TAXES > Trusts (1041)

Taxation Of Trusts And Estates

Trust and estate income is normally taxed to the fiduciary (that is, to the trust or estate itself), if retained by the trust, or to the beneficiary, if distributed. Thus, if the fiduciary passes on income to the beneficiary, the trust or estate deducts the distributed income which then becomes taxable to the beneficiary. A special yardstick called "distributable net income" (DNI), is used to limit both the amount deducted by the trust or estate as a distribution and the amount taxed to the beneficiary. The income that is passed on to the beneficiary has the same tax attributes in the beneficiary's hands as when received by the fiduciary. Trusts and estates compute their tax under a separate, unfavorable tax rate schedule that quickly reaches the top marginal rate. Trusts and estates cannot use the tax tables to figure their tax. A foreign trust or estate is taxed as if it were a nonresident alien individual who is not present in the U.S. at any time, subject to special rules for trusts. Beneficiaries must report items consistently with the entity's return or notify IRS (on Form 8082) of the inconsistency.

Election To Treat Revocable Trust As Part Of Estate

For estates of decedents dying after Aug. 5, 1997, an election can be made to have an individual's revocable trust treated as part of his estate for income tax purposes for all tax years of the estate ending before a specified date that varies depending on whether an estate tax return is required. If no return is required, the date is two year after death; if one is required, it is the date that is six months after final determination of estate tax liability. Both the executor and the trust fiduciary must join in the election. Elect by attaching a specified statement to the estate's first Form 1041 (and by attaching a copy of the statement to the trust's first Form 1041 for the tax year ending after the decedent's death).

Estimated Tax Payments By Trusts And Estates

All trusts and certain estates must make estimated income tax payments (using Form 1041-ES and vouchers) under rules similar to those that apply to individuals, with certain adjustments. Trusts and estates generally have 45 days to compute their estimated tax payments under the annualization rules. Estates and grantor trusts that receive the residue of a probate estate are exempt from making estimated tax payments for their first two tax years after the date of decedent's death. Charitable trusts subject to tax under Code Sec. 511 are subject to corporate, not individual estimated taxes.

Trust's Termination

When a trust terminates, it ends as a separate tax entity and no longer reports gross income or claims the deductions, credits, etc. Though the duration of a trust may depend on the occurrence of a particular event under the trust instrument, e.g., the life beneficiary reaching a specified age, for tax purposes the trust will nevertheless continue for a reasonable period beyond this time to allow for the orderly completion of administration.

Estate's Termination

An estate's status as a separate taxpayer exists only during the period of administration and settlement of the estate. This period starts with the deceased's death and generally extends for the entire time actually required to perform the ordinary duties of administration, such as collecting assets and paying legacies and debts. If estate administration is unduly prolonged, IRS considers the estate terminated for tax purposes after expiration of a reasonable period (considering the estate's assets) for performance by the executor of all the duties of administration.

Gross Income Of Trusts And Estates

What would be gross income in the hands of an individual is gross income when received by a trust or estate - dividends, interest, rents, royalties, capital gains, ordinary gains, etc. Gross income includes income accumulated or held for future distribution under the terms of a will or trust, income that's currently distributable, income received by a deceased's estate during administration or settlement, and income that, in the fiduciary's discretion, pay be either accumulated or distributed.

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