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Unformatted text preview: 20-1Chapter 20 Income Taxation of Trusts & Estates (2011 edition) updated: March 4, 2011Learning Objectives: Understand the basic concepts & definitions concerning trusts and estates Distinguish between trust corpus (principal) and income Know how to compute the trusts taxable income Understand the significance of distribution deduction the DNI Understand the significance of first- and second-tier distributions in complex trusts Understand the concept of income in respect of a decedent (IRD) I. Trusts & Estates Overview A. The function of estates & trusts 1. estate (defined) a transitional legal entity that comes into existence upon the death of an individual it collects and conserves an individuals assets, satisfies all liabilities, and distributes the remaining assets to heirs it is used during the period of time in which the decedents legal affairs are being settled it is used by the executor/administrator of the estate to manage the assets owned by the decedent once all legal requirements are satisfied, the estate terminates & ownership passes to beneficiaries or heirs 2. trust (defined) a legal arrangement (typically involving three parties) in which an individual, the grantor, transfers legal ownership of assets to one party, the trustee, and the legal right to enjoy & benefit from those assets to a second party, the beneficiary(or beneficiaries) usually refers to an arrangement created by a will or by inter vivos (lifetime) gift trustee takes title to property for purpose of protecting or conserving it for the beneficiary it is usually designed for the protection of the beneficiary the terms of the trust, the duties of the trustee, and the rights of the various beneficiaries are specified in the legal document the trust instrumentthe grantor has unlimited discretion such that a trust can be a very flexible document 20-2B. Basic concepts and definitions Estates 1. Decedent 2. Executor a decedents legal representative appointed under the will (or called the administratorif appointed by the probate court because there is no will). Has a fiduciary responsibility to operate the estate. 3. Beneficiary one who will receive the assets and/or income from the estate. C. Basic concepts and definitions Trusts 1. Principal or corpusis the initial assets transferred by the grantor plus certain additions or deductions as required by the provisions of the trust instrument or state law. 2. Incomeis the earnings derived from the principal. Certain gains, losses or deductions may be considered adjustments to principal. 3. Grantor (donor or settlor) the party that transfers assets to the trust 4. Trustee (fiduciary) the party (individual or corporate) that administers the trust....
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- Spring '08