Estate & Trust Taxes Explained: Forms 706 & 1041, Step-Up Basis, and DNI

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Are you confused about how taxes work for estates and trusts? Whether you are a trustee, an executor, or just planning for the future, this video breaks down the complex world of fiduciary taxation.

In this "Estate & Trust Taxation 101" guide, we explain the difference between estates (temporary entities created at death) and trusts (potentially permanent entities created by contract). We cover why these are considered "pass-through entities" and how income is taxed either at the entity level or the beneficiary level—but typically not both.

In this video, we cover:

Aggressive Tax Brackets: Why trusts and estates hit the top 37% tax bracket much faster than individuals (over $15,650 in income) to discourage hiding wealth.

Capital Gains vs. Ordinary Income: Understanding how interest and dividends are usually distributed to beneficiaries, while capital gains from selling assets are often taxed at the trust level.

Key Forms:

Form 1041: The fiduciary income tax return required if the entity has over $600 in income.

Form 706: The "Death Tax" return on the total value of the estate (due 9 months after death).

Form 709: When you need to file a Gift Tax return.

Net Investment Income Tax (NIIT): When the additional 3.8% tax applies.

Distributable Net Income (DNI): The formula used to determine the maximum taxable income a trust can shift to a beneficiary to lower the tax burden.


Gift Tax Rules: The 2025/2026 annual exclusion of $19,000 and how gift splitting works for married couples.

Strategic Elections: How to use the "65-Day Rule" to treat distributions as if they happened in the previous year and the Fiscal Year Election for estates.

Step-Up Basis: How inheriting assets can eliminate capital gains taxes on appreciation that occurred before death.

Important Numbers for 2025/2026:

Estate Tax Exemption: $13.99 million (2025) / $15 million (2026).

Annual Gift Exclusion: $19,000.

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