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  • 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

    Russo Law Group, P.C. Copyright March 2017

  • Qualified Disability Trust

    • Requirement for Qualification

    • Disability Trust

    • All of the beneficiaries are disabled

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

    Russo Law Group, P.C. Copyright March 2017

  • Qualified Disability Trust Election

    Russo Law Group, P.C. Copyright March 2017

    X X

  • Qualified Disability Trust

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

  • 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

    Russo Law Group, P.C. Copyright March 2017

  • Section 663(b) Election Form 1041 Page 2

    Russo Law Group, P.C. Copyright March 2017

    X

  • 65 Day Rule Benefits Case 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.

    Russo Law Group, P.C. Copyright March 2017

  • 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 plus 28% of excess

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

    39.6% $12,501+ $3,233 plus 39.6% of excess

    Russo Law Group, P.C. Copyright March 2017

  • Estate / Trust Charitable 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

    Russo Law Group, P.C. Copyright March 2017

  • Estate / Trust Charitable Deduction

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

    • Amounts permanently set aside

    Russo Law Group, P.C. Copyright March 2017

    $ 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

    Russo Law Group, P.C. Copyright March 2017

  • 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 - $ 25,835 Russo 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

    Russo Law Group, P.C. Copyright March 2017

  • 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 income

    Russo 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)

    Russo Law Group, P.C. Copyright March 2017

  • 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. Disclaimers Russo 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

    Russo Law Group, P.C. Copyright March 2017

  • 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

    Russo Law Group, P.C. Copyright March 2017

  • 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

    Russo Law Group, P.C. Copyright March 2017

  • 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

    Russo Law Group, P.C. Copyright March 2017

  • 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

    Russo Law Group, P.C. Copyright March 2017

  • 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,