1. Chapter 14: Income Taxation of Trusts & Estates
of Trust & Estates
Chapter 14: Income Taxation of Trusts & Estates

2. INCOME TAXATION OF TRUSTS & ESTATES (1 of 2)
Fiduciary taxation
Basic concepts and definitions
Trust taxable income
Distributable net income (DNI)
Simple trusts

3. INCOME TAXATION OF TRUSTS & ESTATES (2 of 2)
Complex trusts
Income in respect of a decedent
Grantor Trusts

4. Fiduciary Taxation Trusts and estates are separate taxpayers
No double taxation
Deductions permitted for income distributed to beneficiaries
Distributed income from trust retains its character in hands of beneficiary
Limited personal exemption available and no dependency exemptions

5. Basic Concepts and Definitions (1 of 5)
Estate comes into existence upon death of person whose assets are being administered
Trust is a legal entity created while a person is alive or under direction of a will following a person’s death
Testamentary trust receives assets from estate of decedent

6. Basic Concepts and Definitions (2 of 5)
Principal or corpus
Initial assets transferred by grantor plus certain additions/deductions required by provisions of trust instrument
Income
Earnings derived from principal but certain gains, losses or deductions may be considered adjustments to principal

7. Basic Concepts and Definitions (3 of 5)
Grantor
Party that transfers assets to the trust
Trustee
Party that administers the trust
Income Beneficiary
Party (or parties) who receives income when distributed by Trustee under provisions of trust instrument

8. Basic Concepts and Definitions (4 of 5)
Remaindermen
Party (or parties) who eventually receives trust principal
Same person may receive both income and principal
Simple trust
Must distribute all income annually
Does not distribute any principal AND
Makes no contributions to charities

9. Basic Concepts and Definitions (5 of 5)
Complex trust
Any trust that is not a simple trust
Personal exemption
$300 if all income required to be distributed annually
$100 if current income may be retained

10. Trust Taxable Income Gross Income - Deductions for expenses
- Personal exemption
= Taxable income before distribution
- Distribution deduction
= Trust taxable income

11. Distributable Net Income (DNI) (1 of 2)
DNI is maximum distribution deduction & income reportable by beneficiaries
No distribution deduction available for portion of distribution deemed to consist of tax-exempt income even though net tax-exempt income included in DNI

12. Distributable Net Income (DNI) (2 of 2)
Taxable income before distributions
+ Personal exemption already deducted
- Capital gains added to principal
+ Capital losses subtracted from principal
+ Tax exempt interest (net of expenses)
= Distributable Net Income

13. Simple Trusts (1 of 3)
Must distribute all of its net accounting income currently
Aggregate gross income reported by beneficiaries cannot exceed DNI
Income received by beneficiaries retains its character

14. Simple Trusts (2 of 3) Allocation of expenses to tax-exempt income
(net of exp. directly attributable thereto) X
Accounting income
(net of all direct exp) =
Indirect expenses allocable to non-taxable income

15. Simple Trusts (3 of 3)
Tax treatment of beneficiary if trust has > 1 beneficiary
Beneficiary’s share of gross income if DNI lower than net accounting income is following fraction of DNI
Income required to be distributed to such beneficiary
Income required to be distributed to all beneficiaries

16. Complex Trusts Complex trusts permit the following activities
Making distributions < current earnings
Distributing principal
Making charitable contributions
Complex trust’s DNI
Impact on beneficiaries

17. Complex Trust’s DNI (1 of 2)
Complex DNI not reduced by charitable contribution deduction when determining maximum distribution for mandatory distributions

18. Complex Trust’s DNI (2 of 2)
DNI reduced when calculating deductible discretionary distributions
Distribution deduction is smaller of DNI or sum of mandatory and other amounts properly paid

19. Impact on Beneficiaries (1 of 2)
In general
Beneficiary includes distributions as gross income up to current DNI for the trust
Accumulation distribution or throwback rules attempt to tax individual as if distributions were made annually
Higher trust tax rates make accumulation less desirable

20. Impact on Beneficiaries (2 of 2)
Tax treatment of beneficiary if trust has > 1 beneficiary
Beneficiary’s share of gross income if total income required to be distributed exceeds DNI
Income required to be
distributed currently to beneficiary
Aggregate income required to be
distributed to all beneficiaries currently

21. Income in Respect of a Decedent (IRD) (1 of 3)
Most individuals use cash basis
IRD is income constructively received, but not actually received before death
Interest on CDs, bonds or savings
Salary, commissions or bonus
Dividends received after date of death with record date before death

22. Income in Respect of a Decedent (IRD) (2 of 3)
IRD must be included
As gross income on estate’s income tax return AND
As part of the gross estate for transfer tax purposes

23. Income in Respect of a Decedent (IRD) (3 of 3)
Estate may claim an income tax deduction for the extra transfer tax due because these items were counted as part of the estate
No step-up in basis for IRD items

24. Grantor Trusts (1 of 2)
Grantor does not give up enough control or economic benefit to be a completed transfer
Grantor taxed on some or all of trusts income
Even if income distributed to beneficiaries

25. Grantor Trusts (2 of 2) Types of grantor trusts See Topic Review C14-4
Revocable trusts
Clifford Trusts
Post-1986 Reversionary interest trusts
See Topic Review C14-4

26. End of Chapter 14
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