Question 1

Identify the parties that are present when an estate is created, and their key duties. Then do the same for a trust.

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Question 2

The Moot Trust distributes an asset to its income beneficiary that shows a realized gain. What are the Federal income tax consequences of the distribution? What if the asset shows a realized loss?

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Question 3

The Gibson Estate is responsible for collecting outstanding income amounts and paying the remaining obligations of Juanita Gibson, the deceased. How does Federal income tax law treat these items? Hint: Define and use the term income in respect of a decedent in your answer.

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Question 4

The Circle Trust reports some exempt interest income for the year. How does this investment income affect Circle's deduction of its fiduciary fees? Charitable contributions?

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Question 5

Consider the term fiduciary accounting income as it is used with respect to the Federal income taxation of trusts and estates. How is this amount computed? Where is it used in computing the parties' taxable incomes?

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Question 6

In 2016, the Prasad Trust incurred the following items:

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Question 7

The Yeoman Trust has generated several Federal income tax credits for this tax year. Which taxpayer(s), if any, can use these credits in computing a Federal income tax liability,e.g., the grantor, the trust, its income beneficiaries, its remainder beneficiaries? Answer for estates, simple trusts, and complex trusts.

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Question 8

Summarize the Federal income tax rules that apply to a trust or estate concerning the alternative minimum tax. Include comments about the applicable tax rates, and any personal exemption.

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Question 9

Your client Pryce is one of the income beneficiaries of the Santiago Trust. Pryce says to you, "I want all of the exempt interest income from Santiago to be allocated to me, as I am the income beneficiary who is subject to the highest marginal Federal income tax rate." How do you respond to Pryce's request?

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Question 10

Olsen has been determined to be a grantor trust by the IRS. What are the tax consequences of this tax status? What are the tax return filing requirements for Olsen and for Peggy, the donor of the trust's assets?

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Question 11

The Raja Trust operates a welding business. Its current-year cost recovery deductions properly amount to $75,000. Raja's accounting income was $100,000, of which $40,000 was distributed to first-tier beneficiary Chuck, $25,000 was distributed to second-tier beneficiary Ruby, and $35,000 was accumulated by the trustee. Ruby also received a $25,000 discretionary corpus distribution. Raja's DNI was $80,000. Identify the treatment of Raja's cost recovery deductions.

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Question 12

The Federal income taxation of a trust or estate has been described as a "modified pass-through" system. Compare fiduciary tax rules to those that apply to LLCs and to individuals.

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Question 13

The Kapoor Trust is your client. Complete the chart below, indicating Kapoor's trust accounting income for each of the alternatives. $$\begin{array} { l r } 
\text { Interest income, taxable } & \$ 60,000 \
\text { Interest income, tax-exempt } & 30,000 \
\text { Interest income, tax-exempt but AMT preference } & 10,000 \
\text { Long-term capital gain } & 40,000 \
\text { Trustee fee } & 5,000
\end{array}$$ ?
Trust agreement provisions
Trust accounting income
Fees and capital gains allocable to corpus
______________________
Capital gains allocable to corpus, one-half of fees allocable to income
______________________
Capital gains allocable to income, silent concerning allocation of fees
______________________
Fees and exempt income allocable to corpus, silent concerning allocation of capital gain/loss
______________________

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Question 14

List and discuss the three major functions of distributable net income (DNI) as that amount is used under Federal income tax law.

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Question 15

List at least three non-tax reasons that you might suggest to your client Connie that she should consider shifting some income and assets to a trust.

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Question 16

Tax professionals use the terms simple trust and complex trust when dealing with fiduciary arrangements. How does one know whether a trust is "simple" or "complex?" When is this determination made?

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Question 17

Marcus has been determined to be a grantor trust by the IRS. Your partner explains that this probably happened because the donor of the trust assets retained excessive powers over the operation of the trust or the use of its assets and income. To what powers is your partner referring?

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Question 18

The DaSinzi Estate has two equal income beneficiaries (Rollo and Luisa) and one remainder beneficiary (Coco). The estate operates a business and generates cost recovery deductions. Which taxpayer(s), if any, can deduct these items, e.g., the deceased, the estate, Rollo, Luisa, or Coco?

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Question 19

Does the estate or trust's distributable net income always equal its deduction for distributions to beneficiaries? Are the two amounts ever equal in amount? Answer for estates, simple trusts, and complex trusts.

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Question 20

Consider the term distributable net income as it is used with respect to the Federal income taxation of trusts and estates. How is this amount computed? Where is it used in computing the parties' taxable incomes?

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Quiz 20: Income Taxation of Trusts and Estates