2020 NATIONAL INCOME TAX WORKBOOK

CHAPTER12: TRUSTS AND ESTATES

P. 411

Definition of a Gift

Gift Tax Exclusion

Basis in Gifted Property

Gifts to a Spouse

When to File Form 709

Planning for Use of the Increased Basic Exclusion

Types of Trusts

Nongrantor Trust Reporting

CHAPTER 12: TRUSTS AND ESTATES P. 399

2020 $11,580,000 ($23,160,000 married)

2026 $5,000,000 ($10,000,000 married) indexed for

inflation◦ Final regulations provide clarification

NOTE: laws could change pre-2026 but gifting

now removes appreciation

ISSUE 6: PLANNING FOR INCREASED EXCLUSION P. 411

Regs say gifts won’t be called back

Ex. 12.23 $6M exclusion, $15M estate. Uses husband’s DSUE and tax on remaining. Approx. $1,420,000 tax

Ex. 12.24 same facts but $8M gifts to trusts for children. 7M estate and no remaining exclusion. After DSUE $620,000 tax

GIFTS TO CHILDREN PP. 411-412

USE IT OR LOSE IT

Ex. 12.25 Ahmed made 4M gifts. 6.8M basis

exclusion (BE) when he dies. Amount of gifts less

than basic exclusion amount – estate tax

calculated based on BE amount at time of death

GIFTS TO CHILDREN CONT. P. 412

Transfers w/in 3 years of Date of Death (D.O.D.) included

Transfers with retained interests or control included

Self-settled trust may not be completed gift, irrevocable

Jurisdiction where self-settled trusts not subject to creditor’s claims (e.g. Michigan) and no retained interest

GIFTS TO SELF P. 412

Spouses establish trusts for each other

Watch out for the reciprocal trust doctrine

Ex. 12.26 Mary and Gary create identical trusts –disregarded

Look at:

When created, same trustees, same assets, prearranged plan, same beneficiaries

GIFTS TO SPOUSE PP. 412-413

See Levy v. Commissioner

Ex. 12.27 Jerry and Felicia create trusts for each other. Different amounts, different assets. Different dates. Felicia has POA that Jerry doesn’t have. If separate and no retained powers, can use increased basic exclusion amounts.

NOTE: Inclusion gets step-up in basis

GIFTS TO SPOUSE CONT. P. 413

Final regs state that if DSUE elected during increased BE, won’t be reduced

when BE decreases

Example 12.28 Carol died in 2019 and estate elected portability of 11.4M DSUE to

husband Wayne. Wayne dies when BE is $6,800,000. Credit calculated based on

the 11.4M DSUE plus Wayne’s BE amount.

NOTE: Changes in laws, changes in estate values possible, ADVISE RE ELECTING

PORTABILITY

Ex. 12.28 shows DSUE applied first to taxable gifts (before donor’s BE amount)

USE OF THE DSUE PP. 414-415

Deceased Spousal Unused Exclusion (DSUE) can be a reason to file form 706 with

the election to carry it to the spouse’s estate return. What is the amount over

which the financial planner should consider filing?

A. $11,580,000, the current limit as adjusted by inflation

B. $5,000,000, the 2026 potential exclusion

C. $15,000, yearly gift tax exclusion

POLLING QUESTION CH. 12 B NUMBER 1

KEY TERMS:

Grantor – creates the trust

Trustee – holds legal title and administers the trust

Trust property – assets of the trust

Beneficiary – receives the benefits of trust property

ISSUE 7: TYPES OF TRUSTS PP. 415-416

Avoid probate, facilitate administration, privacy

REVOCABLE TRUSTS P. 416

Estate planning, charitable gifting, asset protection

IRREVOCABLE TRUSTS P. 416

Personal exemption

◦$300 simple

◦$100 complex

Simple is nongrantor trust that

requires all income distributed currently

does not provide for charities

does not distribute principal

Complex is not simple, not grantor

SIMPLE AND COMPLEX TRUSTS P. 417

IRC Sections 673-678

◦ E.G. section 676 revocable trust

Deemed owner – usually grantor

IRC Section 673: Grantor has more than 5% reversionary interest

IRC Section 674: Power to control beneficial enjoyment

◦ 674(a) grantor or nonadverse party can direct disposition

◦ E.g. add or remove beneficiaries, shift interest, determine distributions

◦ IRC 674(b) exceptions

GRANTOR TRUSTS PP. 417-418

IRC Section 674(c) trustee who isn’t the grantor, or related or subordinate, can

have power to determine distributions. Not the power to add beneficiaries.

Section 674(c) trustee who isn’t grantor or spouse can have power over income.

Language to cause grantor trust status

GRANTOR TRUSTS CONT. P. 418

IRC Section 7675 cause grantor trust status if

◦Power to deal w/ trust assets for less than full consideration

◦Power to borrow w/out adequate interest or security

◦Borrowing trust funds

◦Administrative nonfiduciary powers (list on P. 419)

ADMINISTRATIVE POWERS P. 418

IRC Section 677 power to use income for the grantor’s benefit

IRC Section 678 power to vest income or principal in himself/herself

◦Person with the power treated as the owner if grantor isn’t

GRANTOR TRUSTS CONT. P. 419

1040 instead of 1041

Owned by one grantor or other person – Optional Methods 1 or 2

Owned by two or more grantors or other persons – Optional Method 3

Regular method

◦ Complete entity info part of 1041

◦ Attach statement

Ex. 12.29 John and Abby, spouses, have revocable trust. Trust sold stock. Regular

method, attach schedule to 1041 showing each separate transaction.

GRANTOR TRUST REPORTING P. 419-421

Report beneficiary’s share of income,

deductions, credits on Form 1041 Schedule

K-1. Figure 12.2 p.422 K-1

ISSUE EIGHT: NONGRANTOR TRUST REPORTING P. 421

Attach K-1 to 1041 and give copy to beneficiary

Beneficiary doesn’t file K-1

By April 15 for calendar year trusts◦15th day of the 4th month for fiscal year trusts

Form 7004 for extension

NOTE: 2020 deadlines past for 2019 1041s

FILING SCHEDULE K-1 P. 423

Beneficiary reports K-1 items on his/her return

Generally same way trust reports

Page 2 shows where to report

Figure 12.3 (P. 424)

INCLUSION IN INCOME P. 423

Asterisk (*) on K-1 indicates attached statement

Beneficiary includes income in tax year in which trust’s tax year ends

E.g. trust tax year ends July 31, 2020 and beneficiary’s ends December 31, 2020,

include income on 2020 return.

Special rules for deceased beneficiaries.

REPORTING CONT. P. 425

Reporting statements must be attached to K-1

Code I - *STMT

Separately identify

◦ Qualified income, gain, deduction, loss

◦ W-2 wages

◦ UBIA of qualified property (Unadjusted Basis immediately after acquisition)

◦ PTP items – Publicly Traded Partnership

◦ REIT dividends – Real estate Investment Trust

Also report SSTBs, aggregations, coop amounts

SCHEDULE K-1 AND QBI P. 425

Statement A – QBI items, W-2 wages, UBIA, PTP

items and REIT dividends

Statement B – Aggregations

Statement C – Payments from cooperatives and

allocable 199A(g) deduction

SCHEDULE K-1 AND QBI CONT. P. 425

Is the preparer able to test the numbers as reasonable from the 1041 K-1

Qualified Business Income (QBI) Statements A, B, and C?

1. Yes

2. No

3. Rules are complicated

POLLING QUESTION CH.12 B NUMBER 2

QUESTIONS?