Federal Income Taxation of Estates, Trusts & Beneficiaries (2015)

Over the last half-century or so, taxation of fiduciary income has become increasingly complex. While many fiduciaries and professionals share responsibility for wealth planning or reporting the income taxes relating to transmission of wealth, there is little published to guide them through the maze of choices and problems they may encounter. Federal Income Taxation of Estates, Trusts, & Beneficiaries provides step-by-step guidance for dealing with the problems of preparation of the decedent s final return, characterization of income in respect of a decedent, computation of distributable net income (DNI), the interaction of the system of taxation of trusts and estates and the passive activity rules, the grantor trust rules, and the rules relating to split interest charitable trusts. As always, the update is designed to provide the reader with information that is timely and tailored to the needs of today s busy practitioner. The 2015 Update to Federal Income Taxation of Estates, Trusts & Beneficiaries brings you up to date on the latest developments in this complex and constantly changing area. . In Frank Aragona Trust v. Commissioner, 142 T.C. No. 9 (March 27, 2014), the Commissioner determined that various losses from a trust s real property activities were passive, because the trust, as such, was incapable of performing personal services and, as a result, was also incapable of qualifying under § 469(c)(7) for the so-called real estate professional exception. The government s fallback position was that, even if it was possible for the trust to perform personal services, the activities of the trustees did not count, because they performed them in their roles as corporate employees, rather than as trustees. The Tax Court unequivocally rejected both positions. As to the first, it held that a trust is capable of performing personal services and therefore can satisfy the section 469(c)(7) exception, usually through the activities of its trustees. As to the second, the court held that all of the trustees activities, including their activities as employees of [the corporation] should be considered in determining whether the trust materially participated in its real-estate operations. In short, the Tax Court handed the Service a devastating loss. The narrowness of the opinion, however, makes it difficult to predict whether it foreshadows a broader rejection of the Service s constricted notions of material participation by fiduciaries. On May 27, 2014, the Service at long last issued final regulations relating to the applicability of the 2-percent rule under § 67 to estates and trusts. They are a lightly modified version of the most recent proposed regulations. In general, the new regulations attempt to follow and implement the Supreme Court s decision in Knight. More specifically, they require the unbundling of fiduciary expenses in a broad range of situations: If an estate or a non-grantor trust pays a single fee, commission, or other expense (such as a fiduciary s commission, attorney s fee, or accountant s fee) for both costs that are subject to the 2-percent floor and costs (in more than a de minimis amount) that are not, then . . . the single fee, commission, or other expense (bundled fee) must be allocated . . . between the costs that are subject to the 2-percent floor and those that are not. On the other hand, they appear to exempt most executors commissions and perhaps even many trustees fees from the unbundling requirement by explicitly excepting any bundled fee that is not computed on an hourly basis. As to these fees, only the portion that is attributable to investment advice is subject to the 2-percent floor. The new regulations provide that, in making this allocation, any reasonable method may be used.