Allocating Capital Gains to Distributable Net Income in Estates and Trusts: Achieving Optimal Tax Treatment

Recording of a 110-minute CPE webinar with Q&A


Conducted on Thursday, February 16, 2017

Recorded event now available

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Program Materials

This webinar will provide tax advisers and counsel with a deep understanding of the rules and practices covering inclusion of capital gains in distributable net income (DNI) for trusts and estates. The panel will review the requirements within trust documents to allow treating capital gains as DNI, and will explore state and local provisions for inclusion of capital gains in fiduciary accounting income (FAI) where the trust’s governing document does not contain such a provision.

Description

One of the more complex aspects of both fiduciary accounting and estate planning is the treatment of capital gains held within a trust or estate. The general rule is that an estate or trust must file a tax return and pay income tax on any undistributed net income.

In instances where the executor of the estate or administrator of the trust has discretion, the general practice is to distribute income whenever possible. However, trust accounting rules, as well as IRC 643, generally treat capital gains as part of the corpus of the trust.

The current tax treatment of trusts provides a significant incentive for getting capital gains out of a trust. Currently, trusts are taxed at the maximum rate on any capital gains above the statutory threshold ($12,400 in 2016).

Additionally, these amounts are subject to the 3.8% NIIT, which results in a trust’s capital gains being taxed at a much higher rate than an individual would pay. Lower overall taxes will often be achieved if capital gains are included in DNI rather than added to the corpus amount.

Getting the most beneficial treatment of capital gains income involves careful planning on the part of estate attorneys, financial planners and tax accountants. Because lower overall taxes are generally achieved if capital gains are included in DNI, tax advisers need to pay close attention to make sure that both the trust document and the trust return permit distribution of capital gains to beneficiaries as income.

Listen as our experienced panel delves into the complex intersection of FAI and IRS rules to provide tax advisers and preparers with best practices for making the most tax-advantaged treatment of trust capital gains.

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Outline

  1. FAI under IRC Section 643
  2. Treas. Reg. Section 643(a)-3(b) provisions for including cap gains in DNI
    1. Instrument provides for inclusion in income
    2. Allocated to corpus but treated as distribution
    3. Actually distributed
  3. State unitrust rules
  4. Crummey powers and “5-and-5” trust documents
  5. Non-tax considerations

Benefits

The panel will review these and other key issues:

  • What are the general requirements of IRC 643 on treatment of capital gains and FAI?
  • How can the trust document be structured—and interpreted—to allow inclusion of capital gains in DNI?
  • What states or localities allow total return investing under the UPAIA?
  • What are local and state provisions that may allow capital gains inclusion in DNI?

Faculty

Doyle, Jere
Jeremiah W. Doyle, IV

Senior Wealth Strategist
BNY Mellon Wealth Management

Mr. Doyle provides clients with integrated wealth management advice on how to hold, manage and transfer their...  |  Read More

Patterson, Jacqueline
Jacqueline Patterson

Partner
Buchanan & Patterson

Ms. Patterson specializes in tax, estate and financial transactions, with an emphasis on asset protection and...  |  Read More

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