Deck 20: Income Taxation of Trusts and Estates

Question 1

Tax planning motivations usually predominate over other objectives in deciding whether to create a trust.

Answer 1

False

Question 2

When a trust operates a trade or business, it can claim a deduction for wages paid to employees.

Answer 2

True

Question 3

A decedent's income in respect of a decedent is subject to the Federal income tax, but it is excluded from the estate tax.

Answer 3

False

Question 4

Under IRS regulations, the decedent's estate must terminate within four years of the date of death, to minimize income-shifting techniques.

Question 5

The first step in computing an estate's taxable income is the determination of its fiduciary accounting income for the year.

Question 6

A complex trust pays tax on the income that it accumulates i.e., that it does not distribute).

Question 7

Estates and trusts can claim Federal income tax deductions for costs incurred in maintaining investments in U.S. state and local bonds.

Question 8

Like a corporation, the fiduciary reports and pays its own Federal income tax liability.

Question 9

Corpus, principal, and assets of the trust are synonyms.

Question 10

The Stratford Estate incurs a $25,000 casualty loss in disposing of the decedent's real property. The deduction is claimed against the Federal estate tax unless by election it is claimed on the estate's income tax return.

Question 11

If provided for in the controlling agreement, a trust might terminate when the income beneficiary reaches age 35.

Question 12

The Stratford Estate incurs a $25,000 legal fee in disposing of the decedent's real property. The executor can decide to claim a $5,000 deduction against the Federal estate tax and a $20,000 deduction on the estate's income tax return.

Question 13

Judy can claim one-third of the Sweet Estate's cost recovery deductions, because she received one-third of the fiduciary's distributable net income DNI).

Question 14

Usually, a beneficiary takes a carryover basis when a trust distributes a noncash asset.

Question 15

Trusts can select any Federal income tax year-end.

Question 16

An example of income in respect of a decedent is the taxpayer's last paycheck uncollected at death.

Question 17

With respect to a trust, the terms creator, donor, and grantor are synonyms.

Question 18

A trust might be used when a married couple is divorcing.

Question 19

An estate's remainder beneficiary generally must wait until the entity is terminated by the executor to receive any distributions.

Question 20

Generally, capital gains are allocated to fiduciary income, because they arise from current-year transactions as directed by the trustee.

Question 21

The Whitmer Trust operates a manufacturing business and distributes the profits to its income beneficiaries. Whitmer also passes through to the income beneficiaries the data needed to compute their deduction for qualified business income.

Question 22

The Gable Trust reports $20,000 business income and $10,000 exempt interest income, and it paid a $3,000 fiduciary fee. Gable's distributable net income includes $10,000 of net-tax interest income.

Question 23

A fiduciary's distribution deduction shifts the tax burden for the distributed amount of current-year income from the entity to the beneficiary.

Question 24

Harry, the sole income beneficiary, received a $40,000 distribution from the Lucy Trust in a year when the trust's distributable net income was $30,000. Harry's AGI increases by $40,000.

Question 25

The Gable Trust reports $20,000 business income and $10,000 exempt interest income, and it paid a $3,000 fiduciary fee. Gable's distributable net income DNI) includes $9,000 for the interest income.

Question 26

Winston is classified as a grantor trust because Harry, the donor, can revoke the trust. Consequently, Winston need not file an annual Form 1041, and Harry reports the trust items on his own Form 1040.

Question 27

When DNI includes exempt interest income, the beneficiary includes less than the full amount of DNI in current- year gross income.

Question 28

The Whitmer Trust operates a manufacturing business. When Whitmer incurs a net operating loss, the current-year deduction passes through to the income beneficiaries.

Question 29

Reyes contributed assets to a trust and designated daughter Maria as the income beneficiary and grandson Julio as the remainder beneficiary. This year, fiduciary accounting income was $50,000. The trustee paid $5,000 of this amount as premiums for a life insurance policy on Anita, Reyes's wife. Reyes pays Federal income tax on $5,000 for the year.

Question 30

The Crown Trust distributed one-half of its accounting income to Lee this year. Lee also is allocated one-half of
Crown's credit for building low-income housing.

Question 31

Harry, the sole income beneficiary, received a $40,000 distribution from the Lucy Trust in a year when the trust's distributable net income was $50,000. Harry's AGI can increase by as much as $50,000.

Question 32

First-tier distributions allowed by the will or trust document are made at the discretion of the executor or trustee.

Question 33

In computing distributable net income DNI) for a trust, one removes any net capital gain or loss that is allocable to income.

Question 34

One-fourth of the Cruger Estate's distributable net income consists of net long-term capital gains. Thus, when income beneficiary Susie receives a $40,000 income distribution from the estate, $10,000 of it qualifies for
the beneficial Federal income tax rate on long-term capital gains.

Question 35

The Gable Trust reports $20,000 business income and $10,000 exempt interest income, and it paid a $3,000 fiduciary fee. Gable's distributable net income includes $10,000 of net tax-exempt interest income.

Question 36

The Julius Trust made a gift to the United Charity on August 1, year 2, from its year 1 business profits. The trust's charitable contribution deduction can be claimed in year 2.

Question 37

The Malik Estate operates a manufacturing business. Malik made no income distributions this year. It can claim the full deduction for the MACRS depreciation of the assets of the business.

Question 38

Of the income received by the Atom Trust this year, 60% constituted municipal bond interest. Atom's trustee also made a $100,000 gift to the United Fund, a qualifying charity. The charitable deduction associated with this gift is limited to $60,000.

Question 39

Harry, the sole income beneficiary, received a $40,000 distribution from the Lucy Trust in a year when the trust's distributable net income was $50,000. Harry's AGI increases by $40,000.

Question 40

The Griffin Trust makes a gift of long-term capital gain property to a qualifying charity. Griffin's entity-level deduction cannot exceed 30% of distributable net income.

Question 41

Reyes contributed assets to a trust and designated daughter Maria as the income beneficiary and grandson Julio as the remainder beneficiary. This year, fiduciary accounting income was $50,000. The trustee accumulated $5,000 of this amount and added it to trust corpus. Reyes pays Federal income tax on $5,000 for the year.

Question 42

Tax planning usually dictates that high-income and high-wealth individuals be specified as second-tier beneficiaries of a trust arrangement.

Question 43

The tax rules regarding the income taxation of trusts and estates are included in which Subchapter of the Internal Revenue Code?

A) C
B) J
C) K
D) S

Question 44

The Prakash Trust is required to pay its entire annual accounting income to the Daytona Museum, a qualifying charity. The trust's personal exemption is:

A) $0.
B) $100.
C) $300.
D) $600.

Question 45

The unextended due date for a calendar year trust to file its Form 1041 is March 15.

Question 46

Which of the following is a typical duty of a trustee?

A) File the entity's state and Federal income tax returns.
B) Invest the assets that comprise the corpus of the entity.
C) Distribute entity accounting income to the beneficiaries in accordance with the provisions of the trust instrument.
D) All of these.

Question 47

When a trust distributes an in-kind asset with a realized loss, this loss most likely cannot be immediately deducted by the first-tier beneficiary.

Question 48

Three months after Brianna Timkin died, her executor received the final $40,000 installment from a sale of land that Brianna completed several years ago. Which of the following statements is true?

A) The $40,000 is both included in Brianna's gross estate and subject to tax on her estate's income tax return.
B) The $40,000 is subject to neither income nor estate tax, because it was received after Brianna's death.
C) The $40,000 is only subject to tax on her estate's income tax return.
D) The $40,000 is included only in Brianna's gross estate.

Question 49

The Prakash Estate has equal income beneficiaries Sam and Janet. As allowed by the terms of the will, the estate makes no income distributions during the current tax year. The estate's personal exemption is:

A) $0.
B) $100.
C) $300.
D) $600.

Question 50

Which of the following taxpayers can be subject to an entity-level Federal income tax?

A) Complex trust.
B) Partnership.
C) Limited liability company.
D) All of these taxpayers are pass-through entities, and they never are subject to an entity-level Federal income tax.

Question 51

The Prakash Trust is required to pay its entire annual accounting income to beneficiaries Sam and Janet. The trust's personal exemption is:

A) $0.
B) $100.
C) $300.
D) $600.

Question 52

The Code defines a simple trust as which of the following?

A) One that is allowed to file Form 1041-EZ.
B) One that has only one income beneficiary.
C) One whose grantor was an individual who still is alive.
D) One that must distribute its accounting income every year.

Question 53

The Chen Trust is required to distribute its accounting income every year, one-half to Missy Chen, and one-half to the local church's homeless shelter. What is the Chen Trust's personal exemption?

A) $0
B) $100
C) $300
D) $600

Question 54

The trustee of the Epsilon Trust distributed an asset to Telly, a qualifying income beneficiary. The asset's basis to the trust was $10,000, and its fair market value on the distribution date was $25,000. Which of the following statements is true?

A) Assuming that the trustee made an election under § 643e), the trust is allowed a $10,000 distribution deduction for this transaction.
B) Assuming that the trustee made an election under § 643e), Telly recognizes $10,000 gross income on the distribution.
C) Lacking any election by the trustee, the trust recognizes $15,000 gross income on the distribution.
D) Lacking any election by the trustee, Telly's basis in the asset is $10,000.
E) Lacking any election by the trustee, Telly's basis in the asset is stepped up to $25,000.

Question 55

Which of the following taxpayers use a Schedule K and K-1 to pass through income, loss, and credit amounts to the owners or beneficiaries?

A) Complex trust.
B) Partnership.
C) S corporation.
D) All of these taxpayers use Schedules K and K-1.

Question 56

Reyes contributed assets to a trust and designated daughter Maria as the income beneficiary and grandson Julio as the remainder beneficiary. This year, fiduciary accounting income was $50,000. The trustee paid $5,000 of this amount as Julio's high school tuition. Reyes pays Federal income tax on $5,000 for the year.

Question 57

Which of the following is a typical duty of a trustee?

A) Modify the language of the trust instrument so as to lower the entity's Federal income tax.
B) Make decisions as to how to invest the trust corpus portfolio.
C) Allocate items between income and corpus using Subchapter J rules.
D) All of these.

Question 58

Generally, an administrative expense attributable to municipal bond interest should be claimed on the estate's Form
706.

Question 59

The Philmore Estate is subject to a 40% Federal estate tax rate and a 25% Federal and state income tax rate.
Generally, an administrative expense should be claimed on the estate tax return.

Question 60

Which of the following is a typical duty of an executor of an estate?

A) Pay funeral expenses.
B) Pay off the decedent's financial liabilities.
C) Distribute the net assets of the probate estate.
D) Manage the decedent's assets until they are liquidated or distributed.
E) All of these.

Question 61

Three weeks after Abed died, his brother Tony properly received Abed's last paycheck from his employer. The gross amount of the check was $4,000, and a $300 deduction for state income taxes was subtracted in computing the net amount of the payment. Which of the following statements about the $300 is true?

A) It is deductible on neither Tony's income tax return nor on Abed's estate tax return.
B) It is deductible on both Tony's income tax return and on Abed's estate tax return.
C) It is deductible only in computing Abed's taxable estate.
D) It is deductible only on the income tax return of Abed's estate.

Question 62

The Doyle Trust reports distributable net income of $100,000 for the year and no income from tax-exempt sources. Under the terms of the trust instrument, the trustee must distribute $20,000 to Roger and $20,000 to Sally. After paying these amounts, the trustee can make additional distributions at its discretion. Exercising this authority, the trustee distributes an additional $25,000 to Roger and $50,000 to Sally. How much gross income from the trust must Roger recognize?

A) $50,000
B) $45,000
C) $40,000
D) $20,000

Question 63

For the year, the Uldis Trust has distributable net income DNI) of $100,000 and no income from tax-exempt sources. Under the terms of the trust instrument, the trustee must distribute $75,000 to Roger and $75,000 to Sally. After paying these amounts, the trustee can make additional distributions at its discretion. Exercising this authority, the Uldis trustee distributes an additional $10,000 to Roger and $30,000 to Sally. How much gross income from the trust must Roger recognize?

A) $10,000
B) $50,000
C) $75,000
D) $85,000

Question 64

This year, the Huang Trust is a complex trust. This year, it distributed all of its accounting income and $5,000 from corpus, to its sole income beneficiary Kun. Huang's taxable income for the year is:

A) $0.
B) $100).
C) $300).
D) $5,000).

Question 65

This year, the Zhao Estate generated distributable net income DNI) of $100,000, one-fourth of which was tax- exempt interest, and the balance of which was long-term capital gain. Kyle Zhao, the sole income beneficiary of the estate, received a distribution of the entire $125,000 accounting income of the entity. How does Kyle report the distribution?

A) $75,000 long-term capital gain, $25,000 exempt interest.
B) $50,000 long-term capital gain, $50,000 exempt interest.
C) $75,000 long-term capital gain, $25,000 ordinary income.
D) $93,750 long-term capital gain, $31,250 exempt interest.

Question 66

The Doyle Trust reports distributable net income of $100,000 for the year and no income from tax-exempt sources. Under the terms of the trust instrument, the trustee must distribute $20,000 to Roger and $20,000 to Sally. After paying these amounts, the trustee can make additional distributions at its discretion. Exercising this authority, the trustee distributes an additional $25,000 to Roger and $50,000 to Sally. How much gross income from the trust must Sally recognize?

A) $70,000
B) $60,000
C) $40,000
D) $20,000

Question 67

Ellie Inc., a calendar year C corporation, wants to make a gift to a charity that is deductible on its year 1 Form 1120. The gift must be made by Ellie:

A) During year 1.
B) During year 1 or 2.
C) On or before April 15, year 2.
D) On or before September 30, year 2.

Question 68

During the current year, the Santo Trust received $30,000 of taxable interest income, paid trustee's commissions of $3,000, and had no other income or expenses. The Santo trust instrument requires that $20,000 be paid annually to Marilyn and $40,000 be paid annually to Domingo. How much gross income must Marilyn and Domingo recognize?

A) $20,000 by Marilyn and $40,000 by Domingo.
B) $15,000 by Marilyn and $15,000 by Domingo.
C) $13,500 by Marilyn and $13,500 by Domingo.
D) $9,000 by Marilyn and $18,000 by Domingo.

Question 69

Which of the following is the annual maximum amount to be included as gross income by all of the income beneficiaries of the trust or estate?

A) Entity taxable income.
B) Entity adjusted gross income.
C) Distributable net income.
D) Fiduciary accounting income.

Question 70

The Uldis Trust reports distributable net income of $100,000 for the year and no income from tax-exempt sources. Under the terms of the trust instrument, the trustee must distribute $75,000 to Roger and $75,000 to Sally. After paying these amounts, the trustee can make additional distributions at its discretion. Exercising this authority, the Uldis trustee distributes an additional $10,000 to Roger and $30,000 to Sally. How much gross income from the trust must Sally recognize?

A) $30,000
B) $50,000
C) $100,000
D) $105,000

Question 71

This year, the Nano Trust reported $50,000 entity accounting income and $40,000 distributable net income DNI). Nano distributed $60,000 cash to Horatio, its sole income beneficiary. Nano is a simple trust. Nano's distribution deduction is:

A) $60,000.
B) $50,000.
C) $40,000.
D) $0.

Question 72

Which of the following statements, if any, relates to the tax treatment of both estates and trusts?

A) The termination date of the entity is specified in the controlling document.
B) The entity must use the same tax year as its creator i.e., grantor, decedent).
C) The entity is required to distribute all of its income currently to its beneficiaries.
D) In the year of its termination, the entity's net operating loss carryovers are passed through to its beneficiaries.

Question 73

This year, the Nano Trust reported $50,000 entity accounting income and $40,000 distributable net income DNI). Nano distributed $30,000 cash to Horatio, its sole income beneficiary. Nano is a complex trust. Nano's distribution deduction is:

A) $50,000.
B) $40,000.
C) $30,000.
D) $0. Because the distributions of a complex trust are discretionary, no deduction is allowed.

Question 74

The Ellie Trust, a calendar year entity, wants to make a gift to a charity that is deductible on its year 1 Form 1041. The gift must be made by Ellie:

A) During year 1.
B) During year 1 or 2.
C) On or before April 15, year 2.
D) On or before September 30, year 2.

Question 75

The Chen Trust incurred the following items during the year. What is Chen's deduction for the tax preparation fees? $\begin{array}{lr}\text { Taxable interest received } & \$ 40,000 \\\text { Tax-exempt interest received } & 60,000 \\\text { Tax preparation fees paid } & 5,000\end{array}$

A) $0
B) $2,000
C) $3,000
D) $5,000

Question 76

The distributable net income DNI) of a fiduciary taxpayer:

A) Constitutes the maximum amount for the fiduciary's distribution deduction.
B) Specifies the character of the distributions in the hands of the year's income beneficiaries.
C) Marks the maximum amount of gross income that income beneficiaries must report when receiving distributions.
D) All of these.

Question 77

Ellie, a calendar year individual, wants to make a gift to a charity that is deductible on her year 1 Form 1040. The gift must be made by Ellie:

A) During year 1.
B) During years 1 and 2.
C) On or before April 15, year 2.
D) On or before September 30, year 2.

Question 78

For the year, the Brighton Trust has distributable net income of $100,000 and no income from tax-exempt sources. Under the terms of the trust instrument, the trustee is required to distribute $25,000 to Roger and $50,000 to Sally. After payment of these amounts, the trustee can make additional distributions at its discretion. Exercising this authority, the Brighton trustee distributes an additional $20,000 to Roger, and $30,000 to Sally. How much income from the trust must Sally recognize?

A) $80,000
B) $65,000
C) $50,000
D) $30,000

Question 79

The Doyle Trust reports distributable net income of $100,000 for the year and no income from tax-exempt sources. Under the terms of the trust instrument, the trustee must distribute $30,000 to Roger and $30,000 to Sally. After payment of these amounts, the trustee can make additional distributions at its discretion. Exercising this authority, the trustee distributes an additional $25,000 to Roger and $25,000 to Sally. How much income from the trust must Sally recognize?

A) $25,000.
B) $30,000.
C) $50,000.
D) $55,000.

Question 80

Income beneficiary Turk received $30,000 from the Urgent Trust. Trust accounting income for the year was $100,000. The trust generated $20,000 in cost recovery deductions. How much can Turk deduct with respect to the cost recovery deductions that Urgent generated?

A) $0
B) $6,000
C) $14,000
D) $20,000