Form 1041. Stephen Brooks

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      FORM 1041: INCOME TAXATION OF ESTATES AND TRUSTS

       BY STEPHEN BROOKS, CPA/PFS, CFP, MST

Notice to readers

      Form 1041: Income Taxation of Estates and Trusts is intended solely for use in continuing professional education and not as a reference. It does not represent an official position of the American Institute of Certified Public Accountants, and it is distributed with the understanding that the author and publisher are not rendering legal, accounting, or other professional services in the publication. This course is intended to be an overview of the topics discussed within, and the author has made every attempt to verify the completeness and accuracy of the information herein. However, neither the author nor publisher can guarantee the applicability of the information found herein. If legal advice or other expert assistance is required, the services of a competent professional should be sought.

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      © 2019 Association of International Certified Professional Accountants, Inc. All rights reserved.

      For information about the procedure for requesting permission to make copies of any part of this work, please email [email protected] with your request. Otherwise, requests should be written and mailed to Permissions Department, 220 Leigh Farm Road, Durham, NC 27707-8110 USA.

      ISBN 978-1-119-76379-6 (Paper)

      ISBN 978-1-119-76396-3 (ePDF)

      ISBN 978-1-119-76395-6 (ePub)

      ISBN 978-1-119-76397-0 (oBook)

      Course Code: 736955 ITET GS-0419-0A Revised: May 2019

Chapter 1 What is a Trust? What is an Estate?

      Learning objectives

       Identify the elements of a trust.

       Recognize the difference between a trustee and a trustor.

       Distinguish between probate and nonprobate assets.

       Recall the basics of trust and estate administration.

      Introduction

      This course will provide a comprehensive look at the income taxation of trusts and decedents' estates and the beneficiaries of trusts and estates under the IRC. Trusts and estates are treated as separate taxable entities under the IRC, and they are unique in the way they are treated. Essentially, trusts and estates are what might be termed “semi-conduits.” That is, to the extent that they retain income, they are taxed on that income, and to the extent that they distribute income to the beneficiaries, the beneficiaries are taxed. Before we discuss in detail the taxation of trusts and estates, and the beneficiaries of each, you must first have an understanding of these entities, how they are created, and how they operate.

What is a trust?

      Definition of a trust

A trust is a legal contract between the creator and the trustee for the benefit of another individual, a charitable organization, or an animal. The trustee has a fiduciary duty to abide by the terms in the trust agreement. The creator of the trust is often referred to as the settlor, grantor, or trustor. When a trust is created, the trustee takes legal title and management power over the trust property.¹ The individual, organization, or animal that is benefited by trust is called the beneficiary.

      Terms of the trust

The settlor's intentions in regard to how the trust property is to be held, administered, and distributed for the benefit of the trust beneficiaries are referred to as the “terms of the trust.”² If the trust is evidenced by a written agreement, or in the settlor's last will and testament, the terms of the trust will be provided in the trust agreement or the will.

      Methods of creating a trust

A trust may be created by a transfer in trust made in the settlor's will (a testamentary trust), or a transfer in trust during the settlor's lifetime (an inter vivos trust). A trust can also