[Anonymous]

Struggling to follow Becker’s text on this (R4). Could someone at a high level distinguish the income tax an estate needs to pay and the estate tax? I feel like I’m mixing up the concepts and it’s really confusing.

Some thoughts and questions:

1) Why would an estate need to pay income tax? Does this happen when it takes a while to settle how the estate will be divided up (e.g. legal negotiations) and during that time, the estate generates income (e.g. dividends, interests)? And/or is it when the decedent buys an investment and has just the income distributed to the beneficiaries forever (e.g. a dividend paying stock)?

2) Is this an incorrect way of seeing things? At the moment a person dies, the (e.g. bonds/stocks) assets in the estate, if they get distributed out, would be subject to estate tax (paid only by the estate). If income is generated after a person dies (e.g. interest/dividends), then the income isn’t subject to estate tax, but is subject to income tax (paid either by the estate if it’s kept in, or by the beneficiary if it’s distributed out)?

One way I saw it was if someone gave a beneficiary an apple tree. The tree itself (the principal/corpus) would be subject to estate tax, but the apples that continuously grow afterwards (the income) would be subject to income tax?

[maynardka9]

Hi Akvod,

My understanding of the estate tax is that the tax occurs when property is transferred from the estate of a deceased person a beneficiary. However, it has to be a large estate to owe money as the exemption is $5.34M in 2014 or 5.25M in 2013.

For the income tax, the estate will pay an income tax on taxable income generated from investments in the estate (rental property income, interest etc) if the income stays in the estate. However, if the estate distributes the generated income to a beneficiary, then the estate can deduct the income and the beneficiary who receives the cash/property ends up paying the income tax.

Hope this helps

[maynardka9]

Hi Akvod,

My understanding of the estate tax is that the tax occurs when property is transferred from the estate of a deceased person a beneficiary. However, it has to be a large estate to owe money as the exemption is $5.34M in 2014 or 5.25M in 2013.

For the income tax, the estate will pay an income tax on taxable income generated from investments in the estate (rental property income, interest etc) if the income stays in the estate. However, if the estate distributes the generated income to a beneficiary, then the estate can deduct the income and the beneficiary who receives the cash/property ends up paying the income tax.

Hope this helps

[Anonymous]

So ignoring the UTT credit, if I died with a stock and some cash, the transfer of those two assets would result in an estate tax that's payable by me.

However, if I wrote in my will that the stock is to be kept in an estate/trust(?) for my child and all dividends are to be paid out to my child, then all those dividends will 1) NOT be subject to an estate tax 2) be subject to an income tax, either taxed by the estate if kept in or by the child if he receives it?

And if the will was modified so that the stock itself would get distributed to the child after 10 years, would the dividends generated and distributed during those 10 years be subject to income tax (and no estate tax), but the stock itself would be subject to an estate tax?

Again, to use an analogy, if I had an apple tree when I died, would the tree itself be subject to the transfer tax, but the apples that grow on it be only subject to income tax?

For estate tax purposes, you almost take a snapshot of the assets in the estate at one moment in time, and that's what's subject to estate tax. Any changes to the estate's net assets aren't subject to the transfer tax, but are subject to an income tax.

[Author]

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