...CHAPTER 20 INCOME TAXATION OF TRUSTS AND ESTATES SOLUTIONS TO PROBLEM MATERIALS Question/ Problem 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 *21 22 *23 24 *25 *26 27 28 29 *30 31 32 Learning Objective LO 1 LO 1 LO 1 LO 1 LO 1 LO 1 LO 1 LO 2 LO 2 LO 2 LO 2 LO 2 LO 3 LO 3 LO 2, 3, 5 LO 4 LO 4 LO 1, 4 LO 5 LO 5 LO 1 LO 1 LO 1 LO 2 LO 2 LO 1, 2, 3 LO 2 LO 2 LO 2 LO 2, 3 LO 2, 3 LO 3 Topic Creating a trust Parties to a fiduciary entity Fiduciary tax terminology Fiduciary tax terminology Pass-through entities: incidence of tax Fiduciaries and the AMT Simple versus complex trust; personal exemptions Determining taxable income: five-step approach Distributions of appreciated property Disallowance of § 212 deductions Cost recovery deductions of a fiduciary Charitable contributions of a fiduciary Functions of DNI Computing DNI Terminating a fiduciary entity Fiduciaries and education planning Grantor trust rules Fiduciary tax compliance Fiduciary tax planning Fiduciary tax planning Attributes of simple and complex trusts Fiduciary tax formula Fiduciary AMT computations Entity accounting income Computing entity accounting income Attributes of trusts and estates Income in respect of a decedent Charitable contributions Entity cost recovery Computing DNI, taxable income Computing DNI, taxable income Separate share rule 20-1 Status: Present Edition Unchanged Modified Unchanged Modified Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged Modified Unchanged...
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...Wills, Trusts, and Estates FIN 4004 Spring, 2013 CRN 13341 (MW 4:00-5:15pm) Jason Bryan Malone, Esq. 2117 Pamplin Hall Email: jbmalone@vt.edu Office Hours: MW 12:10pm-1:10pm (Additional hours will be posted on Scholar throughout the semester) (Please feel free to make an appointment or come by during other times) Text: Estate Planning for Financial Planners, 6th ed., Michael A. Dalton and Thomas P. Langdon Course Description: Estate Planning focuses on the efficient conservation and transfer of wealth, consistent with the client’s goals. It is a study of the legal, financial and non-financial aspects of this process, covering topics such as trusts, wills, probate, advanced directives, charitable giving, wealth transfers and related taxes. Course Objectives: At the end of this course, the student should be able to understand, explain, analyze and evaluate estate planning needs and taxation in order to recommend appropriate techniques for meeting estate planning and objectives, including without limitation: • Determine client estate planning needs and objectives, taking into account financial and non-financial (behavioral/social/emotional) aspects of estate planning • Understand the effects of the lack of estate planning, including state laws of intestacy • Project estate taxation and liquidity needs in various situations • Recommend appropriate and efficient methods of wealth transfer for a client’s situation, including...
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...FEDERAL WEALTH TRANSFER TAXATION: CASES AND MATERIALS FEDERAL WEALTH TRANSFER TAXATION: STUDY PROBLEMS SIXTH EDITION 2013 Supplement by PAUL R. MCDANIEL James J. Freeland Eminent Scholar in Taxation and Professor of Law University of Florida Levin College of Law JAMES R. REPETTI William J. Kenealy, S.J. Professor of Law Boston College Law School PAUL L. CARON Professor of Law Pepperdine University School of Law Herzog Summer Visiting Professor in Taxation University of San Diego School of Law FOUNDATION PRESS © 2013 © 2013 By FOUNDATION PRESS ISBN PREFACE This supplement is designed to update our casebook and accompanying study problems book: Federal Wealth Transfer Taxation: Cases and Materials (6th ed. 2009), and Federal Wealth Transfer Taxation: Study Problems (6th ed. 2010). We hereby grant permission to users of Federal Wealth Transfer Taxation to distribute copies of this supplement to students, either in hard copy or in electronic form. This supplement is current through August 1, 2013 and incorporates The American Taxpayer Relief Act of 2012 (Pub. L. No. 112-240, 126 Stat. 2313 (2013)) and The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Pub. L. No. 111-312, 124 Stat. 3296 (2010)). We want to thank Jack Bogdanski (Lewis & Clark) for his detailed comments on the prior edition of these books. This is the third update to Federal Wealth Transfer Taxation since the July 16, 2010 death...
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...CH 12 The scope of the estate tax Sec 2033 Section 2033 · Gross estate: Value of the property to extend of interest at time of death Section A · estate tax is excise tax: “tax included on the property” · Tax base must include the value of the property that most obviously is transferred (FUNCTION OF 2033) · Section 2033 includes (GROSS ESTATE) o Decedent’s securities o Bank deposits o Real state o Income earned before death are collectible by the estate § Rent § Interest § Dividends § Partnership profits § Refunds § Vested rights § Promissory notes (matured or not) § Insurance policies § Saleable (commercial) leasehold interest § Interest in rented property · By either tenants in common or one-half community. § Federal and State bonds are includable despite their exemption from other taxation either by their express terms or by law · REG 20.2033 o Descendant hold only legal title (trustee) under enforceable oral or written does not possess an interest taxable under section 2033. § Ex: agent o ONLY DIRECTLY OWNED PROPERTY · Principal reliance on judicial and administrative interpretation of Sec 2033’s simple language potentially would yield over inclusions “many” o There are not many limits o Limits must be established o Congress explicit responded what property interest that are to be taxed, eventhough they lied beyond the reach of 2033. § 2033- Base line § Section 2041 · in...
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...C:11-58 a. E&P, January 1 $155,000 Current year taxable income before distribution $40,000 Capital gain on distribution of land* 30,000 Minus: Federal income taxes [$7,500 + (0.25 x $20,000)] (12,500) 57,500 E&P before distribution $212,500 Minus: Cash distribution (100,000) Property distribution (100,000) E&P, December 31 $ 12,500 *E&P and tax gains are the same. Both distributions are fully taxable as dividends to Jeff and John in the amount of $100,000 each. John takes a $100,000 FMV basis in the land he receives. b. AAA, January 1 $125,000 Current year ordinary income $40,000 Capital gain on distribution of land 30,000 70,000 AAA before distribution $195,000 Minus: Cash distribution ( 97,500) Noncash distribution ( 97,500) AAA, December 31 $ -0- AE&P, January 1 $ 30,000 Minus: Remainder of cash and property distributions ( 5,000) AE&P, December 31 $ 25,000 Of each distribution, $97,500 is nontaxable assuming the shareholder has sufficient basis in his stock. The remaining $2,500 of each distribution is a dividend included in the shareholder’s gross income. John takes a $100,000 FMV basis in the land he receives. ...
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...Manual Income Taxation (2009 Edition) Chapter 1 True or False 1-1 1. True 2. False. Taxation covers person, properties, rights and transactions. 3. False. Person in taxation includes the concept of partnership, corporation, estate and trust. 4. True 5. False. Taxation as a legislative process is under the power of the legislative body, the Congress. 6. False. Taxation is the primary source of government revenue. Usually, the government resorts to borrowing if taxes collected are not sufficient to defray its budgetary requirements. 7. True 8. True 9. False. Basically, taxes imposed are based on the ability of the taxpayer to pay. 10. False. It is the primary obligation of the state to protect all the constituents regardless of whether they pay or not their tax liabilities. True or False 1-2 1. True 2. True 3. True 4. True 5. True 6. False. The President cannot delegate the power of taxation, since taxation is not vested in the President. Taxation is vested in the legislative body. 7. False. Taxation cannot be separated from the state. The moment a state exists, taxation also exists. 8. False. The making of tax law is undertaken ahead of the collection of taxes. 9. False. Levying refers to the making of tax laws. 10. False. Only the legislative body, the Congress, can grant tax exemptions. True or False 1-3 1. False. It is the legislative branch of the government that is vested with the power of taxation. 2...
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...Manual Income Taxation (2009 Edition) Chapter 1 True or False 1-1 1. True 2. False. Taxation covers person, properties, rights and transactions. 3. False. Person in taxation includes the concept of partnership, corporation, estate and trust. 4. True 5. False. Taxation as a legislative process is under the power of the legislative body, the Congress. 6. False. Taxation is the primary source of government revenue. Usually, the government resorts to borrowing if taxes collected are not sufficient to defray its budgetary requirements. 7. True 8. True 9. False. Basically, taxes imposed are based on the ability of the taxpayer to pay. 10. False. It is the primary obligation of the state to protect all the constituents regardless of whether they pay or not their tax liabilities. True or False 1-2 1. True 2. True 3. True 4. True 5. True 6. False. The President cannot delegate the power of taxation, since taxation is not vested in the President. Taxation is vested in the legislative body. 7. False. Taxation cannot be separated from the state. The moment a state exists, taxation also exists. 8. False. The making of tax law is undertaken ahead of the collection of taxes. 9. False. Levying refers to the making of tax laws. 10. False. Only the legislative body, the Congress, can grant tax exemptions. True or False 1-3 1. False. It is the legislative branch of the government that is vested with the power of taxation. 2...
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...Family Owned Business Estate Planning In this case study, as John’s financial advisor, I have been tasked with reducing, or eliminating the potential estate tax burden of John’s estate. Additionally, I am tasked with maximizing the amount of wealth transferred to John’s heirs. John, age 61, is married to Jane, age 60. He owns Victory Company, a family business professionally valued at $5.6 million. He and Jane have three children and seven grandchildren. One son, Paul, manages Victory Company and will someday own it. John's overall wealth is about $15 million. This includes the $5.6 million value of Victory Company, which nets $1.5 million before tax and after paying John a $300,000 salary plus liberal fringe benefits. After taxes, John earns about $400,000 to $600,000 more per year than he and Jane spend. The balance of John's wealth includes two homes (a main residence and a vacation home) worth a combined $2.7 million; $1.7 million in his 401(k) plan; cash assets and a stock and bond portfolio totaling $1.8 million; $2.9 million in income-producing real estate; and $300,000 in sundry assets. There also is $6.2 million in insurance on John's life that is now owned by an irrevocable life insurance trust (ILIT). This insurance includes a $1.2 million whole life policy and $5 million in 10-year term insurance with six years remaining in the term. Business This first thing I need to get a handle on is John’s company. The $5.6 million value of Victory Company represents over...
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...Estate and Gift Tax Outline Repetti Fall 2013 Boston College Law School Casebook: Federal Wealth Transfer Taxation, 6th Edition Table of Contents Filing Returns 3 Gift Tax: 3 Estate Tax: 3 Generation-Skipping Tax: 3 Statutes of Limitations, Interest, Penalties: 3 Computation of the Estate and Gift Tax 3 General Description of Gift Tax: 4 General Description of the Estate Tax: 4 Role of State Law 4 Scope of the Estate Tax 5 Beneficial Ownership and § 2033: 5 Interests Arising at Death 5 “Property” versus “Expectancy” 6 Bank Deposits, Checks, and Notes 6 Right to Accrued Payments 7 The Scope of the Gift Tax: §§ 2501 and 2511 7 Is There a “Transfer” of “Property?” 7 Interest-Free Loans and Rent-Free Use of Other Assets 8 When is the Transfer “Completed?” 8 Transferred Interest Incapable of Valuation 9 Indirect Transfers 10 What is a “Gift”? 10 Donative Intent and “Adequate and Full Consideration” 10 Transfers of Property in Satisfaction of Marital Rights 11 Dower and Curtesy Interests in the Gross Estate 11 Marital Rights as Consideration 11 Transfers Incident to Separation and Divorce 12 Transfers with Retained Powers and Rights 13 Transfers with Retained Life Estates: § 2036 13 Reciprocal Trusts 14 Retention of Right to Income from Property: § 2036(a)(1) 14 Retention of Possession or Enjoyment of the Property: §§ 2036(a)(1) and 2036(b) 14 Retention of Power to Designate Who Shall Possess or Enjoy the Property:...
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...Chapter 4- Mutual Funds and Other Investment Companies Why buy mutual fund: people are lazy if you are trading stocks you have to give basis data for transactions you make for takes but with a mutual fund they do it for you. Diversification ** an individual investor choosing a mutual fund should consider not only the fund’s stated investment policy and past performance, but also management fees and expenses.** 4.1 INVESTMENT COMPANIES Investment Companies do the following tasks: WHY MUTUAL FUNDS?? • Administration & record keeping (people don’t want to do it themselves) • Diversification & divisibility (diversified portfolio) • Professional management • Reduced transaction costs Investment Companies: Net Asset Value (the value of each share) What determines share price NAV!! • Net Asset Value ' Any fund totals up all the shares does the calculation and generates an NAV ' One time per day ' Used as a basis for valuation of investment company shares ' Selling new shares cash goes in ' Redeeming existing shares (liquidate stocks and send you cash back) cash goes out ' They can keep printing more shares Calculation: Market Value of Assets - Liabilities Shares Outstanding 4.2 TYPES OF INVESTMENT COMPANIES: Investment companies: either Units of trust or managed investment companies Unit Trusts: subset of investment company...
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...Chapter I:1 An Introduction to Taxation Discussion Questions I:1-1 The Supreme Court held the income tax to be unconstitutional in 1895 because the income tax was considered to be a direct tax. At that time, the U.S. Constitution required that an income tax be apportioned among the states in proportion to their populations. This type of tax system would be extremely difficult to administer because different rates of tax would apply to individual taxpayers depending on their states of residence. p. I:1 2. I:1-2 The pay-as-you-go withholding was needed in 1943 to avoid significant tax collection problems as the tax base broadened from 6% of the population in 1939 to 74% in 1945. Pay as you go permitted the federal government to deduct taxes directly out of an employee's wages. p. I:1-3. I:1-3 Under a progressive tax rate structure, the tax rate increases as the taxpayer's income increases. Currently, for 2011, tax rates of 10%, 15%, 25%, 28%, 33% or 35% apply depending upon the taxpayer's filing status and taxable income levels. Under a proportional tax rate or "flat tax" structure, the same tax rate applies to all taxpayers regardless of their income levels. Under a regressive tax rate structure, the tax rate decreases with an increase in income level. The concept of vertical equity holds that taxpayers with higher income levels should pay a higher proportion of tax and that the tax should be borne by those who have the "ability to pay." Thus, Congressman...
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...Chapter 20 True/False Indicate whether the statement is true or false. ____ 1. Tax planning motivations usually are secondary to other objectives in deciding whether to create a trust. ____ 2. A trust might be used by the parties to an impending divorce. ____ 3. Like a limited liability company, the fiduciary is a tax-reporting, but not a separate tax-paying entity. ____ 4. An estate’s income beneficiary generally must wait until the entity is terminated by the executor to receive any distribution of income. ____ 5. With respect to a trust, the terms creator, donor, and grantor are synonyms. ____ 6. Corpus, principal, and assets of the trust are synonyms. ____ 7. If provided for in the controlling agreement, a trust might terminate when the income beneficiary graduates with a law degree. ____ 8. The decedent’s estate must terminate within four years of the date of death. ____ 9. Trusts usually are required to use a calendar tax year ____ 10. A complex trust pays tax on the income that it retains and adds to corpus. ____ 11. A complex trust may incur a liability for the AMT. ____ 12. The first step in computing an estate’s taxable income is the determination of its gross income for the year. ____ 13. Generally, capital gains are allocated to fiduciary income, because they relate to investment assets. ____ 14. Gain or loss is recognized by a trust when it distributes a non-cash asset. ____ 15. Income...
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...Table of contents 1. Executive Summary .................................................................................................. 3 2. Service Policy and Disclaimers ................................................................................ 4 3. Family Profile ................................................................................................................. 6 4. Goals and Objectives .................................................................................................... 8 4.1. Short-‐term Goals ................................................................................................................ 9 4.2. Mid-‐term Goals .................................................................................................................... 9 4.3. Long-‐term Goals .................................................................................................................. 9 5. Risk Profile ................................................................................................................... 10 5.1. Risk Profile Conclusion .................................................................................................. 12 5.2. Risk Recommendation ......................................................
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...Table of Contents Chapter 1 Taxation overview---------------------------------------------------------------- 1 2 General principles ---------------------------------------------------------------- 8 3 Specific principles on gross income------------------------------------------- 12 4 Pension receipts and payments------------------------------------------------- 22 5 Double Taxation------------------------------------------------------------------ 29 6 General deductions----------------------------------------------------------------34 7 Expenditure-------------------------------------------------------------------------38 8 Capital allowances-----------------------------------------------------------------48 9 Leasing------------------------------------------------------------------------------ 60 10 Exemptions------------------------------------------------------------------------- 66 11 Partnership-------------------------------------------------------------------------- 71 12 Farmers------------------------------------------------------------------------------ 76 13 Miners------------------------------------------------------------------------------- 85 14 Exports------------------------------------------------------------------------------ 98 15 Capital gains------------------------------------------------------------------------ 101 16 Hire purchase-----------------------------------------------------------------------...
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...Tax Midterm Chapter 1: Taxation- Its role in decision making Taxation and the financial decision process * Taxation is a controllable cost * Tax cost = cost of doing business * Analyzed to determine which actions or activities have a greater/lesser impact on the resulting tax cost * Each alternative= different impact on the amount of tax and the timing of the payment of tax * Even if marketing decision = direct effect on the long term tax cost of the firm → thus on profits and value * Tax= important on any decision making * Tax costs are relevant when alternative strategies are being considered * Cash flow (CF) exists only on an after-tax basis * All CF= after tax * NPV compared and ranked * Shows the actual value of the individual/corporation * Analysis can’t be of value unless the real tax impact is included * Alternative action to minimize the tax impact * After tax = % of interest x (1 – Tax rate) * 5% dividend on the equity of a “public corporation” = not deductible to the business → after tax = 5% (real cost) * Net value to individual investor subject to 45% tax rate = 3.6% (after applying dividend tax credit) The fundamental income tax structure and its complexity Taxpayers * Individuals * Corporations * Trusts | Business & investment structures * Proprietorship * Corporation * Partnership * Limited partnership * Joint venture...
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