Presents Taxation: Understanding Taxation Issues that ...€¦ · Presents Taxation: Understanding Taxation Issues that Arise for Persons with Special Needs With Vincent J. Russo,

Presents

Taxation: Understanding Taxation Issues that Arise for Persons with Special Needs

With

Vincent J. Russo, J.D., LL.M., C.E.L.A., CAP

March 24, 2017

What We Will Cover

• Tax Elections

• Special Needs Trusts

• The Future of Taxes

Russo Law Group, P.C. Copyright March 2017

Qualified Disability Trust

• Benefits• Trust qualifies for an exemption as an

individual for income tax purposes ($4,050 instead of $100 for 2017)

I.R.C. § 642 Special rules for credits and deduction



• Requirement for Qualification

• Disability Trust

• All of the beneficiaries are disabled

I.R.C. § 642. Special rules for credits and deduction


Qualified Disability Trust Election


XX


• Case Study – Trust taxable income of $22,400• Trust does not qualify as a “Qualified Disability

Trust” • Taxable Income $22,500 with Exemption $100• Tax - $3,960

• Trust does qualify as a “Qualified Disability Trust”

• Taxable Income $18,450 with Exemption $4.050• Tax - $1,564.20

• Tax Benefit of QDT: $2,395.80


65 Day Rule

• If within the first 65 days of any taxable year of an estate or a trust, an amount is properly paid or credited, such amount shall be considered paid or credited on the last day of the preceding taxable year.

• Section 663(b) Election Requirements

I.R.C. § 663. Special rules applicable to sections 661and 662


Section 663(b) ElectionForm 1041 Page 2


X

65 Day Rule BenefitsCase Study

• For example, assume a trust with 2016 taxable income of $30,000 that could pass out to beneficiaries, but only $10,000 was paid out during 2016.

• Under the 65 Day Rule, the trustee can distribute up to $20,000 more to beneficiaries and elect to treat that amount as having been distributed on December 31st of the prior year for income tax purposes.


2017 Income Tax Brackets

Rate Taxable Income Bracket Tax Owed

10% $0 to $9,325 10% of taxable income

15% $9,325 to $37,950 $933 plus 15% of excess

25% $37,950 to $91,900 $5,226 plus 25% of excess

28% $91,900 to $191,650 $18,714 plus 28% of excess

33% $191,650 to $416,700 $46,644 plus 33% of excess

35% $416,700 to $418,400 $120,910 plus 35% of excess

39.60% $418,400+ $121,505 plus39.6% of excess

Rate Taxable Income Bracket Tax Owed

15% $0 to $2,550 15% of taxable income

25% $2,551 to $6,000 $383 plus25% of excess

28% $6,001 to $9,150$1,245 plus28% of excess

33% $9,051 to $12,500$2,127 plus33% of excess

39.6% $12,501+$3,233 plus39.6% of excess


Estate / TrustCharitable Deduction

• Deduction for amounts paid or permanently set aside for charitable purposes • Deduction against taxable income

• No limitation on the amount

• Paid for a charitable purpose

• Set aside not available for trusts created after 10/9/69

I.R.C. § 642. Special rules for credits and deduction


Estate / TrustCharitable Deduction

• Paid after the tax year and before the end of the following year

• Amounts permanently set aside


$ X

Charitable Set Aside Deduction Case Study

• Dominic dies in August 2010

• Will leaves entire Estate to SNT fbo Tina, then to 5 charities upon Tina’s death

• Tina is appointed Executor of Estate but dies in Sept. 2011

• Tina dies before assets of Estate are marshalled and distributed to SNT

• Successor Executor of Estate is appointed in Oct. 2014


Charitable Set Aside Deduction Case Study

• The Estate Taxable income from 2011 to 2014 was $413,463

• No distributions to 5 charities until Jan. 2016

• Estate income tax returns for 2011-2014 were filed in January 2016 with 642(c) election – $0 tax liability

• 2011-2014 combined tax liability without the permanent set-aside 642(c) election:

• Federal - $116,145 / NYS - $ 25,835Russo Law Group, P.C. Copyright March 2017

Estate / Trust Income Election

• Executor of an Estate and Trustee of a Qualified Revocable Trust may elect for the Trust to be taxed as part of the Estate

• Definition of a Qualified Revocable Trust

• Applicable Date

I.R.C. § 645. Certain revocable trusts treated as part of estate


Estate / Trust Income Election on Form 8855

• By the due date (including extensions) of the filing of the initial Estate Tax return

• Effective for two years after date of death

• TIN required of both QRT and the Estate

• If multiple trusts, need multiple Form 8855 signed (one by each trustee)

• Irrevocable Russo Law Group, P.C. Copyright March 2017

Estate / Trust Income Election DNI Allocations

• Combined Income, Deductions and Credits

• Separate Share Rule will apply

• Example of the Section 645 Election• Trust net income of $45,000 ($50,000 interest - $5,000)

• Estate net income of $8,000 ($10,000 dividends -$2,000)

• Trust distributions $45,000 - No Estate distributions

• Beneficiary of Trust reports $45,000 of interest income

• Estate reports $8,000 of dividend incomeRusso Law Group, P.C. Copyright March 2017

Estate / Trust Income Election Advantages

• Fiscal Year Election

• Charitable Set Aside Deduction

• Real Estate Losses – Participation Issue

• Holding Period for S Corp Stock

• Pecuniary Loss Deduction (non-cash property)

• Exemptions (pro or con)


Qualified Disclaimer

• Requirements for a Qualified Disclaimer• Irrevocable and unqualified refusal by person to

accept an interest in property

• Must be in writing

• Writing received not later than 9 months from the latter of date of interest created or attaining age 21

• Non-acceptance of the interest or any of its benefits

• Result: treated as predeceasing the decedent

I.R.C. § 2518. DisclaimersRusso Law Group, P.C. Copyright March 2017

Able Account

• Eligibility• Disabled (prior to age 26)

• Funding• $14, 000 per year (subject to adjustment)

• Qualified Expenses• Any expenses related to the beneficiary

• Tax Benefits• Income Tax Free Growth for Qualified

Expenses


First Party Special Needs Trusts: Taxation

• Gift Taxation on Funding• Incomplete

• Income Taxation on Income Generated• Grantor Trust

• Estate Taxation on Demise of Beneficiary• Included in the Estate

21


Third Party Supplemental Needs Trusts: Taxes

• Gift• Complete versus Incomplete

• Control by drafting trust provisions

• Income• Grantor Trust

• Non-Grantor Trust• Simple Trust or Complex Trust

• Conversion from Grantor Trust on death of Grantor

22


Third Party Supplemental Needs Trusts: Estate Taxes

• Included in Estate of Grantor• Strings Attached

• Maintain Control or Beneficial Enjoyment

• Reversion

• Excluded from Estate of Grantor• No Strings Attached

• No Control or Beneficial Enjoyment Retained

23


Testamentary Third Party Supplemental Needs Trusts

• Gift Taxation• Not subject to Gift Tax laws

• Income Taxation to Settlor, Trust, Beneficiary• Complex Trust

• Estate Taxation• Included in the Estate

24


IRAs: Trust as Designated Beneficiary

• #1 - Trust must be valid under state law

• #2 - Trust must be irrevocable or will, by its terms, become irrevocable upon death of the participant

• # 3 - The beneficiaries must be “identifiable ... from the trust instrument”

• #4 - Certain documentation must be provided to “the plan administrator” by 10/31 of the year following the year of participant’s death

• #5 - All trust beneficiaries must be individuals

IRC Reg. §1.401(a)(9)-4, A-5)

25


IRA – Accumulation Trust

• Trust as Beneficiary of the IRA

• See Through Trusts

• Conduit

• Accumulation

• Accumulation of Required Minimum Distributions

• Measuring Life


Tax Proposals

• Tax Campaign Proposals

• Goals

• Income Tax

• Corporate Tax

• Estate Tax


Proposed Estate Tax Changes

• S. 205: Death Tax Repeal Act of 2017.

• Eliminates the Federal Estate Tax and generation skipping transfer tax for estates of decedents dying on or after the date of enactment .

• Modifies the existing gift tax law but does not eliminate the gift tax.

• H.R. 451: Permanently Repeal the Estate Tax Act of 2017.

• Eliminates the Federal Estate Tax law for estates of decedents dying after December 31, 2016.


Proposed Estate Taxes Changes: Gift Tax Law and Step Up in

Basis• Gift tax law remains in effect with stated

exemption• Step Up in Basis Scenarios

• No Step Up, capital gains tax on sale of assets

• Step Up – up to an exemption amount• Assets in excess of stated amount have a carry over basis or

• Assets in excess of stated amount subject to capital gains tax

• Step Up of Capital Gains – up to an exemption amount


Special Needs and Taxes


Circular 230

Pursuant to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, nothing contained in this communication was intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose. No one, without our express prior written permission, may use or refer to any tax advice in this communication in promoting, marketing, or recommending a partnership or other entity, investment plan or arrangement to any other party.

For discussion purposes only. This work is intended to provide general information about the tax and other laws applicable to retirement benefits. The author, his firm or anyone forwarding or reproducing this work shall have neither liability nor responsibility to any person or entity with respect to any loss or damage caused, or alleged to be caused, directly or indirectly by the information contained in this work. This work does not represent tax, accounting, or legal advice. The individual taxpayer is advised to and should rely on their own advisors.


Thank You

Garden City | Islandia | Lido Beach | Manhattan By Appointment Only: Forest Hills | Patchogue | Southold

phone 800-680-1717 | www.vjrussolaw.com

Documents

Presents Taxation: Understanding Taxation Issues that ...€¦ · Presents Taxation: Understanding Taxation Issues that Arise for Persons with Special Needs With Vincent J. Russo,