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2020 NATIONAL INCOME TAX WORKBOOK
CHAPTER12: TRUSTS AND ESTATES
P. 411
Definition of a Gift
Gift Tax Exclusion
Basis in Gifted Property
Gifts to a Spouse
When to File Form 709
Planning for Use of the Increased Basic Exclusion
Types of Trusts
Nongrantor Trust Reporting
CHAPTER 12: TRUSTS AND ESTATES P. 399
2020 $11,580,000 ($23,160,000 married)
2026 $5,000,000 ($10,000,000 married) indexed for
inflation◦ Final regulations provide clarification
NOTE: laws could change pre-2026 but gifting
now removes appreciation
ISSUE 6: PLANNING FOR INCREASED EXCLUSION P. 411
Regs say gifts won’t be called back
Ex. 12.23 $6M exclusion, $15M estate. Uses husband’s DSUE and tax on remaining. Approx. $1,420,000 tax
Ex. 12.24 same facts but $8M gifts to trusts for children. 7M estate and no remaining exclusion. After DSUE $620,000 tax
GIFTS TO CHILDREN PP. 411-412
USE IT OR LOSE IT
Ex. 12.25 Ahmed made 4M gifts. 6.8M basis
exclusion (BE) when he dies. Amount of gifts less
than basic exclusion amount – estate tax
calculated based on BE amount at time of death
GIFTS TO CHILDREN CONT. P. 412
Transfers w/in 3 years of Date of Death (D.O.D.) included
Transfers with retained interests or control included
Self-settled trust may not be completed gift, irrevocable
Jurisdiction where self-settled trusts not subject to creditor’s claims (e.g. Michigan) and no retained interest
GIFTS TO SELF P. 412
Spouses establish trusts for each other
Watch out for the reciprocal trust doctrine
Ex. 12.26 Mary and Gary create identical trusts –disregarded
Look at:
When created, same trustees, same assets, prearranged plan, same beneficiaries
GIFTS TO SPOUSE PP. 412-413
See Levy v. Commissioner
Ex. 12.27 Jerry and Felicia create trusts for each other. Different amounts, different assets. Different dates. Felicia has POA that Jerry doesn’t have. If separate and no retained powers, can use increased basic exclusion amounts.
NOTE: Inclusion gets step-up in basis
GIFTS TO SPOUSE CONT. P. 413
Final regs state that if DSUE elected during increased BE, won’t be reduced
when BE decreases
Example 12.28 Carol died in 2019 and estate elected portability of 11.4M DSUE to
husband Wayne. Wayne dies when BE is $6,800,000. Credit calculated based on
the 11.4M DSUE plus Wayne’s BE amount.
NOTE: Changes in laws, changes in estate values possible, ADVISE RE ELECTING
PORTABILITY
Ex. 12.28 shows DSUE applied first to taxable gifts (before donor’s BE amount)
USE OF THE DSUE PP. 414-415
Deceased Spousal Unused Exclusion (DSUE) can be a reason to file form 706 with
the election to carry it to the spouse’s estate return. What is the amount over
which the financial planner should consider filing?
A. $11,580,000, the current limit as adjusted by inflation
B. $5,000,000, the 2026 potential exclusion
C. $15,000, yearly gift tax exclusion
POLLING QUESTION CH. 12 B NUMBER 1
KEY TERMS:
Grantor – creates the trust
Trustee – holds legal title and administers the trust
Trust property – assets of the trust
Beneficiary – receives the benefits of trust property
ISSUE 7: TYPES OF TRUSTS PP. 415-416
Avoid probate, facilitate administration, privacy
REVOCABLE TRUSTS P. 416
Estate planning, charitable gifting, asset protection
IRREVOCABLE TRUSTS P. 416
Personal exemption
◦$300 simple
◦$100 complex
Simple is nongrantor trust that
requires all income distributed currently
does not provide for charities
does not distribute principal
Complex is not simple, not grantor
SIMPLE AND COMPLEX TRUSTS P. 417
IRC Sections 673-678
◦ E.G. section 676 revocable trust
Deemed owner – usually grantor
IRC Section 673: Grantor has more than 5% reversionary interest
IRC Section 674: Power to control beneficial enjoyment
◦ 674(a) grantor or nonadverse party can direct disposition
◦ E.g. add or remove beneficiaries, shift interest, determine distributions
◦ IRC 674(b) exceptions
GRANTOR TRUSTS PP. 417-418
IRC Section 674(c) trustee who isn’t the grantor, or related or subordinate, can
have power to determine distributions. Not the power to add beneficiaries.
Section 674(c) trustee who isn’t grantor or spouse can have power over income.
Language to cause grantor trust status
GRANTOR TRUSTS CONT. P. 418
IRC Section 7675 cause grantor trust status if
◦Power to deal w/ trust assets for less than full consideration
◦Power to borrow w/out adequate interest or security
◦Borrowing trust funds
◦Administrative nonfiduciary powers (list on P. 419)
ADMINISTRATIVE POWERS P. 418
IRC Section 677 power to use income for the grantor’s benefit
IRC Section 678 power to vest income or principal in himself/herself
◦Person with the power treated as the owner if grantor isn’t
GRANTOR TRUSTS CONT. P. 419
1040 instead of 1041
Owned by one grantor or other person – Optional Methods 1 or 2
Owned by two or more grantors or other persons – Optional Method 3
Regular method
◦ Complete entity info part of 1041
◦ Attach statement
Ex. 12.29 John and Abby, spouses, have revocable trust. Trust sold stock. Regular
method, attach schedule to 1041 showing each separate transaction.
GRANTOR TRUST REPORTING P. 419-421
Report beneficiary’s share of income,
deductions, credits on Form 1041 Schedule
K-1. Figure 12.2 p.422 K-1
ISSUE EIGHT: NONGRANTOR TRUST REPORTING P. 421
Attach K-1 to 1041 and give copy to beneficiary
Beneficiary doesn’t file K-1
By April 15 for calendar year trusts◦15th day of the 4th month for fiscal year trusts
Form 7004 for extension
NOTE: 2020 deadlines past for 2019 1041s
FILING SCHEDULE K-1 P. 423
Beneficiary reports K-1 items on his/her return
Generally same way trust reports
Page 2 shows where to report
Figure 12.3 (P. 424)
INCLUSION IN INCOME P. 423
Asterisk (*) on K-1 indicates attached statement
Beneficiary includes income in tax year in which trust’s tax year ends
E.g. trust tax year ends July 31, 2020 and beneficiary’s ends December 31, 2020,
include income on 2020 return.
Special rules for deceased beneficiaries.
REPORTING CONT. P. 425
Reporting statements must be attached to K-1
Code I - *STMT
Separately identify
◦ Qualified income, gain, deduction, loss
◦ W-2 wages
◦ UBIA of qualified property (Unadjusted Basis immediately after acquisition)
◦ PTP items – Publicly Traded Partnership
◦ REIT dividends – Real estate Investment Trust
Also report SSTBs, aggregations, coop amounts
SCHEDULE K-1 AND QBI P. 425
Statement A – QBI items, W-2 wages, UBIA, PTP
items and REIT dividends
Statement B – Aggregations
Statement C – Payments from cooperatives and
allocable 199A(g) deduction
SCHEDULE K-1 AND QBI CONT. P. 425
Is the preparer able to test the numbers as reasonable from the 1041 K-1
Qualified Business Income (QBI) Statements A, B, and C?
1. Yes
2. No
3. Rules are complicated
POLLING QUESTION CH.12 B NUMBER 2
QUESTIONS?
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