IG_C28 - CHAPTER 28 INCOME TAXATION OF TRUSTS AND ESTATES...

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CHAPTER 28 INCOME TAXATION OF TRUSTS AND ESTATES LECTURE NOTES AN OVERVIEW OF SUBCHAPTER J What is a Trust? 1. A trust is an arrangement created by a will or by a lifetime declaration, through which a trustee takes title to property for the purpose of protecting or conserving it for the beneficiaries, under the ordinary rules applied in chancery or probate courts. 2. Key parties for trust creation are the following. a. Grantor (donor, settlor). Person who places the property in the trust. b. Trustee (either individual or corporate). Party responsible for maintaining assets placed in the trust in accord with the trust instrument. c. Trust beneficiary. One entitled to the income from the trust property is called an income beneficiary. If the income interest is based on the life of the beneficiary, such person is called a life tenant. (1) Remainder Beneficiary. Party to whom trust assets will be distributed at the trust termination. (2) Reversionary trust. Trust assets are returned to the grantor at the expi- ration of the trust arrangement. 3. Trusts not recognized. a. Grantor trust. Grantor names self trustee and therefore retains virtual control over property. Not recognized for tax purposes. b. Trust in which the grantor, trustee, and sole beneficiary are the same person. 28-1
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28-2 2009 Comprehensive Volume/Instructor’s Guide with Lecture Notes Other Definitions 4. Other terms relevant to trust and estate taxation include the following: a. Corpus: Assets that the grantor transfers to the trust that become the body or principal of the trust. b. Typical trust had two types of beneficial interests. (1) Income interest receives the accounting income. (2) Remainder interest receives the corpus that remains at the termination of the trust. (3) Reversionary interest is where the corpus to revert to the grantor when the trust terminates. c. Trust terms. (1) Term certain is for a specific number of years. (2) Until a specified event occurs; for example for the life of the beneficiary (life tenant). d. Sprinkling trust: A trust where the trustee can determine, within guidelines, either the timing of income or corpus distributions to specific beneficiaries. e. Simple trusts. (1) Required to distribute its entire accounting income each year. (2) Beneficiaries are not qualified charities. (3) Makes no distributions of corpus during the year. f. Complex trust is a trust that cannot qualify as a simple trust.
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Income Taxation of Trusts and Estates 28-3 What is an Estate? 5. Estate definition. Separate taxable entity created upon death of every individual. a. During administration period, decedent’s legal representative is responsible for collecting and conserving all assets, satisfying all claims against the estate, and distributing any remainder to the appointed heirs. b.
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IG_C28 - CHAPTER 28 INCOME TAXATION OF TRUSTS AND ESTATES...

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