Module 39: Other Taxation Topics

TAXATION OF ESTATES AND TRUSTS

Estates

Results from death of individual

  • Assets become part of estate
  • Investments generate income
  • Estate taxed on earnings

Trusts

Types of Trusts

Simple trusts

  • Must distribute all income each year
  • Cannot make charitable contributions
  • Cannot distribute trust corpus (principal)

Complex trusts—all others

Trust Operations

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Taxation of Trusts

Grantor (revocable) trust

  • Creator has right to withdraw assets at any time
  • Earnings taxed to creator (as if trust did not exist)

Irrevocable trust

  • Creator generally may not withdraw assets
  • Trust taxed separately from creator or beneficiaries

Computing Taxable Income of Trusts and Estates

Gross income

Deductions
Exemption
= Taxable income

Gross Income

Same rules as for individuals

Includes

  • Rents
  • Dividends
  • Interest
  • Capital gains

Deductions

Generally similar to those available to individual

In addition

  • Charitable contributions—No limit on amount
  • Management fees—Fees paid to trustee or executor
    • Trust or estate may have nontaxable income
    • Proportionate amount of fees not deductible
  • Distributions paid—Amounts paid to beneficiaries

Exemption

Estate—$600

Simple trust—$300

Complex trust—$100

Distributable Net Income (DNI)

DNI is maximum amount of distribution that can be taxed to income beneficiary

  • Includes most income and expense items on trust tax return
  • Includes ...

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