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Sunday, April 13, 2014

ARTICLE ABSTRACT: Minimize Capital Gains Tax of Estates, Trusts, and Beneficiaries

Minimize Capital Gains Tax of Estates, Trusts, and Beneficiaries
Nicholas E. Christin, William A. Snyder
Estate Planning Journal, April 2014
    • Trusts are taxed at the highest rate on capital gains at a very low income threshold ($12,150 in2014), as well as being subject to the 3.8% Medicare tax on capital gains at the same low threshold.
    • Lower overall taxes will often be available if capital gains are included in DNI and distributed to beneficiaries.
    • General review of Treas. Regs. §1.643(a)-3 rules on inclusion of capital gains in DNI.
    • Regular practice of trustee characterizing discretionary principal distributions as capital gain distributions (should commence from first tax year) as a method of including capital gains in DNI.
    • Use of power to adjust to include capital gains in DNI.
    • Total return unitrusts as a method to include capital gains in DNI- providing an ordering rule in the trust itself, using a state ordering statute.
    • Need to address these issues in the first tax year of the trust, and to consistently apply allocation rules thereafter.
Capital gains; DNI; income taxation of trusts; Code §§643, 661, 662; Treas. Regs. §1.643(a)-3

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