Estates and Trusts earning Objectives: ater studying this chapter, you sho uld be able ! to: 1. Define estate, trust and ees , the relate 2% Identify income-producing estate ae 3, Discuss basic guidelines in handling trusts ae tot fo tax. the rules in taxation of individual Is general irone of an estate or trust shal eee 0 estates and trusts. The taxable ee owe \e same manner and re ss nie cae of an individual. Estates and trusts are allowed a Se 4 oma a poss ees fot individual taxpayers likewise apply. The taxable all be the calendar year. Just like individuals, estate $ u t 5 5, estates and trusts are required to file a declaration of estimated income for the current taxable year enor before April 15 of the same taxable year. DEFINITION OF TERMS, Estate of Inheritance. Refers to all the properties, rights and obligations of a person which are not ‘tinguished by his death and also those ‘which have accrued thereto since the opening, ‘of the succession. Trstis an agreement created by will or an agreement ut conservation or investment with the income ‘therefrom and ulti detibuted in eecordanece with the directives ofthe creatof a5 xPro establishes 2 trust. has been the po! inder which title to property is passed to another for imately the corpus or principal to be sed in the governing instrument. Tristor or grantor is the person Who neary isthe person for whose Broperty transferred to the trust, i! Fiduciary is the general term which aPP! e towards others, such as tl benefit the trust created. A beneficiary has equitable tite to session and use of the property. including, generally that occupy-positions of peculiar administrators, receivers, Of trust an estate ies to all persons of corporations , executors, guardians, person or corporation that holds in {eevators. Fr income tax PUPOSSS fiduciary 207 orp ‘fanother person or persons. : Pe 'AKABLE ESTATES i i t income on his or her property (eg., interest eae apartment complex) is taxed to When an individual is alive, i@COMe OT on an ds, dividend income on stocks, T°P al 239age see See eee se aereeeeeaeereeceneeeee eo that individual. When the individual dies, future income ea et orl be a to those who inherit the property. However, income on pr ee ieee cee he only after they receive the property. The receipt of the noe psesaiits ed fro, income. Often there is considerable time lag between the i patel er a When final settlement of the estate occurs. Thus, a relevant questior eae Axed op income realized from the decedent’s property during this a eee Provide by the Code is that the estate itself is taxed. Estates are legal en aes oat a for the Purpose of managing and distributing the deceased person's ee eee ot heirs While this property is in the estate, the property might earn som: + The income will be taxed to the estate. Notice this discussion concerns only income taxation, that is, taxation of an estate's income, rather than “estate taxation.” Estate taxation has nothing to do with income and applies when the property passes from the deceased person to the estate, The estate tax is levied on the transfer and is based on the fair market value of the Property being transferred at the time of death. The details of estate taxation are discussed jn another text, Transfer and Business Taxation by the same book team. Taxable estates are estates of deceased persons under judicial settlement. Taxation of an estate begins from the time of death. Hence, any income received after the death shall form part of the income of the estate. Income of estates not under judicial settlement are not taxable to the estate. In this case, a co-ownership is created and the co-owners, after actual or constructive receipt of the income are the ones liable to income tax in their individual Capacities. : TAXABLE TRUSTS An individual may want another family member, such as @ son or daughter, to become the owner of some particular piece of the individual's property (e.g., stocks, rental Property). However, the individual may feel that the son or daughter is not capable of managing the property. In this situation, the individual could transfer the Property to2 Property for the benefit of the sono daughter. This legal arrangement is known as a trust, and id be called the beneficiaries of the trust. {EPO of daughter wa N these two extremes, hel! ents of both taxpayers and conduits. enero ieee Pe either retained by the trust or distributed” 7 ined by the trust, the income j itself e Py the trust, me is ee the benefidary. W the income is disribata trust ie allowed y gedit * 240mining its taxable income ee : » and the uton 25 taxable income a beneficiary must includ “A tt the individ i : ind fe the f the : . vidual level Ie receipt of e s taxed to either the try. tal level. All of the current income on trust Fr possesion of the income. the beneficiary, depending on a h party has : 5 ic y ROSS INCOME the items of gross income of estates and trusts are th: i e pee 1e same items of gross income of eéuiduals 2s provided in the Tax Code. They include: t income accumulated in trust for the benefit of unborn or unascertained person or persons with contingent interests, and income accumulated or held for future distribution under the terms of the will or trust. 1 income which is to be distributed currently by the fiduciary to the beneficiaries, and income collected by a guardian of an infant which is to be held or distributed as the court may rect. 2. income received by estates of deceased persons during ‘the period: of administration or settlement of the estate. 4 Income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated. ALLOWABLE DEDUCTIONS Estate or trust is allowed a personal exemption of 20,000. This is regardless of the trusts i ive ‘i i the personal number beneficiary may receive income from. Aside from the pe = : f trust or estate may be deductible from gross exemption of P20,000 allowed, income of come. come which is istril currently by the fiduciary to the beneficiaries; and "come Se a eee ‘an infant which is to be held or distributed as the eer Nee Yate Srom gross rice oF the acer TS 6 #° because sah . fiduciary & grantor 4 trustor 247SCORE: NAME: PROFESSOR: ] SECTION: = Problems 1 Mr. Dimitri passed away on June 30, 2014. His estate, which is under iui Settlement, accumulated P800,000 gross income for the remaining half of the yea, Deductions attributable to the income amount to P400,000. How much was theta, payable by the estate for 2014? Lady Morgana created two irrevocable trusts naming her favorite grandda Alyssa as beneficiary of both trusts. It is provided in the trust document that the year 2014, when Alyssa turns 18, she is to receive 25% of the net incom trusts for her education, Below are additional information: lughter, start 1 of both Trust 1 Trust 2 Gross income 600,000 ~P00,000 Deductions 180,000 280,000 How much is the consolidated tax due? How much is the share of each trust on the consolidated tax due? 2agig SCORE: go PROFESSOR: ations ~ 2009 Bar Exams ave nny transferred a uae 10-door commercial apartment to a designated trustee, iar, Lente in us instrument Santino, Johnny's 10-year old son, as the sole ficiary- The trustee is instructed to distribute the yearly rentals amounting to m0 00. The trustee consults you if she has to pay the annual income tax on the rentals received from the commercial apartment. 4, What advice will you give the trustee? Explain. will your advice be the same if the trustee is directed to accumulate the rental income and distribute the sarie only when the beneficiary reaches the age of majority? Why or why not? 1 | 249