Estate and Gift Tax Update November 6, 2013. Cheryl Jankowski, CPA Chiampou Travis Besaw & Kershner LLP firstname.lastname@example.org (716)630-2457. American Taxpayer Relief Act of 2012. Transfer Tax Highlights Established permanent rules for estate and gift tax for 2013 going forward
Cheryl Jankowski, CPA
Chiampou Travis Besaw & Kershner LLP
Potential Planning for capital gains
Capital Gains – Capital gains cannot be distributed without authority in the trust instrument or state law for doing so. However, under regulation 1.643(a)-3(b), capital gains will be included in DNI if they are, (1) “pursuant to the terms of the governing instrument and applicable law” or (2) “pursuant to a reasonable and impartial exercise of discretion by the fiduciary (in accordance with a power granted to the fiduciary by applicable local law or by the governing instrument if not prohibited by applicable local law)—
(1) Allocated to income (but if income under the state statute is defined as, or consists of, a unitrust amount, a discretionary power to allocate gains to income must also be exercised consistently and the amount so allocated may not be greater than the excess of the unitrust amount over the amount of distributable net income determined without regard to this subparagraph §1.643(a)-3(b));
(2) Allocated to corpus but treated consistently by the fiduciary on the trust's books, records, and tax returns as part of a distribution to a beneficiary; or
(3) Allocated to corpus but actually distributed to the beneficiary or utilized by the fiduciary in determining the amount that is distributed or required to be distributed to a beneficiary.
Grantor Trust – Medicare tax does not apply to grantor trusts as the income from the trust is treated as owned by the grantor
QSST – A qualified subchapter S Trust must pay all of its income to the sole beneficiary each year. Therefore, the beneficiary would compute the Medicare tax, if applicable, at the beneficiary level.
ESBT – S-Corporation income of an ESBT is taxed at the trust level, even if distributed. Therefore, unless the trustee meets the material participation test, the income may be subject to the Medicare tax.
Sale of S Corporation stock – A sale of S corporation stock ( or a partnership interest) is not subject to the net investment income tax if (1) the entity is engage in a trade or business not relating to the trading of financial instruments or commodities and (2) the transferor is engaged in a least one trade or business of the entity. The portion of the gain excluded from net investment income generally will be the portion of the gain attributable to the active trade or business. See Prop. Reg Sec 1.1411-7(c).
Kiddie tax: Although for income tax purposes, a child (person under age 19 or under the age of 24 if a full-time student), whose unearned income over $2,000 for 2013, will be taxed a the parent’s tax rate. However, for Medicare purposes, the child stands alone and is not aggregated with parents or other siblings income.
65 Day Rule – Consider election under IRC Sec. 663(b) – The fiduciary may elect to treat distributions made during the first days following the close of the taxable years as if the distribution had been made on the last day of the prior year.