Taxation of Testamentary Trusts
KNOWLEDGE EXPECTED OF: CFP® Professionals Only
- 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.3
- 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
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