Form 1041: Income Taxation of Estates and Trusts

• Chapter 1 - Introduction
  • Learning Objective
  • Introduction
• Chapter 2 - Legal Aspects of Estates and Trusts
  • Learning Objectives
  • Introduction
  • What Is a Trust?
  • Creation of Trusts
    • Methods of Creating a Trust
    • Formal Requirements for Creating a Trust
    • Trusts Subject to Subchapter J
    • Other Arrangements Not Subject to Subchapter J
  • Trustee Powers
    • State Trust Law
    • General Powers of Trustee
    • Investment Powers
    • Prohibited Transaction Self-Dealing
  • Allocations between Principal and Income
• Chapter 3 - Subchapter J Fundamental Principles and Definitions
  • Learning Objectives
  • Introduction
  • Classification of Trusts and Estates
    • Simple Trusts
    • Complex Trusts
  • Trust Taxable Income and Distributable Net Income
    • Trust Taxable Income
    • Special Depreciation Rules
    • Distribution Deduction
    • Distributable Net Income (DNI)
• Chapter 4 - Subchapter J Fundamental Calculation Concepts
  • Learning Objectives
  • Introduction
  • Basic Taxation of Simple Trusts
    • Conduit Calculation
    • Imperfect Conduit
  • Basic Taxation of Complex Trusts
    • Conduit Approach
    • Accumulation
    • Tax Effect of Accumulation
    • Multiple Trusts
  • Exclusions from Distribution Rules - §663(a)
    • Gifts, Bequests, Etc.
    • Charitable Bequests
    • Denial of Double Deduction
  • Distributions in Kind
    • Deemed Sale Rule
    • Election
  • Taxation of Beneficiary
  • When Beneficiary Is Taxed
• Chapter 5 - Simple Trusts
  • Learning Objective
  • Introduction
  • Fiduciary Income Tax Problem
  • Problems
    • Directions
    • Problem 5-1: Tax-Exempt Interest; Taxable Interest
    • Problem 5-2: Rental Income, Depreciation, Casualty Loss
    • Problem 5-3: Gain on Sale of Securities, Trustee's Commission (Corpus)
    • Problem 5-4: Trustee's Commission (Income)
  • Appendix
    • Solution to Problem 5-1
    • Solution to Problem 5-2
    • Solution to Problem 5-3
    • Solution to Problem 5-4
• Chapter 6 - Complex Trusts and Estates
  • Learning Objective
  • Introduction
  • Nature of Complex Trusts (Including Estates)
    • Components
  • Tier System
  • Charitable Contributions and DNI for First-Tier Distributions - Modified DNI
  • Problems
    • Directions
    • Problem 6-1
    • Problem 6-2
    • Problem 6-3
    • Problem 6-4: Charitable Deduction - Unlimited Yet Limited
  • Appendix
    • Solution to Problem 6-1
    • Solution to Problem 6-2
    • Solution to Problem 6-3
    • Solution to Problem 6-4
• Chapter 7 - Tax Return Preparation
  • Learning Objective
  • Introduction
  • Problems
    • Directions
    • Comprehensive Trust Problem 7-1a
    • Comprehensive Trust Problem 7-1b
    • Comprehensive Trust Problem 7-2
    • Ben E. Wilson Trust
    • Estate Problems
    • Estate Problem 7-1
    • Estate Problem 7-2
  • Appendix
    • Solution to Comprehensive Trust Problem 7-1a
    • Solution to Comprehensive Trust Problem 7-1b
    • Solution to Comprehensive Trust Problem 7-2
    • Observations - Estate Tax Problems
• Chapter 8 - Grantor Trust Rules and Related Matters
  • Learning Objectives
  • Introduction
  • Definitions and Special Operating Rules
    • Adverse Party
    • Non-Adverse Party
    • Related/Subordinate Party
    • Independent Trustee
    • Trustee Categories
  • Reversionary Interests (§673)
    • Before March 1, 1986
    • After March 1, 1986
  • Controls over the Benefits of the Trust Property (§674)
    • Permissible Powers over Income
  • Powers over Principal
    • Limitation of Powers
  • Administrative Controls over the Trust (§675)
    • Prohibited Powers
    • Fiduciary Powers
    • Loans
  • The Power to Revoke (§676)
    • Definition
    • Reversion Event
    • Consent
  • Income for Grantor's Benefit (§677)
    • Delayed Enjoyment
    • Support/Maintenance
    • Overlooked Enjoyment
  • Special Rules and Considerations
    • Trustee Removal
    • Third-Party Owner
    • Defective Grantor Trust
  • Unearned Income of Children under Age 14
    • Net Unearned Income
    • Minimum Amount
    • Divorced Parents
    • Deceased Parents
    • Reporting
• Chapter 9 - Advanced Concepts and Planning
  • Learning Objective
  • Introduction
  • Sale or Distribution of Assets in Kind
    • Gain/Loss
    • Taxation to Beneficiary
    • Installment Sales
  • Special Tax on Trusts Selling Appreciated Property
  • Determining Principal and Income
    • Selection of Investments
    • Depreciation Reserve
    • Natural Resources
    • Asset Dispositions
  • Tax Attributes of the Beneficiaries
    • Charitable Entities
    • Bracket Play
  • Depreciation Reserve Mandated by Trust Agreement
  • Problem 9-1
  • 65-Day Rule
    • Election
    • Simple Trusts
  • Separate Share Rule
    • Termination of Interest
    • Multiple Beneficiaries
    • Non-Elective
  • Capital Gains and Losses
    • Timing
    • Final Distributions
    • Fiduciary Intent
  • Capital Losses
  • Alternative Minimum Tax
    • Schedule I
    • DNI/DNAMTI Variations
    • Reasons for Variations
  • Payment of Estimated Taxes
    • Trusts
    • Estates
• Chapter 10 - Income in Respect of Decedent, Decedent's Final Return, and Other Concepts Affecting Estates and Decedents
  • Learning Objectives
  • Introduction
  • Income in Respect of a Decedent (IRD) (§691)
    • Main Concept
    • Examples
    • Estate Inclusion
    • Deduction of Income Tax from Estate
    • DRD Items
    • General Planning Considerations for IRD
    • Examples
  • The Decedent's Final Return
    • Special Elections
    • Income from Estates and Trusts
    • Income from Partnerships
    • Income from S Corporations
    • Depreciation
    • Charitable Contributions
    • Medical Expenses
    • Net Operating Loss
    • Capital Losses
    • Filing Decedent's Final Return
  • Selection of Fiscal Years
    • Estimates
    • Unused Items
    • Brackets
    • Wasted Items
    • Other Considerations
  • Estate Termination - Planning
    • Administrative Period
    • Alternate Valuation
  • Planning with Regard to Basis
    • Gains
    • Losses
  • Acceleration of IRD
  • Inadvertent Sales and Exchanges
  • Bunching Income
    • Fees and Expenses
    • Residuary Beneficiaries
    • Charitable Deductions
  • 2% Floor on Miscellaneous Deductions
    • Basic Rule
    • Exceptions
    • Inclusion of Qualified Revocable Trust as Part of Estate for Income Tax Purposes
• Chapter 11 - Ethics Focus: Taxation
  • Ethics Overview
  • Recent Developments
  • Spotlight on Independence in Tax Services
  • Key Ethical Dilemmas and Judgment Calls
  • Addressing Ethical Dilemmas
  • Available Resources
• Chapter 12 - Latest Developments
• Appendix A - Summary of Trust Instrument

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Chapter 1 - Introduction

Learning Objective

• Learn how to deal with estate and trust income tax issues.

Introduction

Trusts and estates are encountered by many CPAs on a daily basis. The various legal and tax rules applicable to trusts and estates are readily understandable. Nonetheless, the vast majority of CPAs feel very uncomfortable when dealing with estate and trust income tax issues.

The creation of trusts has traditionally been motivated by many non-tax considerations. Trusts are commonly used by an older generation to provide for members of a younger generation. Usually, the person establishing the trust (the grantor or settlor) will want to take steps to ensure that the younger generation does not expend the assets unwisely. Spendthrift provisions may be inserted to prevent the beneficiary's creditors from reaching trust assets. The grantor may also wish to place certain standards on the beneficiary's use of trust funds. If the trust designer steers a careful course through a maze of legal and tax rules, the grantor's objectives may be obtainable and the trust assets may be excludable from the grantor's estate.

Estates are, of course, formed whenever someone dies. Most of the trust tax rules apply to estates. Separate tax rules may also apply to estates that do not apply to trusts. The CPA who is knowledgeable in the area of fiduciary income taxation has an important opportunity to become much more valuable to her client. The subject of this program, income taxation of estates and trusts, is designed to acquaint the CPA with the area. This area seems to have an unwarranted reputation as being one of the most incomprehensible areas of tax law. Practitioners and Treasury Department representatives alike share this view. Preparers of Form 1041 frequently approach the return from a purely mechanical point of view. This program is designed to give the participant a basic conceptual, yet practical, understanding of the subject and to help the participant develop a perspective on this area that should attune him to the planning opportunities as well.

Chapter 2 - Legal Aspects of Estates and Trusts

Learning Objectives

• Determine when a trust has been formed.
• Recognize common types of trusts.
• Determine what items should be treated as principal and what items should be treated as income under state law principles.

Introduction

In this chapter we discuss the following:

• What is a trust?
• When is a trust created?
• What are common types of trusts?
• What are common trustee powers?
• What items are allocated to principal and what items are allocated to income for state law and trust accounting income purposes?

Taxation generally follows legal principles. For this reason, CPAs working with trusts need to be familiar with the basic legal aspects of trusts and estates.

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