TCP, Tax Compliance and Planning
Sources for Fiduciary Income Tax: Simple and Complex Trusts, DNI, and Grantor Trusts
Last reviewed
The standards and authorities behind PocketCPA's TCP lessons on Fiduciary Income Tax: Simple and Complex Trusts, DNI, and Grantor Trusts. The topic rests on IRC Subchapter J, Sec. 641-679.
About this topic
A trust collects income, passes some of it on, and keeps the rest, and the tax has to follow the money in both directions. Subchapter J is the only major area of the Code where the same dollar of income has to be chased across two returns before anyone can say who pays tax on it.
A trust or estate is a taxpayer in its own right. It is also a taxpayer that gets a deduction for handing income to somebody else. That deduction and the beneficiary's inclusion are welded together by a single figure called distributable net income.
Key points
- A simple trust must distribute all income currently, has no charitable deduction, and distributes no corpus.
- A complex trust may accumulate income, make charitable contributions, and distribute corpus.
- Distributable net income (DNI) caps the distribution deduction and determines the character of income to beneficiaries.
- A grantor trust is disregarded for income tax; all income is taxed to the grantor.
What the lessons cover
- The trust as a conduit
- Distributable net income
- The distribution deduction and the tiers
- Grantor trusts
- Section 663: specific bequests, the 65-day election, and separate shares
- Distributions in kind and the Section 643(e) election
- The charitable deduction under Section 642(c)
- Rate compression and the net investment income tax
- The final year: excess deductions and loss carryovers
Authoritative references
The trust as a conduit and distributable net income:
- Sec. 641(a) and (b), the imposition of tax on the taxable income of an estate or trust, computed in the same manner as for an individual except as Subchapter J provides.
- Sec. 643(a), distributable net income: taxable income modified for the distribution deduction, the personal exemption, tax-exempt interest, and capital gains allocated to corpus; (a)(3) treats capital gains as excluded from distributable net income unless they are distributed or required to be.
- Sec. 642(b), the deduction in place of the personal exemption: $600 for an estate, $300 for a trust required to distribute all income currently, and $100 for any other trust.
- Sec. 67(e), adjusted gross income of an estate or trust, and Sec. 265(a)(1), the allocation of expenses to tax-exempt income.
- Sec. 643(b), the definition of income, and Sec. 643(c), the definition of beneficiary.
The distribution deduction and the tiers:
- Sec. 651(a) and (b), the deduction for a trust that distributes current income only, and Sec. 652(a) through (c), the inclusion of that income by the beneficiary.
- Sec. 661(a)(1) and (a)(2), the deduction for a complex trust, including the first-tier income required to be distributed currently and the second tier of other amounts properly paid, credited, or required to be distributed, with the limit by distributable net income at (c).
- Sec. 662(a)(1) and (a)(2), the inclusion by the beneficiary in the same two tiers, Sec. 662(b), the character of the amounts, and Sec. 662(c), the different taxable years of the trust and the beneficiary.
- Sec. 663(a)(1), the exclusion of specific sums of money or specific property paid in not more than three installments; Sec. 663(b), the election to treat distributions in the first 65 days of the year as made in the preceding year; Sec. 663(c), separate shares treated as separate trusts.
- Sec. 643(e)(1) through (e)(4), the basis of property distributed in kind, and the election to recognize gain or loss as though the property were sold to the beneficiary at fair market value.
- Sec. 643(f), the treatment of multiple trusts as one trust.
- Sec. 642(c)(1), the charitable deduction of an estate or trust for amounts paid or permanently set aside under the governing instrument, without the percentage limits of Sec. 170(b), and Sec. 170(c) and Sec. 508(d), the definitions and the rule for split-interest trusts.
Grantor trusts:
- Sec. 671, the trust income, deductions, and credits attributable to the grantor or another person when the grantor is treated as the owner.
- Sec. 672(a) through (c) and (f), the definitions of an adverse party, a nonadverse party, and a related or subordinate party, and the rule for a foreign person.
- Sec. 673(a) through (d), the treatment of the grantor as owner of a trust in which the grantor has a reversionary interest, and Sec. 674(a), the power to control beneficial enjoyment.
- Sec. 675, administrative powers, Sec. 676(a) and (b), the power to revoke, and Sec. 677(a) and (b), income for the benefit of the grantor, including income applied to the support of a dependent and to the payment of insurance premiums at (a)(3).
- Sec. 678, a person other than the grantor treated as the owner, and Sec. 679(a)(2) and (c)(1), a foreign trust with a United States beneficiary.
Rates, the net investment income tax, and the final year:
- Sec. 1(e), the compressed rate schedule for an estate or trust.
- Sec. 1411(a)(2) and (b), the net investment income tax on the lesser of undistributed net investment income or the excess of adjusted gross income over the dollar amount at which the highest bracket begins.
- Sec. 642(h)(1) and (h)(2), the carryover of an unused net operating loss, capital loss carryover, and the excess deductions on termination to the beneficiaries succeeding to the property, with Sec. 1212 and Sec. 172.
- Sec. 642(e), the allowance of depreciation and depletion between the trust and its beneficiaries, with Sec. 167(d).
How PocketCPA uses these sources
Every lesson is written in original words and cites the paragraph each rule comes from. No standard's text is reproduced. How lessons and questions are written and checked is set out in our methodology.