Corp. Sol., 2008 Chap.14

Corp. Sol., 2008 Chap.14 - Chapter C:14 Income Taxation of...

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Chapter C:14 Income Taxation of Trusts and Estates Discussion Questions C:14-1 The taxable income of an estate or trust is reduced by the distribution deduction for amounts distributed, and the beneficiary reports these amounts as gross income. The estate or trust pays tax only on amounts retained, less the personal exemption. p. C:14-4. C:14-2 The opportunity for income tax savings from using trusts is limited because of the compressed rate schedules and because of the reduced tax rate on dividends, a common type of income for trusts. Non-tax reasons for creating trusts still exist, however, including providing for expert management, assuring that assets are preserved, and reducing probate costs. p. C:14-3. C:14-3 Section 641(b) provides that taxable income of estates and trusts is computed in the same manner as for individuals unless Part I of Subchapter J provides a rule to the contrary. Among the major differences are a smaller personal exemption deduction and a much more compressed rate schedule for fiduciaries. Also, fiduciaries receive a distribution deduction and have no ceiling on deductible charitable contributions. p. C:14-4. C:14-4 Often the trustee cannot distribute principal, or can do so only in limited circumstances. Many trust instruments mandate that all of the income and/or nothing but income (meaning income in the accounting, not tax, context) be distributed annually. Thus, the categorization of a receipt, gain, expenditure, or loss item as principal or income often affects the dollar amount that the beneficiary can receive. pp. C:14-4 and C:14-5. C:14-5 Under the Uniform Act (1962 version), common examples of principal include the gain (plus return of capital) upon the disposition of an asset owned by the fiduciary. Common examples of income include dividends, interest, and rents. pp. C:14-5 and C:14-6 and Topic Review C:14-1 (p. C:14-7). C:14-6 In general, state law controls; however, if provisions in a trust instrument provide for a different allocation, the provisions in the trust instrument prevail over state law. p. C:14-5. C:14-7 No. Irene will not receive a distribution equal to the amount of the gain. Under the Uniform Act, the gain is not classified as income for fiduciary accounting purposes, and Irene is entitled to receive only income. pp. C:14-5 and C:14-6. C:14-8 The gain is retained by the trust for ultimate distribution to Beth, and the trust pays the tax on the gain. The tax is imposed in the year of the sale. pp. C:14-5 and C:14-6. C:14-1
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C:14-9 Under the Uniform Act (1962 version), 100% of the depreciation is charged against accounting income and therefore is deductible by the trust. Under the laws of many states, however, the depreciation is charged to principal. In the latter situation, for tax purposes, all the depreciation would be allocated to the beneficiary because all the income is distributed. On the other hand, the depreciation—because of being charged to corpus—does not reduce the amount distributable to the income beneficiary. A provision in the trust instrument requiring a reserve
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Corp. Sol., 2008 Chap.14 - Chapter C:14 Income Taxation of...

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