Question 1

In the current year, a trust has distributable net income (DNI)of $30,000. During the year, the trust makes a mandatory distribution to Sarah of $5,000 and a discretionary distribution of $10,000 to Kyle. The trust has no tax-exempt income. The distribution deduction of the trust is

Accepted Answer

The distribution deduction of a trust is limited to the amount of DNI for the year, which is $30,000 in this case. However, since the trust made distributions totaling $15,000 ($5,000 to Sarah and $10,000 to Kyle), the distribution deduction is limited to $15,000, which is the total amount of distributions made. Therefore, the correct answer is B.

Question 2

A trust is required to distribute all of its income annually. It distributes all of the income and $2,000 of principal to the beneficiary. Which of the following statements is correct?

Accepted Answer

The trust is a simple trust because it is required to distribute all of its income annually. The trust is allowed a $300 exemption because it distributed more than $2,000 of principal to the beneficiary.

Question 3

A trust must distribute all of its income annually. Capital gains are allocated to principal. The trust has dividend income of $12,000, capital gains of $6,000, and no expenses. Calculate the trust's taxable income.

Accepted Answer

The answer of A trust must distribute all of its...

Question 4

Identify which of the following statements is true.

Accepted Answer

Beneficiaries of simple trusts are taxed currently on their pro rata share of taxable distributable net income (DNI) regardless of the actual amount distributed to them during the period. Option B is false since the income received by beneficiaries retains its character, and option C is also false since capital losses may pass through to beneficiaries succeeding to trust property.

Question 5

The $3,000 limitation on deducting net capital losses does not apply to a trust.

Accepted Answer

The $3,000 limitation on deducting net capital losses applies to both individuals and trusts, restricting the amount of net capital losses that can be deducted against ordinary income each year.

Question 6

A simple trust has a distributable net income (DNI)of $50,000 and net accounting income of $60,000, all from taxable sources. The trust has a sole beneficiary, Marty. The trust reports on a calendar tax year and distributes the $60,000 of 2018's net accounting income to Marty on January 20, 2019. No other distributions are made in the current year. Marty's taxable income from the trust this year is

Accepted Answer

Marty's taxable income from the trust this year is $50,000, which is the amount of the Distributable Net Income (DNI). The DNI sets the upper limit on the amount that can be taxed to the beneficiary. Even though the distribution was more than the DNI, Marty is taxed only on the DNI amount of $50,000.

Question 7

A trust has the following results:  The Uniform Act is followed. The trust document requires one-fifth of the income to be distributed annually to David and the remainder of the income to Patty. What is distributable net income?

Accepted Answer

The answer of A trust has the following results: ...

Question 8

A trust is required to distribute all of its income currently. Two years ago, it had a $10,000 capital loss. Last year, it had a $3,000 capital gain. This year, the trust is terminated. Albert has a 40% interest in the trust, and Barbara has a 60% interest. Barbara receives a capital loss pass-through of

Accepted Answer

Barbara receives a capital loss pass-through of $4,200 because the trust's capital loss carryover of $7,000 ($10,000 loss - $3,000 gain) is distributed according to her 60% interest in the trust.

Question 9

Identify which of the following statements is true.

Accepted Answer

The other statements are false. The personal exemption available to a trust is not adjusted annually based on changes in the consumer price index (A), and distributable net income (DNI) includes tax-exempt income (C). However, income received by a trust beneficiary does have the same character it had at the trust level (B).

Question 10

A trust reports the following results:  All of the items above are allocated to income. Calculate the maximum amount of trustee fees that are deductible.

Accepted Answer

The answer of A trust reports the following results: ...

Question 11

Ebony Trust was established two years ago with Brent as the beneficiary. The trust instrument instructed the trustee last year to make discretionary distributions of income to Brent. Beginning in two years, the trustee is instructed to pay all of the trust income earned that year to Brent. What was the trust's personal exemption last year? What will the personal exemption be in two years?

Accepted Answer

The answer of Ebony Trust was established two years ago...

Question 12

A trust reports the following results:  All of the items are allocated to income except the capital gains. Calculate the maximum amount of trustee fees that are deductible.

Accepted Answer

The answer of A trust reports the following results: ...

Question 13

A trust reports the following results:  The trust must distribute all of its income annually. Calculate taxable income after the distribution deduction.

Accepted Answer

The answer of A trust reports the following results: ...

Question 14

Melody Trust has $60,000 of DNI for the current year, $20,000 of rental income and $40,000 of corporate bond interest. The trust instrument requires the trustee to distribute 30% of the trust income to Lee and 70% to Sarah, annually. The trust instrument does not require an allocation of the different types of income to the two beneficiaries. What is the amount and composition of the income reported by Lee and Sarah, respectively?

Accepted Answer

The answer of Melody Trust has $60,000 of DNI for...

Question 15

Panther Trust has net accounting income and distributable net income of $100,000, $75,000 from taxable sources and $25,000 from tax-exempt sources. During the year, the trust makes a mandatory distribution to Julius and Steve of $50,000 each. The distribution deduction is

Accepted Answer

The distribution deduction is limited to the lesser of the distributable net income (DNI) or the actual distributions made. Here, the DNI is $75,000, which is less than the total distributions of $100,000, so the deduction is $75,000.

Question 16

A trust that is required to distribute all of its income annually receives a exemption for the year of

Accepted Answer

A trust that is required to distribute all of its income annually is still entitled to a $300 exemption.

Question 17

Distributable net income (DNI)does not include capital gains allocated to principal.

Accepted Answer

DNI includes only those items of income, deduction, and credit that are required to be allocated to beneficiaries for the current year. Capital gains allocated to principal are not required to be distributed to beneficiaries and therefore not included in DNI.

Question 18

Which of the following is not an addition to trust taxable income when computing distributable net income (DNI)?

Accepted Answer

Capital gains allocated to principal are generally not added to trust taxable income when computing distributable net income (DNI), as they are typically not considered part of DNI unless they are specifically allocated to be distributed or are actually distributed to the beneficiaries.

Question 19

Panther Trust has net accounting income and distributable net income of $100,000, $75,000 from taxable sources and $25,000 from tax-exempt sources. During the year, the trust makes a mandatory distribution to Julius and Steve of $50,000 each. How much of Steve's distribution is taxable?

Accepted Answer

Steve's distribution is $50,000. The taxable portion of the trust's income is $75,000 out of $100,000 total income. Therefore, 75% of any distribution is taxable. 75% of $50,000 is $37,500.

Question 20

Explain the three functions of distributable net income (DNI).

Accepted Answer

The answer of Explain the three functions of distributable net...

Quiz 14: Income Taxation of Trusts and Estates

In the current year, a trust has distributable net income (DNI) of $30,000. During the year, the trust makes a mandatory distribution to Sarah of $5,000 and a discretionary distribution of $10,000 to Kyle. The trust has no tax-exempt income. The distribution deduction of the trust is

A trust is required to distribute all of its income annually. It distributes all of the income and $2,000 of principal to the beneficiary. Which of the following statements is correct?

A trust must distribute all of its income annually. Capital gains are allocated to principal. The trust has dividend income of $12,000, capital gains of $6,000, and no expenses. Calculate the trust's taxable income.

Identify which of the following statements is true.

The $3,000 limitation on deducting net capital losses does not apply to a trust.

A trust has the following results: The Uniform Act is followed. The trust document requires one-fifth of the income to be distributed annually to David and the remainder of the income to Patty. What is distributable net income?

Identify which of the following statements is true.

A trust reports the following results: All of the items above are allocated to income. Calculate the maximum amount of trustee fees that are deductible.

A trust reports the following results: All of the items are allocated to income except the capital gains. Calculate the maximum amount of trustee fees that are deductible.

A trust reports the following results: The trust must distribute all of its income annually. Calculate taxable income after the distribution deduction.

Panther Trust has net accounting income and distributable net income of $100,000, $75,000 from taxable sources and $25,000 from tax-exempt sources. During the year, the trust makes a mandatory distribution to Julius and Steve of $50,000 each. The distribution deduction is

A trust that is required to distribute all of its income annually receives a exemption for the year of

Distributable net income (DNI)does not include capital gains allocated to principal.

Which of the following is not an addition to trust taxable income when computing distributable net income (DNI) ?

Panther Trust has net accounting income and distributable net income of $100,000, $75,000 from taxable sources and $25,000 from tax-exempt sources. During the year, the trust makes a mandatory distribution to Julius and Steve of $50,000 each. How much of Steve's distribution is taxable?

Explain the three functions of distributable net income (DNI).