Taxation of Testamentary Trusts

KNOWLEDGE EXPECTED OF: CFP® Professionals

Highest Knowledge Level: Understanding

Knowledge Levels and Associated Verbs


Awareness
The state of being aware that something exists / to have familiarity with a particular activity or subject
Understanding
To comprehend the general relationship of particulars / to have an expertise with how something works
Application
Ability to put information to use / to use knowledge for relevant, practical purposes
Evaluation
To judge or conclude by utilizing data / a systematic determination of something’s worth or significance
Define
To state exactly the meaning of
Identify
To be aware of / to recognize and correctly name / to locate an appropriate resource
Explain
To make clear the meaning of / to describe something in more detail or reveal relevant facts or ideas related to it
Determine
To ascertain / to come to a decision, such as by investigation or reasoning
Compare
To note the similarities and differences between two or more things
Estimate
To determine an approximate value for
Calculate
To find the value using mathematics
Convert
To change from one form or purpose to another
Evaluate
To reach a conclusion or make a through careful study
Interpret
To give the meaning of / to construe or understand / to translate orally

Hold cursor over or click on each term to read its definition.


Additional Knowledge Expected of CFP Professionals
  • Define a testamentary trust.1
  • Identify how a testamentary trust is viewed in relation to the parties to the trust for tax purposes. 
  • Explain how property transferred into a testamentary trust will be treated for tax purposes. 
  • Identify circumstances when an election to opt out of a tax-deferred rollover of property into a testamentary trust may be beneficial, such as:
    • Settlor has carry-forward capital losses that may be used to offset capital gains upon deemed disposition of property
    • Settlor has capital gain deduction limit that may be used upon deemed disposition of property 
  • Explain circumstances when a tax-deferred transfer of capital property may be made into a testamentary trust.2
  • Explain how income earned by a testamentary trust will be taxed.
    • For income retained by a trust within the first 36 months after the settlor’s date of death (trust is part of a Graduated Rate Estate)
    • For income retained by a trust after the first 36 months after the settlor’s date of death
    • For income distributed to the beneficiaries 
    • For trusts where the beneficiary is eligible for the federal Disability Tax Credit (Qualified Disability Trust) 
  • Explain when property is deemed to have been disposed of by a testamentary trust.
    • For a spousal or common-law partner trust
    • For all other trusts 
  • Explain the value at which capital property may be transferred to a beneficiary from a testamentary trust.  
  • Identify the tax year-end for a testamentary trust.
    • During the life of the trust
    • In the year the trust is wound up

REFERENCES

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