Question 1

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

Accepted Answer

These terms are all used interchangeably to refer to the person who establishes a trust and transfers assets into it.

Question 2

A complex trust automatically is exempt from the Federal AMT.

Accepted Answer

False

Question 3

Tax planning motivations usually are secondary to other objectives in deciding whether to create a trust.

Accepted Answer

Tax planning is often not the primary reason for creating a trust, as other objectives such as asset protection, estate planning, and charitable giving may take precedence.

Question 4

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

Accepted Answer

The statement is true. The fee for disposing of the real property can be claimed as a deduction against the Federal estate tax, unless the estate elects to claim it on the income tax return instead.

Question 5

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

Accepted Answer

Capital gains are typically allocated to the corpus or principal of the trust, not to fiduciary income, unless the trust document specifically directs otherwise or state law allows for such allocation to income.

Question 6

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

Accepted Answer

Trusts can deduct wages paid to their employees as a business expense, similar to other businesses.

Question 7

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

Accepted Answer

All three terms refer to the property or holdings within a trust.

Question 8

Trusts can select any fiscal Federal income tax year.

Accepted Answer

The answer of Trusts can select any fiscal Federal income...

Question 9

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

Accepted Answer

The answer of Estates and trusts can claim Federal income...

Question 10

A trust might be used by one running for a political office.

Accepted Answer

A trust can be used by a political candidate to manage and protect their assets while also avoiding conflicts of interest. It can also be used to allocate funds for campaign expenses.

Question 11

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

Accepted Answer

Income in respect of a decedent refers to income earned by a person before their death but received by their estate or beneficiaries after their death. An example of this is an uncashed paycheck that the taxpayer earned before they passed away.

Question 12

The decedent's estate must terminate within four years of the date of death.

Accepted Answer

There is no specific timeline for the termination of an estate. The length of time to settle an estate can vary depending on the size and complexity of the estate, as well as any legal challenges that may arise.

Question 13

An estate's income beneficiary generally must wait until the entity is terminated by the executor to receive any distribution of income.

Accepted Answer

An estate's income beneficiary can generally receive regular distributions of income while the entity is still active, as determined by the executor or trustee.

Question 14

A complex trust pays tax on the income that it retains and adds to corpus.

Accepted Answer

A complex trust is required to pay taxes on the income it retains and adds to its corpus. Any distribution of income to beneficiaries is then taxed at their individual tax rates.

Question 15

The Bard Estate incurs a $25,000 fee in disposing of the real property of the decedent. 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.

Accepted Answer

The executor of the estate can claim a $5,000 deduction against the Federal estate tax and a $20,000 deduction on the estate's income tax return for the $25,000 fee incurred in disposing of the real property.

Question 16

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

Accepted Answer

The answer of The first step in computing an estate's...

Question 17

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

Accepted Answer

If the controlling agreement allows for it, a trust can terminate when the income beneficiary reaches a certain age, such as age 35. This would depend on the specific provisions outlined in the trust agreement.

Question 18

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

Accepted Answer

The answer of A decedent's income in respect of a...

Question 19

A realized loss is recognized by a trust when it distributes a non-cash asset.

Accepted Answer

The answer of A realized loss is recognized by a...

Question 20

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

Accepted Answer

As a legal entity, the fiduciary is responsible for its own tax liabilities and must report and pay taxes like a corporation.

Quiz 28: Income Taxation of Trusts and Estates