Inclusion of Capital Gains in Distributable Net Income for Trusts and Estates: Allocations for Optimal Tax Treatment

Fiduciary Accounting Rules, Treas. Reg. Section 643(a)-3(b) Provisions, State Unitrust Rules, Crummey Powers

Note: CPE credit is not offered on this program

Recording of a 90-minute CLE video webinar with Q&A

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Conducted on Thursday, October 14, 2021

Recorded event now available

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Course Materials

This CLE course will provide trust, estates, and tax counsel an in-depth analysis of the rules and practices covering the 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. It will explore state and local requirements for including capital gains in fiduciary accounting income (FAI) where the trust's governing document does not contain such a provision.

Description

The treatment of capital gains held within a trust or estate involves complex tax rules and effective planning for fiduciary accounting and estate planning. Trusts, estates, and tax counsel must understand essential planning methods and potential pitfalls in treating capital gains as DNI.

Where the executor of the estate or administrator of the trust has the discretion, the general practice is to distribute income whenever possible. However, trust accounting rules and 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.

Additionally, these amounts are subject to the 3.8 percent NIIT, which results in a much higher tax rate on trusts than on individuals. Achieving lower overall taxes can be as simple as including capital gains in DNI rather than added to the corpus amount.

Getting the most beneficial treatment of capital gains income involves careful planning by estate planners and tax counsel. If capital gains are included in DNI, lower overall taxes are generally achieved. Counsel must pay close attention to ensure the trust document and the trust return permit distribution of capital gains to beneficiaries as income.

Listen as our experienced panel discusses trust document provisions to allow treating capital gains as DNI, state and local requirements and issues, and best practices for making the most tax-advantaged treatment of trust capital gains.

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Outline

  1. IRC Section 643 and FAI rules
  2. Including capital gains in DNI; Treas. Reg. Section 643(a)-3(b)
  3. State unitrust rules
  4. Crummey powers
  5. Non-tax considerations and best practices for estate planners and tax counsel

Benefits

The panel will review these and other key issues:

  • The requirements of IRC 643 on the treatment of capital gains and FAI
  • Structuring trust documents to allow the inclusion of capital gains in DNI
  • Distribution of assets and the total-return-investing under the UPAIA
  • Local and state provisions that may allow capital gains inclusion in DNI

Faculty

Brogan, Robert
Robert F. Brogan
President
Brogan Law Group

Mr. Brogan's boutique practice focuses exclusively on elder law, special needs planning and asset protection. He...  |  Read More

Gadarian, Gregory
Gregory V. Gadarian
Partner
Gadarian & Cacy

Mr. Gadarian's practice focuses on tax strategy, estate planning and asset protection law. Previously, he was a...  |  Read More

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