Trusts and Estates Chapter 6 pp 237 270

Trusts and Estates Chapter 6 pp. 237 -270 2019 National Income Tax Workbook™

Trusts and Estates p. 237 § Estate Tax Planning for an Increased Exclusion Amount § Planning for Use of the Increased Basic Exclusion § QBI Deduction for Trusts and Estates

Trusts and Estates § Trust and Estate Tax Returns § Basis in Inherited Assets § Below-Market Loans § Trust and Estate Charitable Deductions p. 237

Issue 1 p. 239 § A – B Trusts § A – B – C Trusts ▪ Outdated A-B or A-B-C Trusts may not be necessary, and ▪ May significantly increase income taxes

Issue 1 pp. 239 -240 Basic Exclusion Amount § 2019 ▪ $11. 4 million - Individual ▪ $22. 8 million - Spouses electing DSUE § 2026 ▪ $5. 0 million –adjusted for inflation

Issue 1 p. 240 Proposed Regulations (Reg. 106706) Estate of decedent dying in 2026 or later may compute its estate tax credit using the higher of the: ▪ basic exclusion amount applicable to gifts made during lifetime, or ▪ basic exclusion amount applicable on date of death

Issue 1 p. 240 Ex. 6. 1 § Post 1976 gifts of $9. 0 million – no gift tax due to $10. 0 million basic exclusion § Dies after 2025 – (basic exclusion is $5. 0 million) the credit to be applied is based on the $9. 0 million basic exclusion when gifts made

Issue 1 p. 240 Basic Exclusion Amount Applicable Exclusion Amount equals Total Basic Exclusion plus Any DSUE Amount received from estate of predeceased spouse

Issue 1 p. 240 Prior Estate Planning A-B Trust § A Trust usually a marital deduction trust § B Trust usually a credit shelter trust § A-B-C Trust usually includes surviving spouse’s share May be unnecessary with increased exclusion amount and portability

Issue 1 p. 242 Making the Election § Refer to I. R. C. § 2010(c)(5)(A) § Executor must timely file (including extensions) a complete and properly prepared Form 706. § Even if NO estate tax is due. § If no return is required, not filing Form 706 opts out of portability

Issue 1 p. 243 Ordering Rules § First – the DSUE § Second – decedent’s own basic exclusion amount

Issue 1 p. 243 Deciding whether to Elect Portability § It is the client’s decision! § Regardless of decision made, do a written recordation of advising the client of the choice

Issue 1 p. 245 Practitioner Note: Nontax Use of Trusts 1. Protection for a surviving spouse 2. Protection from creditors 3. Lock in designation of heirs

Issue 1 p. 245 Marital Estates above or near the Combined Exclusion Amount § Use A-B or A-B-C Trusts § Especially if they have appreciating assets

Issue 1 p. 246 Generation-Skipping Transfer Tax Exclusion § Surviving spouse cannot use the deceased spouse’s unused GSTT

Issue 1 p. 247 State Estate Tax § Refer to Ex. 6. 11 § Refer to the Observation (page 247)

Issue 2 pp. 248 -250 Planning for use of the increased exclusion § 2019 Basic Exclusion = $11. 4 million § 2026 Basic Exclusion = $5. 0 million § Making gifts during periods with higher exclusion locks in the exclusion (to amount of gifts) if decedent dies after 2025 -- IF THE LAW IS NOT CHANGED!

Issue 3 pp. 250 -255 QBI Deduction for Trusts and Estates Trust or Estate may: 1. claim the QBI deduction at the entity level, or 2. pass the deduction through to its beneficiaries

Issue 3 p. 250 General Rules Two Treatments 1. A trust or estate is treated as a relevant pass-through entity (RPE) to the extent it allocates QBI and other items to beneficiaries 2. A trust or estate is treated as an individual to the extent it retains the QBI and other items

Issue 3 pp. 250 -251 Grantor Trust § The grantor computes the Section 199 A deduction as if that person directly conducted the activities of the trust.

Issue 3 pp. 250 -251 Nongrantor Trusts and Estates § QBI calculated at entity level § Expenses properly allocable to the business are to be allocated among trust or estate and beneficiaries § Relevant UBIA of depreciable properly (unadjusted basis immediately after acquisition) must be allocated among trust or estate and beneficiaries

Issue 4 pp. 256 -259 § Trust and Estate Tax Returns § When a trust or estate must file a tax return

Issue 4 p. 256 Final Income Tax Return § Final Form 1040 for the decedent § Form 56 needed if a court appointed executor must sign the return § If person filing is not the executor or the surviving spouse and a refund is owed, filer must submit Form 1310

Issue 4 pp. 256 -257 Estate Tax Return Form 706 must be filed: § if gross estate plus adjusted taxable gifts is greater than $11. 4 million (for 2019) or § if the executor wants to elect portability for the surviving spouse

Issue 4 p. 257 Basis Consistency § Basis of ANY property received from the decedent must be consistent (in the hands of the recipient) with the estate tax return and/or Form 8971 § Form 8971 is not required if Form 706 is filed ONLY to elect portability § Be aware of 30 -day filing rule

Issue 4 p. 257 Estate Income Tax Return Form 1041 must be filed: § if income is ≥ $600 or § if any beneficiary is a nonresident alien Due date is the same as for Form 1040 (Form 7004 for extension)

Issue 4 p. 258 Income in Respect of Decedent (IRD) items must be reported on Form 1041

Issue 4 p. 258 Trust Income Tax Return Form 1041 must be filed if: 1. Any taxable income 2. Gross income ≥ $600 3. A beneficiary is a nonresident alien

Issue 5 pp. 259 -262 Basis of Inherited Assets § Generally FMV on date of death § Date of death value determination § Basis allocation for jointly owned property

Issue 5 p. 259 Basis Rules Special rules for basis § I. R. C. § 2032 A – special use valuation of real property only § I. R. C. § 2031(c) – valuation of land subject to a qualified conservation easement

Issue 5 p. 259 Basis Rules § Typically, any accumulated losses (at date of death) are not deductible by the estate or a beneficiary § Unrealized gain not recognized § Refer to Ex. 6. 18

Issue 5 p. 260 Gifts within 1 Year of Death § Gift from decedent within 1 year of death and donor is the beneficiary of the gifted item § NO step-up in basis § Donor’s basis = decedent’s basis immediately before death

Issue 5 p. 260 Determining Value Fair market value or basis § Automobiles § Stocks and Bonds § Household and Personal Property § Real Property

Issue 5 pp. 260 -262 Jointly Owned Property Nonspousal Joint Tenants § Step-up if decedent’s share in property required to be in decedent’s gross estate § Refer to Ex. 6. 19 and Ex. 6. 20

Issue 5 pp. 260 -262 Jointly Owned Property (cont. ) Spousal Joint Tenants § Different rules apply to community and noncommunity property states § Ex. 6. 21 – noncommunity property § Ex. 6. 22 – community property

Issue 6 pp. 263 -264 Below-Market Loans § Made with interest below the prevailing market rate § I. R. C. § 7872 enacted to eliminate abuse § Demand Loans § Term Loans

Issue 6 p. 263 Definition of Below-Market § Demand loan – rate of interest below the Applicable Federal Rate (AFR) § Term Loan – amount of loan > present value of all the payments due

Issue 6 p. 263 Applicable Federal Rate (AFR) § Published monthly § Loan Terms ▪ Short-term (up to 3 years) ▪ Mid-term (3 to 9 years) ▪ Long-term (over 9 years) § Demand loan – short-term rate in effect for the period for which the forgone interest is being computed

Issue 6 p. 264 Exceptions to I. R. C. § 7872 1. 2. 3. 4. No principal purpose to avoid tax De Minimis exception (< $10, 000) Compensation Loan (< $10, 000) Gift Loans – imputed interest is limited to debtor’s net investment income and aggregate loan balance ≤ $100, 000

Issue 7 pp. 265 -270 Trust and Estate Charitable Deductions § Direct – I. R. C. § 642 § Indirect – Charitable Remainder Trust ▪ I. R. C. § 664(d)(1) - Charitable Remainder Annuity Trust (CRAT) ▪ I. R. C. § 644(d)(2) - Charitable Remainder Unitrust (CRUT)

Issue 7 pp. 265 -266 Outright Gifts § Estate charitable contribution deduction as: 1. an estate tax charitable contribution deduction on Form 1041 2. an estate tax charitable contribution deduction on Form 706 NOTE: one or the other, not both.

Issue 7 p. 266 Charitable Remainder Trusts § Charitable Remainder Annuity Trust (CRAT) § I. R. C. § 664(d)(1) § Four requirements for a CRAT

Issue 7 p. 266 Charitable Remainder Trusts § Charitable Remainder Unitrust (CRUT) § I. R. C. § 664(d)(2) § Generally the same re quirements as a CRAT except: 1. Annual payment is fixed percent, and 2. CRUT can receive additional contributions

Issue 7 p. 267 CRT Planning Properly structured CRT advantages 1. Avoid recognition of taxable gain on sale 2. Transfer generates an income tax deduction 3. Property transferred excluded from donor’s taxable estate 4. Distribution timing can avoid NIIT 5. Cash flow benefits available to donor

Issue 7 pp. 267 -269 Income Tax Deduction § Grantor receives an immediate income tax deduction § 3 step process for calculating value of the payments ▪ Refer to Ex. 6. 24 for calculating the charitable deduction for a CRAT ▪ Refer to Ex. 6. 25 for calculating the charitable deduction for a CRUT

Issue 7 p. 270 Estate Tax Deduction § If grantor is the income beneficiary and dies before end of term, part of trust’s value is included in estate (retained income interest) § If grantor is not the income beneficiary and dies before end of term, trust’s value is not typically included in estate

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