Income Tax Consequences of Funding a Bequest: Specific, Pecuniary, and Residuary Distributions

Determining whether bequests carry out DNI, how they are taxed, and whether the trust or the beneficiary is taxed is complicated. As defined in Section 663(a)(1), specific bequests do not carry out DNI under specific circumstances. This is an exception to the general rules under Sections 661 and 662 requiring the inclusion, in beneficiaries' gross income, of amounts required to be paid, credited, or distributed by an estate or trust.

Unless satisfying a pecuniary bequest, distributing property generally does not generate a gain or loss for an estate or trust. The beneficiary receives the property at the trust or estate's basis. However, Section 643(e)(3) provides an election for recognition of the gain or loss on property distributions by the entity.

Bequests are rarely simple. Even after determining whether a bequest is specific, pecuniary, or residual, the executor may substitute property to satisfy a bequest. Additionally, distributions often include formula allocations to marital and bypass trusts. Trust and estate advisers need to grasp the intricacies of these bequests and elections to properly tax trusts and their beneficiaries.

Listen as our panel of trust and estate tax experts explains the types of funding requests, the applicable holding periods, and the basis of assets received by beneficiaries of bequests.

1. Funding bequests introduction
2. Types of distributions
3. Distributions and DNI
4. Capital gains
5. Holding period
6. Distribution of substituted property
7. Basis of assets
8. Marital trusts
9. Other considerations

The panel will cover these and other critical issues:

• Which distributions carry out DNI?
• When should an election be made under Section 643(e)(3) for recognition of gain by a trust or estate?
• How is the basis in appreciated assets determined by the beneficiary?
• When is a pecuniary bequest not taxable to a beneficiary?
• What are the three funding approaches outlined in Revenue Procedure 64-19 for marital pecuniary bequests?

Learning Objectives

After completing this course, you will be able to:

• Determine whether a distribution carries out DNI, and how much
• Ascertain whether an estate or trust is required to recognize gain or loss
• Decide when an election should be made under IRC 643(e) for recognition of gain by a trust or estate
• Differentiate distributions from different types of trusts
• Establish the impact of the separate share rule to income in respect of a decedent

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite: Three years+ business or public firm experience preparing complex tax forms and schedules, supervising other preparers or accountants. Specific knowledge and understanding of estate, gift and trust taxation including various trusts types, the unified credit, and portability.

Strafford Publications, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of Accountancy have final authority on the acceptance of individual courses for CPE Credits. Complaints regarding registered sponsons may be submitted to NASBA through its website: www.nasbaregistry.org.

IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).