Estates and Trusts fter s i i studying this chapter, YOU should be able to: 1. Defi E- iene trust and the related terms used. per pncome-producing estate subject to tax, 'ss basic guidelines in handling trusts subject to tax. me Ust shall be computed in the same manner and 0” bee Individual, Estates and trusts are allowed a personal exemP! tax rates for individual taxpayers likewise apply. The '2%2 s shall be the calendar year. Just lke individuals, estates 2né a declaration of estimated income for the current taxable Is as in the case of an j 20,000. The income Ir of estates and trust: ists are required to file OF Inheritance. Refers to all the properties, rights and obligations of a person which are ne uished by his death and also those which have accrued thereto since the opening of the succession is an agreement created by will or an agreement under which title to property is pas vation or investment with the income therefrom and ultimately the corpus or prin buted in accordance with the directives of the creator as expressed in the governing instr Of or grantor is the person who establishes a trust. lary is the person for whose benefit the trust has been created, A beneficiary ha property transferred to the trust, including, generally, the pos Session and use of the ry is the general term which applies to all persons or corporations that oc dence towards others, such as trustees, executors, guardi ators, For income tax purposes, a fiduciary is any pers other person or persons. ans, of admin OF Corporation that Wolds, BLE ESTATES in an individual is alive, income on his or her property lee. un Inds, dividend income on stocks, rental income on an apartment : re 239at property will be that individuat When the individual dies, future income a evs taxable to thew to those who inherit the property. However, income on . erty itself is excludeg ay Only after they receive the property. The receipt of nee time a person dies and wa, income. Often there is considerable time lag betwee” tl ‘stion to ask is Who is taxeg rl final settlement of the estate occurs. Thus, 2 relevant ms interval eee ‘ income realized from the decedent's property during a al entities that exist for th, by the Code is that the estate itself is taxed. Estates 37° TE onerty to the hein Purpose of managing and distributing the deceased pel some income. The incon While this property is in the estate, the property might £2” " will be taxed to the estate. ; tion of an Notice this discussion concerns only income taxation, that sxhing to do with incon income, rather than “estate taxation.” Estate taxation has n° Te fo the esta and applies when the property passes from the deceased a ae of the tn _ estate taxis levied on the transfer and is based on the fair mar! aaa Per t being transferred at the time of death. The details of estate taxa SSed in another text, Transfer and Business Taxation by the same book team. Taxable estates are estates of deceased persons under judicial anaes mek an estate begins from the time of death. Hence, any income received after the death shall form part of the income of the estate. Income of estates not under judicial settlement are not taxable to the estate. In this case, a co-ownership is created and the co-owners, after actual or constructive receipt of the income are the ones liable to income tax in their individual capacities... 2 : TAXABLE TRUSTS An individual may want another family member, such as a son or daughter, to become the owner of some particular piece of the individual's property (e.g., stocks, rental property). However, the individual may feel that the son or daughter is not capable of managing the property. In this situation, the individual could transfer the property toa trustee in order to have the trustee manage the property for the benefit of the son or daughter. This legal arrangement is known as a trust, and the son or daughter would be called the beneficiaries of the trust. Trusts are a unique form of legal entity, being neither pure taxpayer nor pure conduit. For taxpayers such as corporations, all income is taxed to the income-earning organization. For conduits such as general professional Partnerships, no income is taxed to the income-earning organization. Rather, income is taxed to the owners of the partnership when earned, regardless of whether that income is distributed to them. The taxation of trusts and their beneficiaries falls between these two, ext! v elements in common with the tax treatments of both taxpayers and aan al Pre-tax income earned by a trust may be either retai Fi ; ined civil the trust’s beneficiary. If retained by the trust, the income ae trust or distributed to the beneficiary. If the income is distributed, the truct gen a.t° the Must itself, not eee Tust is allowed a deduction in — ‘ 240mining its taxable ihcome, ie ; 5 Nd th mipution aS taxable income a @ benefi = ay is taxed to either the ite individual pil Must include the receipt of the Fett possession of the income,’ - benetcian e the current income on trust d Bolg 1 depending on which party has trust to be taxable, [Link], - fo : 7 st be irre ° ellation, both as to co) vocable, m i cane TPUS OF Brincipare. pins it cannot be changed II Dal Bnd inco changed by recal me, na revocable trust where title to inet : i omnes § ject to inco i may sr be ee oni ber _ is the Grant ate in the grantor, the trust itself incom ri taxi iso directly to th luted for the benefit of able. In case of trust where the arable directly to the grantor, Of the grantor, such income is likewise gpossINCOME ‘he items of gross income of estates and viduals as provided in the Tax Code, The als ate the same items of gross income of ey include: : 4, Income accumulated in trust for the benefit of with contingent interests, and income accumu terms of the will or trust. x eae ee te distributed currently by the fiduciary to the beneficiaries, and income j e ed by a guardian of an infant which is to be held or distributed as the court may jirect. 3 % 4. Income received by estates of deceased persons during i inistrati th settlement of the estate. eit Ee enue inane ee 4, Income which, in the discretion’ of ‘the fiduciary, may be either distributed to the beneficiaries or accumulated. unborn or unascertained person or persons lated or held for future distribution under the ALLOWABLE DEDUCTIONS ee eee ‘f peak wae TRAN # state or trust is alloweda personal exemption of P20,000. This is. regardless of the rumber of trusts a beneficiary may receive income from. Aside from the personal exemption of P20,000 allowed, income of trust or estate may be deductible from gross income, ae Income which [Link] be distributed currently by the fiduciary to the beneficiaries; and income collected by a guardian ‘of an infant which is to be held or distributed as the court may direct, are deductible from gross income of the fiduciary. This is so because’ such income is taxable directly to the beneficiary, whether distributed or not. Income received by ‘estates of deceased persons during the period of administration or Settlement of the estate; and income which, in the discretion of the fiduciary, may be &ither distributed to the beneficiaries or accumulated, are taxable chet its us a0) or beneficiary, depending on the amounts paid or credited ‘to the legatee, hei beneficiary, “ ‘ af ei " ; 241vita Uf f2xabIe to the fiduciary (meaning no income has been ~ eiringentend a {he Income is nat deductible from the gros income ofthe fdr Buti tna beneficiary, such income shall form part of the gr08s aE maa Gledictible from such gross income. The income thus distributed ita be included Efoss income of the beneficiary. The deductions just discussed shall not be alloweg a the case of a trust administered ina foreign country. Mlustration: Ms. Red Butterfly died on Aug. 14, 2014, Her estate is now under Iu settlement. The estate had P1,500,000 gross income from Aug. 14 to Dec. 31, 2014 Expenses related to this income was P400,000. There was no distribution of inayns mong the heirs. How much was the tax due for the year? j Gross Income 4,500,000, Less: Deductions 400,000 Personal Exemption 20,000" __420,000_ Taxable income --P2,080,000 Tax Due: ‘On P500,000 125,000 580,000 185,600 310,500, tax the trust was P500,000. Compute for the tax due, Gross Income < Less: Deductions (50%) 250,000 De * Personal Exemption 20,000 aati eons SEE os TRezp00 : os onion : ; $0000 at 2s% co. : sear san CONSOLIDATION OF INCOME OF TWo OR More TRUSTS When two or more trusts are created by the same trusts Is the same, the taxable income of all the tru ‘computed on such consolidated income, } 242 Consolidated Gross income Less: Consolidated Deductions Consolidated Taxable Income Less: Personal Exemption Taxable income ‘Multiply by: Tax rate in See. 2 ‘Amount of Income Tax on Consolidated Taxable incor gach trustee shall compute his sh income based on the formula beloy Taxable income of a trust before exemption Consolidated taxable income of all trusts before exemption Illustration: Mr. Anilov maintains t * minors, as common beneficiaries. ’ be distributed to the beneficiaries Following are data relative to the tr Gross income Deductions The share of each trust on the in computed below: Consolidated Gross Income Less: Consolidated Deduction Consolidated Taxable Income Less: Personal Exemption Taxable Income Tax Due on Consolidated Ta ‘©n P500,000 180,000 at 32%Consolidated Gross Income : Less: Consolidated Deductions >: Consolidated Taxable Income = Less: Personal Exemption . wx Taxable Income Multiply by: Tax rate in See. 24(4) * Amount of Income Tax on = Consolidated Taxable Income 0 a : fach trustee shal compute his share of the inco mone bssed onthe formula belo me tax on the consolidated taxable Taxable income of atrust ___beforeexemption __ Income taxon consol Income tax payable Consolidated taxable income of dated taxable income by each trustee all trusts before exemption Ilustration: Mr. Anilov maintains two irrevocable trusts that name his three children, all - minors, as common beneficiaries. The terms of the trusts provide that no income shall be distributed to the beneficiaries until the youngest should become | 25 years of age. following are data relative to the trusts: : Trust 1 Trust 2 Gross Income 450,000 600,000 Deductions * 450,000 200,000 The share of each trust on the income tax on consolidated taxable income in 2014 is computed below: Consolidated Gross Income P1,050,000 =. Less: Consolidated Deductions 350,000, Consolidated Taxable Income P 700,000 Less: Personal Exemption 20,000 Taxable Income . 680,000 : Tax Due on Consolidated Taxable Income: ‘On P500,000 P125,000 180,000 at 32% pee z P182,600 Trust 1: Trust2 P3000 < 400,000 [ ee x pig2,600 = BZ8,257 .~procooo * P8600 = [Link] 243