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24211_ch25_final_p001-008 - 25 Income Taxation of Estates...

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Income Taxation of Estates and Trusts Solutions to Problem Materials D I S C U S S I O N Q U E S T I O N S 25-1 To describe a fiduciary as a conduit of income implies that income earned and accounted for by the fiduciary flows through the fiduciary and is taxed to the beneficiaries of the fiduciary rather than the fiduciary itself. Under this conduit principle, the character of the income is not changed as it flows through the fiduciary. A fiduciary functions as an income conduit only to the extent cash or property distributions are made to the beneficiaries. (See p. 25-13 and §§ 651, 652, 661, and 662.) 25-2 Trusts are useful in situations in which it is desirable or necessary to separate the legal ownership and control of property from the beneficial enjoyment of the property. Such situations could occur when the beneficial enjoyment of property is to be given to a number of individuals (as opposed to one individual), a minor, or an incompetent or incapacitated individual. (See p. 25-2.) 25-3 A trust cannot exist unless there is a separation of legal ownership and beneficial ownership. No such separation exists if the trustee and sole beneficiary are the same person. (See p. 25-2.) 25-4 If the income beneficiaries and remaindermen of a trust are different individuals, the grantor may want both types of beneficiaries to bear a portion of the cost of the trust administration. (See p. 25-3.) 25-5 Congressional tolerance may be due to the fact that estates, unlike trusts, are not intentionally created and that an estate usually exists as a separate taxable entity for a very short period of time. (See pp. 25-1 and 25-5.) 25-6 The concept of fiduciary income as defined by the trust instrument or applicable state law may differ from the concept of fiduciary taxable income as defined in the Internal Revenue Code. Therefore, a distribution of 100% of fiduciary income may not represent a distribution of 100 percent of taxable income. [See p. 25-3 and § 643(b).] 25-7 Administrative expenses (or any portion thereof) may be claimed as a § 2053 deduction from the gross estate or a § 212 expense for fiduciary income tax purposes. No double deduction is allowed. [See pp. 25-6 and 25-8 and § 642(g).] 25-8 Per rules governing individual taxation, a fiduciary may deduct an annual maximum of $3,000 of net capital loss; and excess capital loss is carried forward [See p. 25-10 and § 641(b).] 25 25-1
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25-9 Operating losses of a fiduciary do not flow through to be deducted by beneficiaries; rather, they are subject to carryback or carryforward at the fiduciary level. [See p. 25-10 and § 642(d).] 25-10 From the point of view of the fiduciary, the taxable portion of DNI is the maximum amount deductible for distributions to beneficiaries. For beneficiaries, the taxable portion of DNI represents the maximum amount of fiduciary income for which they may be taxed. [See pp. 25-14 through 25-16 and §§ 651(b), 652(a), 661(c), and 662(a).] 25-11 When a beneficiary receives a distribution from a fiduciary, the distribution is considered nontaxable to the same extent, or in the same proportion, that the fiduciary DNI is nontaxable. [See Example 12, p. 25-14,
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