The tax incidence on estate income suggests the need for the estate fiduciary to distinguish between transactions affecting principal and those affecting income. Furthermore, a decedent’s will may stipulate certain provisions regarding estate income that differ from those regarding principal.
For example, a will might stipulate that the interest income earned on bonds subsequent to the decedent’s death is to accrue to a particular beneficiary for a period of time. The recipient of the income is referred to as an income beneficiary, and the party ultimately receiving the principal is referred to as the remainderman.
If the will is not clear with respect to the measurement of income, state statutes should be applied. Many states have adopted the Revised Uniform Principal and Income Act, which provides guidance as to the measurement of estate principal and income. The determination of estate income does not always parallel generally accepted accounting principles (GAAP). As discussed previously, the gains or losses on the sale of estate assets is considered a component of principal rather than income. When bonds are a part of the estate at the time of death, the premium or discount on the bonds is not amortized. Generally, however, if bonds are purchased subsequently by the fiduciary, a premium is amortized whereas a discount is not amortized.
Unless the will requires it, the common procedure is not to make any charge against income for depreciation. If the decedent wishes to protect principal for the depreciation factor, there should be a statement in the will that depreciation should be charged against income and an amount equal to the depreciation should be transferred from income to principal. For the depletion on wasting assets, the general rule is that income should be charged for the depletion because of the possibility of total consumption of principal.
One’s taxable estate may be reduced in a number of ways, including annual gifting, the creation of trusts, and marital exclusions.
The taxable estate consists of the gross estate less allowable deductions. The amount of estate tax is also reduced by a unified credit.