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This page contains information about selected terms and concepts used in SOI's Income from Trusts and Estates Study articles and tables.
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Adjusted gross income
Adjusted gross income (AGI) is total income less the amount of the exemption and certain eligible deductions.
Adjusted gross income is total income less the administration costs of the estate or trust, the income distribution deduction, the amount of the exemption, the domestic production activities deduction, and the net operating loss deduction (NOLD) claimed on line 15a.
Allowable miscellaneous deductions
Allowable miscellaneous deductions are expenses for the production or collection of income, including investment advisory fees and subscriptions to investment advisory publications.
According to the 2009 Tax Year Instructions for Form 1041, “miscellaneous itemized deductions are deductible only to the extent that the aggregate amount of such deductions exceeds 2% of adjusted gross income.”
Source: Form 1041, Line 15b (2009 revision)
Attorney, accountant, and return preparer fees
Fees paid to attorneys, accountants and return preparers in exchange for their services performed on behalf of the trust are a deductible expense.
Source: Form 1041, Line 14 (2009 revision)
Bankruptcy estate - Chapter 7
A Chapter 7 bankruptcy estate contains all assets owned by an individual when they file for bankruptcy under Chapter 7 of the Bankruptcy Code, otherwise known as a liquidation bankruptcy.
Bankruptcy estates are created when an individual files a bankruptcy petition with the United States Bankruptcy Court under Title 11 of the United States Code. A Chapter 7 Bankruptcy resolves debt by appointing a trustee to sell the debtors’ possessions and distribute any proceeds to creditors. Bankruptcy estates contain all of the debtors’ property at the time of filing and remain in existence until all debt is paid for Chapter 7 filers. For more information on Bankruptcy estates, see IRS Publication 908, Bankruptcy Tax Guide.
Bankruptcy estate - Chapter 11
A Chapter 11 bankruptcy estate contains all assets owned by an individual when they file for bankruptcy under Chapter 11 of the Bankruptcy Code, otherwise known as a reorganization bankruptcy.
Bankruptcy estates are created when an individual files a bankruptcy petition with the United States Bankruptcy Court under Title 11 of the United States Code. Individual debtors may file under Chapter 11, which allows for a reorganization of assets as well as a temporary reprieve from creditors. During the reorganization, debtors must work to decrease their debt-to-asset ratios. Bankruptcy estates contain all of the debtors’ property at the time of filing and remain in existence until Chapter 11 filers can resume responsibility for their debts. For more information on Bankruptcy estates, see IRS Publication 908, Bankruptcy Tax Guide.
Business income (less loss)
Business income (less loss) is the sum of all income and expenses which are the result of a business operated by the trust or estate.
An activity qualifies as a business if the primary purpose for engaging in the activity is for income or profit and the activity occurs with continuity and regularity. The income and expenses which result from a business are also reported on Form 1040 Schedule C, Profit or Loss from a Business.
Source: Form 1041, Line 3 (2009 revision)
Capital gain (less loss)
Capital gain (less loss) is the gain or loss that results from the sale of capital assets by the trust or estate.
Capital assets include most things that it is possible to own and use for personal or investment purposes. Capital gains and losses are also reported on Form 1040 Schedule D, Capital Gains and Losses. For more information on the distinction between capital and noncapital assets, refer to IRS Publication 544, Sales of Other Dispositions of Assets.
Source: Form 1041, Line 4 (2009 revision)
Charitable distributions deduction
Charitable distributions deductions are any part of the estate or trust that is paid for a charitable purpose.
Acceptable charitable purposes are specified in section 170(c) of the Internal Revenue Code. It is not necessary that the charitable organization be created or organized in the United States.
Source: Form 1041, Line 13 (2009 revision)
A complex trust is any trust that either retains income, makes charitable distributions, or distributes amounts from corpus.
The corpus of a trust consists of the original assets transferred into the trust. Often referred to as the body of the trust, the corpus may generate income streams.
A decedent’s estate is created at the time of death and contains all of the decedent’s property at the time of death until they are allocated to creditors and beneficiaries.
The decedent’s will generally acts as the fiduciary instrument that assigns an executor and determines beneficiaries. The estate typically exists for a short time because the sole purpose of the estate is to allocate all of the assets. Once the executor of a decedent’s estate resolves all debts, including taxes owed, and distributes any remaining assets to designated beneficiaries, the estate is terminated.
Distributable net income (DNI)
Distributable net income (DNI) is the income available for distribution from a decedent’s estate or trust.
Distributable net income (DNI) acts as a limit to the deduction that fiduciaries can take for amounts distributed to beneficiaries. DNI is determined on Schedule B of Form 1041 and is calculated by modifying the value of taxable income of the estate or trust. Generally, this modification includes adding the values of the distribution deduction, fiduciary income tax exemption, and tax-exempt interest and subtracting net capital gains.
Source: Form 1041, Schedule B, Line 7 (2009 revision)
Electing Small Business Trust (ESBT)
An electing small business trust (ESBT) is a trust in which beneficiaries are considered shareholders of a subchapter S corporation.
Special rules apply when figuring the tax on the S portion of an ESBT. The S portion of an ESBT is the portion of the trust that consists of stock in one or more S corporations and is not treated as a grantor type trust. The tax on the S portion is entered to the left of Form 1041, Schedule G, line 7 and is included in the total tax on Schedule G, line 7.
Estate tax deduction
The estate tax deduction is equal to the value of tax paid for estate or trust income that was previously included in a decedent’s income.
The estate tax deduction is equal to the value of tax paid on the Form 706, Federal Estate Tax Return, for estate or trust income that was previously included in a decedent’s gross income.
Source: Form 1041, Schedule B, Line 19 (2009 revision)
Estimated and applied payments
Estimated payments are estimated tax payment made with Form 1041-ES, Estimated Income Tax for Estates and Trusts. Applied payments are overpayment made on previous Forms 1041 that is applied to this year’s tax.
Estimated and applied payments are the amount of any estimated tax payment made with Form 1041-ES plus the amount of any overpayment made from the previous year’s Form 1041 return that was applied to the current year’s estimated tax.
Source: Form 1041, Line 24a (2009 revision)
Estimated tax payments allocated to beneficiaries
Estimated tax payments allocated to beneficiaries are any portion of the estimated tax treated as a payment of estimated tax made by beneficiaries.
The trustee (or executor, for the final year of the estate) may elect under section 643(g) of the Internal Revenue Code to have any portion of its estimated tax treated as a payment of estimated tax made by a beneficiary or beneficiaries. This election is made on Form 1041-T, Allocation of Estimated Tax Payments to Beneficiaries.
Source: Form 1041, Line 24b (2009 revision)
Estimated tax penalty
The estimated tax penalty is the result of underpayment of estimated tax liability.
See Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts, to determine whether the estate or trust owes a penalty and to determine the amount of the penalty.
Source: Form 1041, Line 26 (2009 revision)
Fiduciaries of trusts and estate may be entitled to a standard exemption whereby a portion of taxes are forgiven.
The size of this exemption is determined based on the type of entity. The value of the fiduciary income tax exemption is adjusted for inflation annually and ranged from zero to $3,500 for Tax Year 2008.
Source: Form 1041, Line 20 (2009 revision)
Farm income (less loss)
Farm income (less loss) is any income and expenses related to the estate or trust’s operation of a farm.
Federal income tax withheld
Federal income tax withheld is a credit that can be claimed for federal income tax withheld on income received by an estate or trust.
The federal income tax withheld credit is available for federal income tax withheld (and not repaid) by an employer on wages of a decedent received by the decedent’s estate, a payer of certain gambling winnings, or a payer of distributions from pensions, annuities, retirement plans, etc. received by a decedent’s estate or trust.
Source: Form 1041, Line 24e (2009 revision)
Federal telephone excise tax refund
The Federal Telephone Excise Tax Refund (TETR) was available on tax year 2006 federal income tax returns to refund excise taxes collected on long distance telephone services billed between March 2003 and July 2006.
A fiduciary is charged with holding, investing, and distributing the assets of an estate or trusts.
Fiduciaries of trusts are often referred to as “trustees,” while fiduciaries of estates are generally referred to as “executors” or “administrators.” A fiduciary may be an individual or group of individuals, or an entity, such as a bank. Each has a legal responsibility to both manage the property of the estate or trust and to ensure that all transactions, including distributions, conform to estate or trust documents as well as applicable laws. In exchange for their services, fiduciaries often receive a fee.
Fiduciary Accounting Income (FAI)
Fiduciary accounting income is a portion of gross income and is defined by guidelines included in the governing instrument as well as the law.
Generally, fiduciary accounting income does not include capital gains, which are considered to be apportioned to corpus by many trust instruments as well as State laws.
Fiduciary fees are the deductible fees paid or incurred to the fiduciary for administering the estate or trust during the tax year.
Source: Form 1041, Line 12 (2009 revision)
A grantor is the individual who previously owned and subsequently transferred the assets comprising the corpus into the trust.
A grantor trust occurs when some or all powers or ownership benefits are retained by the trust grantor.
A grantor may retain power or ownership benefits over all the trust assets or over some specific portion. According to the 2009 Tax Year Instructions for Form 1041 “in general, a grantor trust is ignored for tax purposes and all of the income, deductions, etc., are treated as belonging directly to the grantor. This also applies to any portion of a trust that is treated as a grantor trust.”
The Internal Revenue Code defines gross income as all income from whatever source derived.
Gross income includes (but is not limited to) compensation for services, gross income derived from business, gains derived from dealings in property, interest, rents, royalties, dividends, and annuities. Gross income, unlike total income, does not include losses of any kind.
Income distribution deduction
An income distribution deduction is allowed for distributions to beneficiaries. The beneficiary pays income tax on his or her distributive share of income.
Interest income is equal to the estate or trust’s share of all taxable interest income that was received during the tax year.
Examples of taxable interest include interest from: accounts with banks, credit unions, and thrift institutions; notes, loans and mortgages; U.S. Treasury bills, notes, and bonds; U.S. savings bonds; original issue discount; and income received as a regular interest holder of a real estate mortgage conduit.
Source: Form 1041, Line 1 (2009 revision)
Interest paid is the amount of interest (subject to limitations) paid by the estate or trust on amounts borrowed by the estate or trust.
Other income (less loss)
Other income (less loss) is equal to income not listed elsewhere on Form 1041.
Other income includes unpaid compensation received by the decedent’s estate, and lump sum distributions from annuities, retirement plans, IRAs, etc.
Source: Form 1041, Line 8 (2009 revision)
Other deductions are equal to deductible items not listed elsewhere on Form 1041.
These deductions include bond premium(s), casualty and theft losses, domestic production activities, net operating loss deduction, and the estate or trust’s share of amortization, depreciation and depletion not claimed elsewhere.
Source: Form 1041, Line 15a (2009 revision)
Other payments are equal to the sum of the credit for tax paid on undistributed capital gains and the credit for federal tax on fuels.
Source: Form 1041, Line 24h (2009 revision)
Ordinary dividends are a result of the trust or estates’ investment in a corporation and are paid out of the earnings and profits of the corporation.
Ordinary dividends are taxable as ordinary income unless they are qualified dividends. Qualified dividends are a subset of ordinary dividends that meet the requirements to be taxed as net capital gains. These requirements are outlined in IRS Publication 550, Investment Income and Expenses.
Source: Form 1041, Line 2a (2009 revision)
Ordinary gain (less loss)
Ordinary gain is equal to the ordinary gain or loss from the sale of property other than capital assets and also from involuntary conversions.
Source: Form 1041, Line 7 (2009 revision)
Overpayment is equal to the amount that total payments exceed the sum of total tax and the estimated tax penalty.
Source: Form 1041, Line 28 (2009 revision)
Partially taxable grantor trusts
A partially taxable grantor trust is a trust in which the grantor retains power over only a portion of the trust asset. The remaining portion of the trust is organized as a complex or simple trust.
Pooled income fund
A pooled income fund (PIF) is a type of split-interest trust into which grantors to a charitable organization contribute their assets to a pool of donated assets and receive income payments for the remainder of the grantors’ lifetimes.
Pooled income funds are generally considered a type of split-interest trust, but are considered a separate entity for Form 1041 filing purposes. The pooled assets are invested by the recipient, or donee, which is often a large educational institution or charity.
Qualified disability trust
A qualified disability trust is a trust created to benefit individuals who are disabled and under the age of 65.
A qualified disability trust is generally considered a type of complex trust. When the trust is created, all beneficiaries must have been disabled, as determined by the Commissioner of Social Security, during some part of the tax year.
Qualified dividends are a subset of ordinary dividends that meet the requirements to be taxed as net capital gains.
Qualified funeral trust
A qualified funeral trust is created to hold and invest funds that will be used to pay for funeral or burial services for the beneficiary.
A qualified funeral trust acts as a contract between the beneficiary and the providers of the services, including funeral homes and crematories. A qualified funeral trust must pay taxes on all income and capital gains on assets included in the trust.
Rents, royalties, partnerships, other estates and trusts, etc.
Rents, royalties, partnerships, other estates and trusts, etc. is the trust’s or estate’s share of income or losses from rents, royalties, partnerships, S corporations, other estates and trusts and REMICs.
A trust may be a simple trust if all income must be distributed currently, the trust does not distribute amounts allocated to the corpus, and the trust does not make charitable distributions.
A trust may qualify as a simple trust if:
- The trust instrument requires that all income must be distributed currently
- The trust instrument does not provide that any amounts are to be paid, permanently set aside, or used for charitable purposes; and
- The trust does not distribute amounts allocated to the corpus of the trust.
A split-interest trust (SIT) is an arrangement which has both charitable and noncharitable beneficiaries. The amount and timing of the distributions depends on the type of arrangement.
All split-interest trusts are required to file Form 5227 , Split-Interest Trust Information Return, on which they report income, losses, holdings, distributions, and contributions. If the SIT has any unrelated business taxable income, they are required to file a Form 1041.
A split-interest trust is a trust that:
- Is not exempt from tax under section 501(a)
- Has some unexpired interests that are devoted to purposes other than religious, charitable, or similar purposes described in Internal Revenue Code section 170(c)(2)(B); and
- Has amounts transferred in trust after May 26, 1969, for which a deduction was allowed under Internal Revenue Code section 170 (for individual taxpayers) or similar Code sections for personal holding companies, foreign personal holding companies, or estates or trusts (including a deduction for estate or gift tax purposes).
Tax owed is equal to the sum of total tax and the estimated tax penalty less total payments.
Source: Form 1041, Line 27 (2009 revision)
Tax paid with extension
Tax paid with extension is the amount of tax paid at the time of filing Form 7004, Application for Automatic Extension of Time to File.
Source: Form 1041, Line 24d (2009 revision)
Taxable estate or trust
A taxable estate or trust is one that incurs a tax liability after tax credits.
On Form 1041, taxability is based on the value of line 23. If total tax liability is positive, the trust or estate is taxable. If the total tax liability is negative, the trust or estate is not taxable.
Taxable income is the amount that remains after total deductions are subtracted from gross income.
For the purposes of this study, only amounts greater than zero are recorded.
Source: Form 1041, Line 22 (2009 revision)
Total deductions are the aggregate sum of all reported deductions.
Total deductions includes amounts for interest paid, taxes paid, and fees, charitable contributions, allowable miscellaneous items, income distributions to beneficiaries, and the standard exemption.
Source: Form 1041, Line 16 (2009 revision)
Total income (less loss)
Total income (less loss) is the aggregate sum of all income from an estate or trust.
Total income (less loss) includes: interest; ordinary dividends; business income (less loss); capital gains (less loss); rents, royalties, partnership income (less loss), and income from other estates and trusts; farm income; ordinary gains (less loss); and other income.
Source: Form 1041, Line 9 (2009 revision)
Total prior payments
Total prior payments are the amount of any prior payments made with Form 1041-ES, Estimated Income Tax for Estates and Trusts, plus the amount of any overpayment from the previous year.
Source: Form 1041, Line 24a (2009 revision)
Total tax liability
Total tax liability is the amount of tax that an estate or trust is legally obligated to pay.
Total tax liability is the calculated on Schedule G, Form 1041. Taxable income is multiplied by the appropriate tax rate, based on the trust type and tax year. A tax on lump sum distributions and alternative minimum taxes are then added to this amount. Tax credits, including credits claimed on Form 3800, General Business Credit are subtracted. Finally, recapture and household employment taxes are added, resulting in the total tax liability amount.
Source: Form 1041, Line 23 (2009 revision)