Income Taxation of Trusts and Estates
Calfee
Fall 2011
Introduction
What is a Decedent’s estate?
-is the property that someone leaves when they die.
Intestate v. Testate Distribution
-Intestate Succession is determined by State law.
-Administrator deals with the property.
-Testate
-the Will says how person’s property will be distributed.
-the Personal Representative gathers the property and administrates the will.
-the lawyer drafting the will may name himself the Personal Representative.
Requirements to be Personal Representative (Fla. Stat. 733.302):
-to be a personal representative, you have to have sui juris; meaning you have to be a resident or corporation of Florida unless relative to testator, 18 years or older, and no felony conviction. Fla. Stat. § 733.302, 733.303.
-Persons not qualified is someone mentally or physically unable to do job; someone who is under age 18; or someone with a felony.
-Can a non-resident be a Personal Representative?
-Pursuant to Fla. Stat. 733.304 yes if the person is related to testator.
-Trust Companies pursuant to Fla. Stat. 733.305 can act as personal rep.
-Family Trust Companies are big business.
-What are the fees a Personal Representative may earn?
-What is trust fee schedule of Corporate Fiduciary?
-How long can an estate stay open/live?
-an estate can stay open for 1 year for administration. An estate’s birth is on date of death. (Probate Rule 5.400)
-an estate can be open up to 27 months if Federal Estate Tax is due.
-must get court permission for an extension (over 27 months).
-an estate is a person, it has its own Tax ID.
Trust
-Requirements of Trust (Statutory: Fla. Stat. 736.0402):
1. Grantor/Settlor has capacity to create trust
2. Trustee
-Requirements to be Trustee:
-Duties of Trustee:
1-Trustee must notify all qualified and contingent beneficiaries of irrevocable trust within 60 days after creation of irrev. trust.
2-Trustee must make accountings available to beneficiaries.
-Uniform Trust Code Sec. 105.
-Fla. Stat. 738.08135
-Trustee must disclose:
1-identity of trust
2-time period of trust
3-disbursements and receipts for income and principal.
4-gain and losses in value of property.
5-carry value/cost AB.
6-administrative charge paid.
3. Beneficiary
-Types:
1. Income Beneficiary
-Mandatory Income
-for life, for X number of years, upon an event.
-Discretionary Income
2. Remainder Beneficiary
3. Corpus Invasion
-Mandatory or Discretionary
4. Intent to Create trust
5. Must be a transfer of property to Trustee (Fla. Stat. 736.0401)
-property must be identified.
-a person can be grantor, trustee, and beneficiary if there is someone else who is also a beneficiary.
-Types of Trusts:
Testamentary
Is always irrevocable.
Inter Vivos
Revocable
i. Default rule in Florida is that trust is revocable pursuant to Fla. Stat. 736.0602.
Irrevocable
Trust Modification Rules
How can a person make a trust always irrevocable? Can a trust make the modification rules inoperable?
How long may a trust last in Florida?
-Rule Against Perpetuities used to be the common law in Florida.
-Now, a trust may last 360 years in Florida.
Florida Uniform Principal and Income Act (UPIA)
-provides a set of rules of what to do when a Trustee has a receipt or a disbursement.
-designed to take into account commercial transactions; i.e. derivatives and options.
Steps to Allocating b/t Principal and Income:
Read the trust document.
A trust may diverge from the UPIA in that a trust may say how to allocate income and principal. Fla. Stat. 738.103(1)(a). So, read trust document.
Look for discretionary language.
A trust may grant a trustee complete discretionary power to allocate principal and income. Fla. Stat. 738.103(1)(b). So, look for discretionary language.
Look at statute.
If a trust does not give discretionary powers to Trustee or does not state how to allocate principal and income, then follow the rules of the UPIA. Fla. Stat. 738.103(1)(c). So, look at the statute.
Principal is default.
If UPIA does not tell you how to allocate principal or income, then add receipt or charge disbursement to principal. Fla. Stat. 738.103(1)(d). So, if nothing in statute, then go to principal.
Problem 1
-we have an inter vivos irrevocable trust with the following assets:
1-IBM stock
-Q: how is stock transferred into the trust?
-A: you have to read the stock certificate (look for restrictions). Follow instructions on back of certificate. Receive the physical stock certificate. You can also transfer the stock electronically.
-What if transforer wanted all IBM Stock to go to Income instead of Principal? Yes!
-Grantor is allowed to do this b/c Fla. 738.103(1)(a) says UPIA is default rules and that trust may diverge from these default rules.
2-Rental Property
-Does transfer occur when deed is given to Trustee? Or, does deed have to be recorded for transfer to be complete?
-this is important to determine when trust starts.
-recording is not required; instead just need to give deed to trustee.
e price = income.
-Fla. Stat. 738.503(2) is used to determine 9800 is principal.
11-Interest from Bond
-Fla. Stat. 738.503(1) says that interest received shall be allocated to income without any provision for amortization of premium.
-this means that if you receive $600, but $200 is return of premium paid on bond, that $200 is not allocated to income, only the $400 is allocated to income.
-this shows the advantage of buying bonds at premium.
Charges and Expenditures
12-Trustee’s Commission
-Fla. Stat. 738.701(1) and (1)(a) says to bifurcate commission b/t both principal and income; meaning ½ to each.
13-Depreciation on Rental Property
-Fla. Stat. 738.703
-Depreciation for Tax Purposes:
1. Cost Basis
2. Useful Life (27.5 years for residential rental property)
3. Mid-Month Convention
4. Straight-Line Method
-Depreciation for Financial Accounting (GAAP):
1. Cost Basis
2. Useful Life
3. Methods (straight line, double declining balance, etc)
-Depreciation for Fiduciary Accounting Purposes (UPIA):
1. Cost Basis is for FMV (thus, 600k).
2. Under Fla. Stat. 738.703(2), a trustee may transfer to principal a reasonable amount of the net cash receipts from a principal asset that is subject to depreciation, but may not transfer any amount for depreciation:
(a) of the portion of real or personal property used for personal use. (same rule as for taxes, meaning property must be used in trade or business),
(b) during the administration of a decedent’s estate, or
-generally estate lasts just for 12 months.
(c) under this section if the trustee is accounting under Sec. 738.403 for the business or activity in which the asset is used.
-738.403 allows for Trustee to keep separate accounting records for certain businesses.
-under 738.403(3)(d) says management of rental properties (what does it mean by plural ‘properties’).
-a Trustee can hold back more for depreciation under Sec. 738.403 b/c trustee can hold back more for working capital, acquisition or replacement of fixed assets, and reasonably foreseeable needs of the business or activity.
-the amount held back is limited by ‘net cash receipts.
