Form 1041 Reporting of Pecuniary Property-in-Kind Distributions: Tax - PowerPoint PPT Presentation

FOR LIVE PROGRAM ONLY Form 1041 Reporting of Pecuniary Property-in-Kind Distributions: Tax Impact on Trusts and Estates WEDNESDAY , MAY 3, 2017, 1:00-2:50 pm Eastern IMPORTANT INFORMATION FOR THE LIVE PROGRAM This program is approved for 2 CPE credit hours . To earn credit you must: • Participate in the program on your own computer connection (no sharing) – if you need to register additional people, please call customer service at 1-800-926-7926 x10 (or 404-881-1141 x10). Strafford accepts American Express, Visa, MasterCard, Discover . • Listen on-line via your computer speakers. • Respond to five prompts during the program plus a single verification code . You will have to write down only the final verification code on the attestation form, which will be emailed to registered attendees. • To earn full credit, you must remain connected for the entire program. WHO TO CONTACT DURING THE LIVE EVENT For Additional Registrations : -Call Strafford Customer Service 1-800-926-7926 x10 (or 404-881-1141 x10) For Assistance During the Live Program : -On the web, use the chat box at the bottom left of the screen If you get disconnected during the program, you can simply log in using your original instructions and PIN.

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Form 1041 Reporting of Pecuniary Property-in-Kind Distributions May 3, 2017 Lawrence H. McNamara, Jr., CPA, FVS, TEP Bend, Ore. larry@lhmcpa.com Klaralee R. Charlton, J.D., LL.M. Katz Look & Onorato, Denver kcharlton@thedenverlawyers.com

Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

Form 1041 Reporting of Pecuniary Property-in-Kind Distributions 5 S T R A F F O R D P U B L I C A T I O N S , I N C M A Y 3 , 2 0 1 7 K L A R A L E E R . C H A R L T O N , J . D . L L . M . K A T Z , L O O K & O N O R A T O , P . C . D E N V E R , C O L O R A D O K C H A R L T O N @ T H E D E N V E R L A W Y E R S . C O M 3 0 3 - 8 3 2 - 1 9 0 0 Klaralee R. Charlton | Katz, Look & Onorato, P.C.

Taxation of Trusts and Estates 6 Klaralee R. Charlton | Katz, Look & Onorato, P.C.

Taxation of Trusts and Estates 7 Total Income Minus Deductions = Adjusted Total Income Minus Income Distribution Deduction Minus Exemption = Taxable Income Klaralee R. Charlton | Katz, Look & Onorato, P.C.

Income Distribution Deduction 8 Klaralee R. Charlton | Katz, Look & Onorato, P.C.

Income Distribution Deduction 9 Klaralee R. Charlton | Katz, Look & Onorato, P.C.

Taxation of Trusts and Estates 10 Trust $300 Dividends ($50 Attorney Fees) Adjusted Total Income $250 Distributions to Beneficiaries $500 Beneficiary 1 Beneficiary 2 K-1 for $125 Dividend Income K-1 for $125 Dividend Income Klaralee R. Charlton | Katz, Look & Onorato, P.C.

Income Taxation of a Pecuniary Bequest 11 Klaralee R. Charlton | Katz, Look & Onorato, P.C.

Pecuniary Bequest Factors 12 Bequest must be provided for in the Document 1. 2. Identify a sum of money (or property) Paid in 3 installments or less 3. I.R.C. § 663; C.F.R. § 1.663-1 Klaralee R. Charlton | Katz, Look & Onorato, P.C.

Example Language 13 Standard Pecuniary Bequest Language “Upon my death, my Trustee shall distribute the sum of Ten Thousand and 00/100 Dollars ($10,000) to each of my then living grandchildren, outright and free of trust. ” OR “Upon my death, my Personal Representative shall distribute the sum of Ten Thousand and 00/100 Dollars ($10,000) to my neighbor, Fred Rodgers. ” Klaralee R. Charlton | Katz, Look & Onorato, P.C.

Example Language 14 “Upon my death, my Personal Representative shall distribute my house to my son and a sum of money equal to the value of my house to my daughter. ” Both the distribution of the house and of the money qualify for treatment under I.R.C. § 663. Klaralee R. Charlton | Katz, Look & Onorato, P.C.

Bequests that Will Not Qualify 15 The amount of money or identity of the specific 1. property is not ascertainable under the terms of the governing document as of the date of death; 2. An amount which can be paid or credited only from the income of an estate or trust; An annuity; 3. 4. A residuary estate or the corpus of a trust; or A bequest paid in a lump sum, if the gift or bequest 5. is required to be paid in more than three installments under the governing instrument. Klaralee R. Charlton | Katz, Look & Onorato, P.C.

Example Language (not a pecuniary bequest) 16 “Upon my death, my Trustee shall distribute the sum of Ten Thousand and 00/100 Dollars ($10,000) to each of my then living grandchildren, outright and free of trust each year for 5 years. ” >3 Installments OR “Upon my death, my Personal Representative shall distribute the remainder of my estate to my neighbor, Fred Rodgers. ” Residuary Klaralee R. Charlton | Katz, Look & Onorato, P.C.

Example Language (not a pecuniary bequest) 17 “Upon my death, my Personal Representative shall distribute to my spouse money or property equal to 50% of my adjusted gross estate. ” Identity at DoD “My Trustee shall distribute the sum of Ten Thousand and 00/100 Dollars ($10,000) from income to each of my grandchildren when they reach age 25. ” Payable Solely from Income Klaralee R. Charlton | Katz, Look & Onorato, P.C.

Basics of Distributable Net Income (DNI) 18 Trust $300 Dividends ($50 Attorney Fees) Adjusted Total Income $250 Distributions to Beneficiaries $500 Beneficiary 1 Beneficiary 2 K-1 for $125 Dividend Income K-1 for $125 Dividend Income Klaralee R. Charlton | Katz, Look & Onorato, P.C.

DNI and Specific Pecuniary Bequest 19  Simple Will distributes $10,000 to Friend and divides remainder 50/50 between Son and Daughter  Estate assets on date of death include:  Savings Account $50,000  House $220,000  IRA Payable to Estate $10,000 Klaralee R. Charlton | Katz, Look & Onorato, P.C.

DNI and Specific Pecuniary Bequest 20  During administration the house is sold for $250,000, the $10,000 IRA is cashed in, and the $50,000 savings account earns $100 interest.  Administration expenses totaled $3,000.  The administration is completed in one year. $10,000 cash is distributed to Friend. $297,100 cash is distributed between Son and Daughter. Klaralee R. Charlton | Katz, Look & Onorato, P.C.

DNI and Specific Pecuniary Bequest 21 On the Estate’s Form 1041, the following will be reported:  Line 1, Interest Income $100  Line 4, Capital Gain/Loss $30,000  Line 8, Other Income (1099R) $10,000  Line 14, Attorney Fees ($3,000)  Line 17, Adjusted Total Income $37,100 Klaralee R. Charlton | Katz, Look & Onorato, P.C.

DNI and Specific Pecuniary Bequest 22 The Estate will take an income distribution deduction of $37,100 on account of the distributions made to Son and Daughter. The estate will have a zero tax liability. IRC § 661. The Adjusted Total Income of $37,100 will be divided equally between Son and Daughter on the Final Schedule K-1 resulting in each reporting $18,550 of income on their personal returns. IRC § 662. The Friend who received the $10,000 specific pecuniary bequest will not receive a Schedule K-1 and will report NO income on his personal return. IRC § 663. Klaralee R. Charlton | Katz, Look & Onorato, P.C.

Basics of Distributable Net Income (DNI) 23 Trust Friend Adjusted Total Income $37,100 $10,000 No Schedule K-1 Distributions to Residuary Beneficiaries $297,100 Son Daughter K-1 for $18,550 Income K-1 for $18,550 Income (Ordinary, Cap Gain, Int) (Ordinary, Cap Gain, Int) Klaralee R. Charlton | Katz, Look & Onorato, P.C.

Interest Income on a Pecuniary Bequest 24  Under local law, the estate/trust may have to pay interest to the recipient of a pecuniary bequest if the bequest is not paid within a designated time period.  No Income Distribution Deduction may be taken by the entity on account of the interest paid. Rev. Rul. 73-322.  Beneficiary must report interest portion as Income on its own income tax return. Klaralee R. Charlton | Katz, Look & Onorato, P.C.