Char Ded (14,206)

Exemption (100)

Total 69,000 47,223

66

Trustee Fee Allocable to T/E Income

15,000 T/E Income

85,000 Gross TAI x 3,000 Total Tr Fees = 529

67


15,000 T/E Income

85,000 Gross TAI

x 3,000 Total Tr Fees = 529

(529)

2,471 Deductible Tr Fees

Non-Deductible

68

INCOME TAI TI

Rents 40,000 40,000 40,000

Tax Int. 30,000 30,000 30,000

T/E Int 15,000 15,000 -

LTCG 8,000 - 8,000

78,000

EXPENSES


R/E Rent Ex 14,000 (14,000) (14,000)

Tr Fee-Prin 1,000 - (2,471)

Tr Fee-Inc 2,000 (2,000) -

Char Ded (14,206)

Exemption (100)

Total 69,000 47,223

69


15,000 T/E Income

85,000 Gross TAI

x 17,250 TAI Charity = 3,044

3,044 Non-Deductible

Charitable Deduction 14,206

70

DNI

TI before Dist Ded 47,223

Add: Exemption 100

Add: Net T/E Income 15,000

Less: ND Tr Fee (529)

Less: ND Char Ded (3,044) 11,427

Less: LTCG (8,000)

DNI 50,750

Calculation of DNI

71

DNI

TI before Dist Ded 47,223

Add: Exemption 100

Add: Net T/E Income 15,000

Less: ND Tr Fee (529)

Less: ND Char Ded (3,044) 11,427

Less: LTCG (8,000)

DNI 50,750

Calculation of DNI

Enter on Form 1041,

Sch. B, Line 7

72

Components of DNI

47.06%

Rental

Income

35.29%

Taxable

Interest

17.65%

T/E

Interest

100%

Total

Gross TAI 40,000 30,000 15,000 85,000

LESS:

Rental Exp (14,000) (14,000)

Tr. Fees (1,412) (1,059) (529) (3,000)

Char Ded (8,118) (6,088) (3,044) (17,250)

Totals 16,470 22,853 11,427 50,750

73

Application of the Tier System

• Will is a FTB - entitled to 50% of the income or $34,500

• Cam is a STB - discretionary distribution of $17,250

• How do we allocate DNI between FTB and STB???

74

Now We’ve Got a Problem!!!

FTB Will gets distribution of $34,500

STB Cam gets distribution of $17,250

Total Distributions $51,750

But DNI is only $50,750!!!

75

The Tier System Solves Our Problem

FTB Will - Receives $34,500; limited to

DNI of $50,750

Share of DNI

$34,500

STB Cam - Receives $17,250; limited to

remaining DNI: 50,750 less 34,500 or

$16,250

$16,250

Total (Equal to DNI) $50,750

76

The Tier System Solves Our Problem

FTB Will - Receives $34,500; limited to

DNI of $50,750

Share of DNI

$34,500

STB Cam - Receives $17,250; limited to

remaining DNI: 50,750 less 34,500 or

$16,250 $16,250

Total (Equal to DNI) $50,750

% of DNI

67.98

32.02

100

77

Remember This??? - Components of DNI

47.06%

Rental

Income

35.29%

Taxable

Interest

17.65%

T/E

Interest

100%

Total

Gross TAI 40,000 30,000 15,000 85,000

LESS:

Rental Exp (14,000) (14,000)

Tr. Fees (1,412) (1,059) (529) (3,000)

Char Ded (8,118) (6,088) (3,044) (17,250)

Totals 16,470 22,853 11,427 50,750

Will and Cam get 67.98% and 32.02%,

respectively, of each of these items

78

67.98%

Will

32.02%

Cam Total

Rental

Income 11,196 5,274 16,470

Taxable

Interest 15,536 7,317 22,853

T/E

Interest 7,768 3,659 11,427

Total 34,500 16,250 50,750

Trustee reports these

amounts to Will and

Cam on separate K-1s

79

67.98%

Will

32.02%

Cam Total

Rental

Income 11,196 5,274 16,470

Taxable

Interest 15,536 7,317 22,853

T/E

Interest 7,768 3,659 11,427

Total 34,500 16,250 50,750

Will Reports

$26,731 of TI

80

67.98%

Will

32.02%

Cam Total

Rental

Income 11,196 5,274 16,470

Taxable

Interest 15,536 7,317 22,853

T/E

Interest 7,768 3,659 11,427

Total 34,500 16,250 50,750

Cam Reports

$12,592 of TI

81

But . . Aren’t We Missing Something???

Will

Reports

Cam

Reports

$26,731 $12,592 Taxable Income

82

YES! - Depreciation

Will

Reports

Cam

Reports


Depreciation (3,000) (1,500)

Net Taxable Income $23,731 $11,092

83

Where’s the Other $1,500 of Depreciation?

Will

Reports

Cam

Reports


Depreciation (3,000) (1,500)

Net Taxable Income $23,731 $11,092

It is Allocated to Charity and is Wasted!!!

84

67.98%

Will

32.02%

Cam Total

Rental

Income 11,196 5,274 16,470

Taxable

Interest 15,536 7,317 22,853

T/E

Interest 7,768 3,659 11,427

Total 34,500 16,250 50,750

The Distribution

Deduction is $39,323

85

Trust’s Taxable Income

TI Before Dist Deduction $47,223

Distribution Deduction $39,323

Taxable Income $7,900

The taxable income is the LTCG less the $100 exemption

86

Trust’s Taxable Income

TI Before Dist Deduction $47,223

Distribution Deduction $39,323

Taxable Income $7,900

The taxable income is the LTCG less the $100 exemption

Report on

Form

1041,

Page1,

Line22

87

Summary

• Compute TAI

• Figure Distribution Beneficiaries Get

• Calculate Taxable Income

– Allocate Depreciation

– Allocate Expenses to T/E Income

• Calculate DNI

• Apply Tier System

– Allocate DNI

• Send K-1s to Beneficiaries

• Complete 1041

• Thank God for Tax Software!!!

88

Summary

• Trust or estate is a separate taxable entity

• Income is taxed to either to estate/trust or beneficiary

• Concept of “distributable net income” (DNI) determines

– Amount of distribution deduction

– Amount included in beneficiary’s income

– Character of income

• DNI affected by

– Tier system of allocating DNI

– Separate share rule

– 65 day rule

– Section 663(a)(1) for specific bequests

• This stuff is really complicated

89

Resources

• Federal Income Taxation of Estates, Trusts and Beneficiaries, 3rd

Edition by Ferguson, Freeland and Ascher (Aspen/CCH)

• 1041 Deskbook (Practitioners Publishing Co)

• Income Taxation of Trusts and Estates, 852-3rd (BNA portfolio –

Estate, Gift and Trust series)

• Federal Income Taxation of Decedents, Estates and Trusts,

David A. Berek (2013 Edition) (CCH)

• Federal Income Taxation of Trusts and Estates, by Zaritsky and

Lane, 3rd Edition (RIA/Thompson/West)

• Income Taxation of Fiduciaries and Beneficiaries by Byrle M.

Abbin, 2 volumes, 2013 Edition (CCH)

income and fiduciary tax issues for estate planners, part … · seminar title: income &...

Documents