Trust and Estate Taxation

David has spent the bulk of his tax career focusing on the specialty of trust and estate tax compliance. This field of expertise is vast and intensive, requiring years of training. Having learned from the best in the field, David is ready to assist you with all of your fiduciary duties and tax needs. Let a trust and estate tax specialist help evaluate your unique situation to determine which filings are necessary.

The US Estate and Gift Tax System

The United States Gift and Estate Tax

In addition to income tax, real property tax, and sales tax, there is a lesser known tax in the US called the “gift tax” or the “estate tax.” These two terms are used interchangeably but refer to the same tax. The general rule is that an individual is allowed to gift a specified amount during life and death before that individual is subject to tax on gifts.

The total amount allowed to be gifted before tax is incurred is called the lifetime exemption amount. As of 2022, the Federal lifetime exemption amount is $12.06 million and the NYS lifetime exemption amount is $6.11 million. This means that a taxpayer can give away $12.06 million for Federal tax purposes and $6.11 million for NYS tax purposes without owing any gift/estate tax.

Once a taxpayer has given in excess of the specified lifetime exemption amount, any further gifts or bequests are subject to gift/estate tax. This tax is levied on both a gift tax return, which is filed during the life of the individual in the year a gift is made, and/or an estate tax return, which is filed at the death of an individual when their assets are transferred to their beneficiaries.

Trust Taxation

What is a trust?

A trust is a fiduciary relationship in which one party, known as a trustor, gives another party, the trustee, the right to hold title to property or assets for the benefit of a third party, the beneficiary. Trusts are established to provide legal protection for the trustor’s assets, to make sure those assets are distributed according to the wishes of the trustor, and to save time, reduce paperwork and, in some cases, avoid or reduce inheritance or estate taxes.

Trust Income Tax (Form 1041)

For tax purposes, a trust is a separate entity that requires its own income tax return (except for grantor trusts). Similar to an individual, a trust is required to pay income tax on any income generated within the trust every year. The individual responsible for filing the income tax return is the trustee.

Trust income taxation is complex as it comprises two types of taxation: taxation at the trust level and taxation at the individual level. When a trust generates income, that income can be subject to tax at the trust level. In other words, Form 1041 could calculate a tax to be paid by the trust. However, when a trust makes distributions to a beneficiary, the trust may carry out some or all income generated during the year to one or more beneficiaries.

The beneficiaries will be issued Form K-1, which is generated as part of the trust income tax filing. Similar to a partner reporting his/her income from a partnership, a beneficiary may be required to report his/her income from a trust. The tax results of these types of transactions depend on the type of trust reporting taxes. Different types of trusts for tax purposes are beyond the scope of this article.

David has mastered trust tax compliance and handles all types of fiduciary income tax, including split-interest trusts, electing small business trusts, qualified subchapter S trusts, and partial grantor trusts. If you are a trustee of a trust, don’t hesitate to reach out for assistance. If you are a beneficiary of a trust, be sure to check with the trustee of your trust if you should expect a K-1 for your income taxes.

Estate Taxes

What is an estate?

An estate is everything comprising the net worth of an individual, including all land and real estate, possessions, financial securities, cash, and other assets that the individual owns or has a controlling interest in. For tax purposes, an estate usually refers to the assets owned by an individual at date of death.

Estate Income Tax (Form 1041)

As an executor of an estate, your duties may seem overwhelming and difficult to handle. The very idea of a tax return for an estate can be stressful as the area is extremely complex. Our tax office is here to walk you through the process and give you peace of mind. Let David handle all aspects of the tax compliance process.

Estates producing income from assets held in the estate are required to file income tax returns. Form 1041 is filed to report all items of income, expense, gains and losses incurred by the estate. If the estate has sufficient income earned during a given period of time, it will be required to pay income tax to the Federal and NYS governments.

Estate Tax Return (Form 706)

Not to be confused with an estate income tax return, some estates are required to file a tax return that reports the fair market value for all assets held by the individual at date of death. This tax return would encompass all assets owned by the decedent, with certain exceptions.

When an individual passes away with an estate in excess of a certain fair market value, the executor of the individual’s estate is required to pay transfer tax to the Federal and NYS government. The Federal government and NYS government have different thresholds for estate taxation.

As of 2022, the Federal exemption amount is $12.06 million and the NYS exemption amount is $6.11 million.  The form used to file this estate tax return is Form 706 – Estate and Generation-Skipping Transfer Tax Return.

Gift Taxes

What is a gift?

For tax purposes, a gift is when an individual gives something of value (cash, vehicle, stocks, etc.) to another individual or entity. Gifts are often confused with “charity.” Clients frequently ask me whether or not a gift to another individual is considered a charitable contribution. The answer is no. A gift is something completely separate from a charitable contribution. A deductible charitable contribution is when something of value is given to a certified 501(c)(3) organization, or other “qualified charity.”

It is important to note that when an individual transfers anything of value to a trust, that transfer is considered a gift (generally speaking). However, distributions from a trust to a individual beneficiary is not a gift. Distributions are instead transfer of principal and income which have already been gifted to the trust, or earned by the trust.

Gift Tax Return (Form 709)

A gift tax return is filed in any year a taxpayer makes gifts in excess of the annual exclusion amount. The annual exclusion amount is the amount of gifts a taxpayer can give during a single year before the taxpayer starts to utilize the lifetime exemption amount. The annual exclusion amount as of 2022 is $16,000.

For example, John has a remaining lifetime exemption amount of $12 million. In 2022, John will give away $20,000 to his daughter. For tax purposes, $16,000 of this amount will be used for the annual exclusion, and only $4,000 will eat into John’s lifetime exemption amount. John’s remaining lifetime exemption amount for 2023 will be $11,996,000. (This is for explanatory purposes only – actual gift tax calculation is different). This is a very basic example of utilizing the annual exclusion and preserving the lifetime exemption amount.

It is important to note that there are no gift tax rules for New York or NYC. The lifetime exemption amount for NY is utilized only at death. Form ET-706 is the form used for New York to file an estate tax return. Gifts during life are not counted against the NY lifetime exemption amount (except under specific circumstances).

Our Services include:

Estate Planning

  • design and implementation of estate plans
  • review of existing wills and trust agreements
  • advising on the tax implications of sophisticated estate planning strategies

Tax Consultation

  • estate, gift and generation-skipping transfer tax issues
  • complex fiduciary income tax issues
  • charitable planning strategies

Estate Administration

  • preparation of Federal and State estate tax returns for U.S. domiciliaries and nonresident aliens
  • preparation of decedent’s final income tax returns and estate’s fiduciary income tax returns
  • post-mortem tax planning

Tax Return Preparation

  • federal and state gift tax returns
  • federal and state fiduciary income tax returns for domestic trusts
  • foreign nongrantor trusts
  • informational filings related to the funding of and distributions from foreign trusts
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