Archive for Trusts
March 12, 2013 John R. Dundon II Corporation, Estate Tax, Estimated Taxes, Excise Tax, Extension, Paying Taxes, Penalty, Sub-chapter S, Tax Guidance & Preparation, Tax Relief, Trusts If your corporation, partnership or estate operates on a calendar year basis the tax return is due March 15th which is coming up! If you need additional time to file tax returns for these entities file IRS Form 7004 which is an application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns.
Filing this form by March 15th gives you an additional 5 or 6 months to file your actual tax documents. Instructions for this form are essential so be sure to read them.
If you contact me (or any tax practitioner worth their salt) to hit this deadline the first thing that you will be advised to do at this late date is to get this automatic extension request filed. If anything it alleviates the stress of rushing through the tax return AND you avoid the onerous late filing penalty.
IRS Notice 2011-82 makes available the ability for taxpayers to pass along their unused estate & gift tax exclusion amounts to their surviving spouse if an estate tax return is filed. This new portability election allows estates of married taxpayers to pass along the unused part of their exclusion amount ($5 million cap in 2011) to their surviving spouse,which in theory should eliminate the need to do silly things like re-title property etc.
It is expected that most estates of people who are married will want to make the portability election, including people who are not required to file an estate tax return for some other reason. The only way to make the election is by properly and timely filing an estate tax return on Form 706. As bizarre as this seems, there are no special boxes to check or statements needed to make the election. The estate tax return is due nine months after the date of death. Estates unable to meet this deadline can request an automatic six-month filing extension by filing Form 4768. Estates of those who died before 2011 are not eligible to make this election. Stay tuned in further regulation on the matter.
Under IRC §170(c)(2)(A) generally speaking when a trust uses its income to buy an asset and in a later year gives that asset to a charity it is allowed a charitable deduction. Chief Counsel Advice 20104202 stipulates however that if the deduction was not limited to the trust’s basis in the assets, the contribution of low-basis property would yield a double tax advantage because the trust would be able to avoid tax on the potential gain and it would be able to deduct not only the basis but also the gain from gross income.
In other words trusts generally speaking may take a charitable deduction for real property donated equal to the trust’s cost basis in the property assuming that the property in question was purchased with income generated from the trust.
For tax purposes a Simple Trust requires that all income generated by the trust be distributed each year to the trust’s beneficiaries. Even if a trust distributes all its income every year this alone does not necessarily make it a simple trust though. Understanding the trust document is important. If all income is not distributed the trust is essentially a complex trust, any net income after expenses is taxed in the trust at the trust’s tax rate. If distributed, the beneficiaries’ share of taxable income after expenses is reported on a K-1 and taxed on the beneficiaries respective returns at their respective tax rates.
A trust treated as a simple trust in year 1 can become a complex trust in future years if it doesn’t violate the trust agreement. I’ve seen this happen when the trust wishes to make charitable donations. A Simple Trust is prohibited from allowing its funds to be used for charitable purposes.
If the income is not distributed out of a simple trust annually, the Trustee has problems. That is where tax problems happen and I get called in. What I have learned is that ultimately the beneficiary may be taxed on the income whether it is distributed or not particularly when a simple trust becomes a complex trust without the beneficiaries grasping the tax realities of the change.
