 Hello and welcome to this session in which we would look at fiduciary income tax return to be more specific states and trust, which, which goes on 10 form 1041. Now, before you understand 1041 form 1041, you have to understand what is an estate, what is a trust. So in this session, we're going to be looking at the elements of states and trust. Now, before we start, I would like to remind you that if you are an accounting student, this topic is covered in your income tax course. Usually it's not, but it's required because it is covered on the CPA exam. So often students, they graduate and they don't know anything about this topic by the time they get to the CPA exam. So if you're taking your CPA exam, what I'm going to be offering you is an additional supplemental course in addition to your CPA review course. So if you're taking a CPA review course, that's great. What I offer is something different. I offer explanation, detailed explanation, like what you skip in college or what you did not learn in college or what you learned in college and you forgot the CPA review course. They don't teach you the material they reviewed with you. They assume you already know it. So here's my offer to you. Here's my challenge. Are you willing to spend $29 or $30 just to try out to see if my system works. And if it works, excellent. You're going to be able to add 10 to 15 points to your CPA exam. And what I suggest you do, if not for anything, check out my website to see how well is your university doing on the CPA exam. Because that's going to tell you how well are you prepared, generally, because it's a good indication of the rigor of your accounting program. Also, I do have other accounting finance audit courses. Please check them out. Also connect with me on LinkedIn if you haven't done so. Also check it, check my LinkedIn recommendation where people already used my system to pass the exam and see what they say about my system. Please like this recording, share it and subscribe to my YouTube. Connect with me on Instagram and Facebook. So where does the form 1041, the state and trust, fits in our tax life? Well, when we are alive, we are, as individual, will have to fill out our 1040 on a yearly basis. Then if we have a C corporation, then we have to fill out form 1120. If we are an S corporation, then we have to fill out the form 1120 S and everything flows to the shareholder through K1. If we have a partnership, we fill out form 1065. Also, it's a tax flow entity. It goes to everything goes to the partners on form K1. Now, we are looking at form 1041. 1041 is very similar, very similar to form 1065 and form 1120 S. It means it's a conduit. It's a tax flow entity. So everything from 1041, it's going to go to the K1s. Who are the K1s? Who gets to the K1s? The beneficiaries and we'll talk about this shortly. Now, we want to make sure we're aware that we still have to fill out sometime form 709, which is this is the gift tax, and this is filled out as needed because a lot of people confuse the gift tax and the estate tax, which is form 706 with form 1041. 706, it sounds like estate tax. Well, this is not the same thing as estate and trust. Estate tax is filled out nine months after the death of the individual. And this is where they value their assets and they pay taxes to the government one time. Okay. 1041 is a little different. And this is what we need to talk about. So you need to understand what is an estate? What is a trust? So you'll be able to understand how 1041 works. Let's go ahead and get started. So let's talk about a trust versus estate. What is a trust and what is an estate? Well, a trust, it can be created anytime while you are alive. You're breathing oxygen, so on and so forth. It's basically it's an arrangement. It's a contract. Think of it as a contract or it's an arrangement entered by declaration through which a trustee, and we're going to see who the trustee is, take titles to the property. The property could be a building, stocks, bonds, cash for the purpose of protecting or conversing to the beneficiary. So what does that mean? Let's look at this picture. We have a trust and think of a trust again as a corporation trust. It's a legal entity. So you create a trust. Then you are the donor. The donor. Let's assume just to make it simple. Your rich uncle. It's the donor. The donor will transfer asset into distrust. They will transfer stocks, bonds, building, cash, gold, any other assets that they want to transfer to distrust. Then the donor will name a trustee. Who's the trustee? Think of the trustee as the donor's lawyer or attorney. They don't have to. They can be somebody at a financial institution. They can be any person that they can trust. But the trustee is the person that the donor trust. They're going to take care of these assets and follow their instruction. And what is their instruction? You create a trust to benefit someone for the beneficiaries. So who could be the beneficiaries? The beneficiaries could be charities or they could be your kids, your grandkids, someone you like, a cause that you want to contribute to. So simply put, examples will be trust for minors. What you do is you provide funds for college, for the college education or other needs for the minor. And the trust will manage this and they will distribute this money because you really want to take care of your kid, of your minors. But you don't want to give them all the assets now. You only want to give them the income. So you put those assets away in a trust and a trustee, a lawyer will take care of this and they will distribute the income as needed to those beneficiaries. Also another example of trust and we could have many types of trust is a divorce trust where you transfer the assets under the control of the trustee. And you will instruct the trustee to use the income to benefit the ex-spouse in form of child support or alimony payment or whatever the purpose is. So basically you're trusting someone to take care of this for you. So you put the assets away and they will take care of it. So think of it as you have three parties here. You have the donor, think of the donor, the person with the money. You have the trustee, the person that's going to take care of your assets and follow your instruction. And you have the beneficiaries, the people or the organizations that's going to benefit from that trust. So this is what we are looking at. This is the big picture. Now, what's the difference between the trust and an estate? Well, estate occurs only when someone dies. So when someone dies, basically it becomes an estate or an estate is created when someone dies to distribute their assets. Same thing. When someone dies, rather than a trust, it's called an estate. And in that estate, you have all your assets. And we'll talk about estate assets in a separate recording, but this is what we're looking at too. Basically the same picture, except that the donor here is the decedent. So the decedent, the person that dies will have older assets in that estate. Then we have the executor. Either again, it could be assigned by the person that died before they died under will or it could be assigned by the state. But you do have a trustee. It's called specifically executor. Then what's going to happen? This individual will manage the estate, then distribute the whatever needed to be distributed income or assets to the beneficiaries. Notice three parties, the decedent here, the executors and the beneficiaries. And the estate is basically an artificial, like a corporation, an artificial legal entity. So this is basically, you want to understand this picture before we start. So remember, trust and estates are separate from the taxpayer. They're separate taxpayers. They're artificial taxpayers. They're a legal entity, like a C corporation, and they have to fill out form 1041, which we'll look at later on. But this is the big picture. Now, some basic concepts of fiduciary taxation. One, there's no double taxation. What does that mean? So unlike a C corporation where the corporation pay taxes, then once the money is transferred to the shareholders, the shareholders pay taxes, there is no double taxation here. So although it looks like a C corporation, but there is no double taxation in general. So who pays the taxes taxable income of the trust or an estate is taxed to the entity itself, to the trust or the estate, or to the beneficiaries to the extent that each receive something called accounting income. Now, what is accounting income? Don't worry about the storm. We're going to talk about accounting income later on in the next session. So think of the trust as a conduit. It's basically, it holds the money that it passes to the beneficiaries, not the shareholders. Now we have beneficiaries. So it's like an S corporation and a partnership. It's a flow through entity. Now we have to understand a couple of few terms about estate and trust. We have something called income and remainder interest. So when you put the assets in that trust or when you put the assets in that estate, the assets that are going to generate interest from the bonds, dividend from the stocks, rent from the building, they're going to have income. So you're going to have one part. You're receiving the accounting income of the trust. It's called income interests, the people that receive the income. And you're going to have at some point people taking the corpus, which is the principal amount of the trust, like the stocks themselves, the bond, the building at the termination of the trust as a legal entity. And this, and the people that gets this, they are called. They're getting the remainder interest. So we have the income interest where you get the income from the bannies for the beneficiaries and somebody eventually will get the stocks and the bonds, the remainder interest. Make sure you are familiar with those, understanding those two terms. Let's take a look at a few other topics or additional topics for this session. Is what are the filing requirement tax here? And do they have to pay estimated tax payment? Well, fiduciary must file a Form 1041 for the estate and the following situation. For an estate with a gross income more than 600. And for a trust that either has any taxable income or if no taxable income has a gross income of 600 or more, the due date of the estate and trust return is the 15th of the fourth month following year end. So what is year end then? Well, for a state, they can use any physical year for the estate. Because when you die, no one knows when you die, therefore the government says you can use any physical year. If you're creating a trust, the trust must use, generally speaking, the calendar year. Remember, the trust is the calendar year, the estate you could use any year. And when is the return due? Like three and a half month after three and a half month after you create the trust. Simply put, the few years in the calendar year, it becomes 415, which is April 15, the hour tax day. Do they have to make estimated payment? Trust and estates are required to make estimated tax payment using the schedules as individuals. So yes, they do have to. Applies to a state and grantor trust. What is a grantor trust? A grantor trust is when you are all three. When you are the Benny, you are the creator of the trust, the donor, and you are the trustee. Basically, you put your money to manage it in a separate corporation, not separate corporation, separate legal entity. So applies to those only tax years ending two or more years after the decedent step. Because generally speaking, when someone dies, you're not going to have those assets sitting there for too long, maybe a year or two. What's going to happen? Eventually, you will distribute the asset and the trust is gone. Charitable trust, if you put money away in private foundation, are exempt from making estimated payments. So if you put your money away in what's called the charitable trust, what is the charitable trust for? You put that money away and you want to give it to charities. So notice we have different type of trust. Charity trust is basically, as the name suggests, just basically you want to contribute to a cause, to certain charities. Therefore, you put that money away and you let somebody else manage it for you in that trust. We have also simple versus complex trust. We need to know the difference between simple and complex trust. A simple trust is a trust that's required to distribute its entire accounting income. So don't worry about what is accounting income now. We're going to learn about it in the next session. It means they have to distribute everything to the designated beneficiaries. Also, has no beneficiaries that are qualifying charitable organization. So they don't have charitable organization, qualifying charitable organization, and make no distribution of the trust corpus. What is the trust corpus? Trust corpus is the principle. Remember, what are the principle? The stocks, the bonds, the building, whatever is generating income for that trust. You cannot distribute that. You have a simple trust. What is a complex trust? Anyone? Anything? That's not a simple trust. So if it's not a simple trust, guess what? It's a complex trust. Now, why do we have to know the difference between simple and complex trust? Because we're going to have what's called personal exemptions. The government gives you a freebie. If you are dealing with a simple trust, you'll have a personal exemption of $300. Simply put, what does that mean? It means you can deduct $300 from the taxable income that you are computing. If it's a complex trust, it's $100. If we're dealing with an estate, the personal exemption is $600. Exit, basically, what are exemptions? Just, well, if you have $600 or less in your estate, don't worry about it. You know, that $600 will wipe it out. If you have $300, it will be wiped out. That's basically what we are saying. So the first $600, first $300, first $100 of income, they're not taxable. Now, in the next session, we're going to start to look at actually some more important topic. I just want to make sure you get the big picture about the trust, how does it work, what's the purpose of it. And we have to learn how to compute accounting income and the trust, taxable income, and most importantly, distributable net income or D&I. At the end of this recording, I'm going to ask you again, if you like this recording, like it, share it, and don't forget about your CPA exam. If you are studying for the CPA exam, I don't replace your CPA course, but I can help you improve your score. Check out my website. You're not going to lose anything. Well, you would lose $30. Yes, if you decided to subscribe, you would lose $30. Well, if you don't like it, you lost it basically. But here's basically the trade-off. Are you willing to try something for $30 to take your chances in passing your exam? It may or may not work. It worked for many, but it worked for you. That's the question. Good luck, study hard, and let's take a look at the next session shortly.