Deck 19: Income Taxation of Trusts and Estates

Question 1

The first step in computing a fiduciary's taxable income is the determination of its distributable net income for the year.

Answer 1

False
Fiduciary accounting income is computed first.

Question 2

The decedent's estate must terminate by the third anniversary of the date of death.

Answer 2

False
The termination date of an estate is somewhat discretionary. It occurs when all of the required asset and income distributions are made,when all of the decedent and estate liabilities are paid,and when all other work of the executor is completed.

Question 3

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

Answer 3

True

Question 4

The fiduciary entity pays tax on the income that it distributes to beneficiaries.

Question 5

With respect to a selling expense incurred by an estate in disposing of the decedent's property,a deduction can be claimed on the Form 1041 only if the executor waives the corresponding deduction in computing the Federal estate tax.

Question 6

Generally,interest and dividend income is allocated to fiduciary corpus,because they relate to investment assets.

Question 7

The executor of the Globe Estate has reported a $10 million gross estate for the entity,and a taxable estate that exceeds the exemption equivalent by $10,000.The estate incurred a $50,000 sales commission in disposing of the decedent's assets.There was no exempt income this year.The executor can claim a $10,000 deduction for the commission against the taxable estate,thereby eliminating the estate tax liability.The remaining $40,000 can be deducted on the Form 1041 for the year of the expenditure.

Question 8

A trust might be used to carry out a corporate liquidation.

Question 9

Distribution of an appreciated asset triggers immediate gain recognition to the trust.

Question 10

Income in respect of a decedent is subject to both income and estate tax at the Federal level.

Question 11

An estate claims an ordinary deduction for cost of sales.

Question 12

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

Question 13

An example of an expense in respect of a decedent is the state income taxes attributable to the taxpayer's last paycheck,uncollected at death.

Question 14

Like a partnership,the fiduciary is a tax-reporting,but not a separate tax-paying entity.

Question 15

A fiduciary entity may incur a liability for the AMT.

Question 16

Estates and trusts can claim deductions for their costs incurred in maintaining investments in municipal bonds.

Question 17

Trusts are created exclusively to reduce tax liabilities.

Question 18

A remainder beneficiary generally must wait until the trust terminates to receive any distribution of income.

Question 19

If provided for in the trust agreement,a trust might terminate when the income beneficiary is married.

Question 20

Trusts typically use a calendar tax year.

Question 21

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 can increase by as much as $40,000.

Question 22

Cost recovery deductions are assigned pro rata to the recipients of distributable net income.

Question 23

Eighty percent of the income received by the Atom Trust this year constituted municipal bond interest.Atom's trustee also made a $50,000 gift to the United Fund,a qualifying charity.The charitable deduction associated with this gift is limited to $10,000.

Question 24

In computing distributable net income (DNI)for a trust,one removes capital gains allocable to corpus.

Question 25

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

Question 26

A complex trust can claim a Year 1 deduction for a gift to charity,where the contribution was made in Year 2 out of gross income recognized in Year 1.

Question 27

One-third of the Hermann Estate's distributable net income consists of qualifying dividends.Thus,when income beneficiary Susie receives a $30,000 income distribution from the estate,$10,000 of it qualifies for the 15% tax rate.

Question 28

"Second-tier distributions" are allowed by the will or trust document to be made at the discretion of the fiduciary.

Question 29

In the year in which an estate terminates,its beneficiaries receive and can use as their own any unexpired NOL carryforwards proportionately to the corpus assets that they received.

Question 30

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 is computed net of the full $3,000 deduction for the fees.

Question 31

When a trust makes a gift to a qualifying charity,the entity-level deduction is allowed only to the extent of 10% of distributable net income.

Question 32

A trust passes through to its income beneficiaries the data needed to compute the domestic production activities deduction.

Question 33

A fiduciary's distribution deduction assures that current-year income is taxed only once.

Question 34

An estate cannot claim a § 199 domestic production activities deduction,as the deduction passes through to the income beneficiaries.

Question 35

When a trust incurs a net operating loss,the current-year deduction passes through to the income beneficiaries.

Question 36

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 $9,000 for the interest income.

Question 37

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 for the interest income.

Question 38

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 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 can increase by as much as $50,000.

Question 40

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 $40,000.

Question 41

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

A)Take title to the assets belonging to the entity.
B)File the entity's tax returns.
C)Invest the assets that comprise the corpus of the entity.
D)Distribute trust income of the beneficiaries in accordance with the provisions of the trust instrument.
E)All of the above.

Question 42

The Wilson Trust is required to distribute its accounting income every year,one-half to Missy Wilson,and one-half to the Lung Cancer Research Center.What is the Trust's personal exemption?

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

Question 43

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

A)C
B)E and T
C)J
D)K

Question 44

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

A)Partnership.
B)Trust.
C)Limited liability company.
D)All of the above taxpayers are passthrough entities, and they never are subject to an entity-level Federal income tax.

Question 45

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

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

Question 46

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

A)Determine the date on which trust terminates.
B)Modify the language of the trust instrument so as to lower the entity's Federal income tax.
C)Pay the estate taxes of the grantor.
D)Allocate items between income and corpus using Subchapter J rules.
E)All of the above.

Question 47

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

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 the above

Question 48

Generally,an administrative expense attributable to municipal bond interest should be claimed on the estate's income tax return.

Question 49

The grantor set up a trust,income to a daughter,remainder to a grandson.To the extent that trust income is used to satisfy the grantor's legal obligation to pay alimony to an ex-spouse,Subchapter J rules are ignored,and the income is taxed to the grantor.

Question 50

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

A)One which is allowed to file Form 1041-EZ.
B)One which has only one income beneficiary.
C)One whose grantor was not a corporation.
D)One which must distribute its accounting income every year.

Question 51

The grantor set up a trust,income to a daughter,remainder to a grandson.To the extent that trust income is used to pay a life insurance premium on the grantor's spouse,Subchapter J rules are ignored,and the income is taxed to the grantor.

Question 52

The grantor set up a trust,income to a daughter,remainder to a grandson.To the extent that trust income is accumulated for a later distribution to the grandson,Subchapter J rules are ignored,and the income is taxed to the grantor.

Question 53

The Jain Estate is required to pay its entire annual accounting income to Sam and Janet.The estate's personal exemption is:

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

Question 54

Generally,an administrative expense should be claimed on the decedent's estate tax return,because it is subject to a higher marginal tax bracket than is the estate's taxable income.

Question 55

When a trust distributes an in-kind asset with a realized loss,most likely this loss should be allocated to and immediately deducted by the first-tier beneficiaries.

Question 56

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

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

Question 57

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

Question 58

The Winston Trust is classified as a grantor trust,because the donor can dictate the corpus investments made by the trustee. Consequently,Winston need not file an annual Form 1041.

Question 59

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)Partnership.
B)Trust.
C)S corporation.
D)All of the above taxpayers use Schedule K and K-1.

Question 60

The regular due date for a calendar-year trust to file its Form 1041 is April 15.

Question 61

The Roz Trust has distributable net income for the year of $100,000 and no income from tax-exempt sources.Under the terms of the trust instrument,the trustee must distribute $80,000 to Roger and $80,000 to Sally.After paying these amounts,the trustee is empowered to make additional distributions at its discretion.Exercising this authority,the trustee distributes an additional $40,000 to Roger and $20,000 to Sally.How much gross income from the trust must Sally recognize?

A)$50,000.
B)$75,000.
C)$80,000.
D)$100,000.

Question 62

The Edgerton Estate generated distributable net income (DNI)this year of $100,000,one-fourth of which was tax-exempt interest,and the balance of which was long-term capital gain.Kyle Edgerton,the sole income beneficiary of the Estate,received a distribution of the entire $150,000 fiduciary income of the entity.How does Kyle report the distribution?

A)$100,000 ordinary income.
B)$150,000 ordinary income.
C)$75,000 long-term capital gain, $25,000 exempt interest.
D)$75,000 long-term capital gain, $75,000 exempt interest.
E)$50,000 long-term capital gain, $50,000 exempt interest.

Question 63

The Roz Trust has distributable net income for the year of $100,000 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 is empowered to make additional distributions at its discretion.Exercising this authority,the trustee distributes an additional $40,000 to Roger and $40,000 to Sally.How much income from the trust must Sally recognize?

A)$90,000.
B)$60,000.
C)$50,000.
D)$40,000.

Question 64

The Roz Trust has distributable net income for the year of $100,000 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 paying these amounts,the trustee is empowered to make additional distributions at its discretion.Exercising this authority,the trustee distributes an additional $10,000 to Roger and $30,000 to Sally.How much gross income from the trust must Sally recognize?

A)$80,000.
B)$60,000.
C)$50,000.
D)$20,000.

Question 65

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

Question 66

Beneficiary Terry received $40,000 from the Urgent Trust.Trust accounting income for the year was $100,000.The trust generated $30,000 in cost recovery deductions.How much can Terry deduct with respect to the cost recovery deductions that Urgent generated?

A)$30,000.
B)$18,000.
C)$12,000.
D)$0.
E)Some other amount.

Question 67

During the current year,the Madison Trust received $40,000 of taxable interest income,paid trustee's commissions of $4,000,and had no other income or expenses.The 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)$20,000 by Marilyn and $20,000 by Domingo.
C)$12,000 by Marilyn and $24,000 by Domingo.
D)$18,000 by Marilyn and $18,000 by Domingo.

Question 68

The Watson Trust incurred the following items during the year.

What is Watson's deduction for the tax preparation fees?

A)$0.
B)$5,000.
C)$10,000.
D)$50,000.

Question 69

Delphi is a complex trust.This year it distributed all of its accounting income and $5,000 from corpus.Delphi's taxable income for the year is:

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

Question 70

The distributable net income (DNI)of a fiduciary taxpayer:

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

Question 71

The Roz Trust has distributable net income (DNI)for the year of $100,000 and no income from tax-exempt sources.Under the terms of the trust instrument,the trustee must distribute $80,000 to Roger and $80,000 to Sally.After paying these amounts,the trustee is empowered to make additional distributions at its discretion.Exercising this authority,the trustee distributes an additional $40,000 to Roger and $20,000 to Sally.How much gross income from the trust must Roger recognize?

A)$120,000.
B)$100,000.
C)$80,000.
D)$50,000.

Question 72

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

Question 73

The Roz Trust has distributable net income for the year of $100,000 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 paying these amounts,the trustee is empowered to make additional distributions at its discretion.Exercising this authority,the trustee distributes an additional $10,000 to Roger and $30,000 to Sally.How much gross income from the trust must Roger recognize?

A)$60,000.
B)$50,000.
C)$40,000.
D)$30,000.

Question 74

The Roz Trust has distributable net income for the year of $100,000 and no income from tax-exempt sources.Under the terms of the trust instrument,the trustee is required to distribute $30,000 to Roger and $60,000 to Sally.After payment of these amounts,the trustee is empowered to make additional distributions at its discretion.Exercising this authority,the trustee distributes an additional $40,000 to Roger,and $40,000 to Sally.How much income from the trust must Sally recognize?

A)$70,000.
B)$65,000.
C)$60,000.
D)$30,000.
E)Some other amount.

Question 75

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 76

Three months after Emma died,her executor received the final $10,000 installment of Emma's Super Lottery winnings from the state.Which of the following statements is true?

A)The $10,000 is included only in Emma's gross estate.
B)The $10,000 is subject to tax only on her estate's income tax return.
C)The $10,000 is subject to neither income nor estate tax, because it was received after Emma's death.
D)The $10,000 is both included in Emma's gross estate, and subject to tax on her estate's income tax return.
E)None of the above.

Question 77

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

A)The entity is required to distribute all of its income currently to its beneficiaries.
B)The entity must use the same tax year as its creator (i.e., grantor, decedent).
C)In the year of its termination, the entity's net operating loss carryovers are passed through to its beneficiaries.
D)None of the above.

Question 78

The Rodriguez Trust generated $35,000 in alternative minimum taxable income (AMTI)this year.The trust is subject to a marginal rate of:

A)15%.
B)20%.
C)26%.
D)28%.

Question 79

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 $50,000.Which of the following statements is true?

A)Lacking any election by the trustee, the trust recognizes $40,000 gross income on the distribution.
B)Lacking any election by the trustee, Telly's basis in the asset is $10,000.
C)Lacking any election by the trustee, Telly's basis in the asset is stepped up to $50,000.
D)Assuming that the trustee made an election under § 643(e), the trust is allowed a $10,000 distribution deduction for this transaction.
E)Assuming that the trustee made an election under § 643(e), Telly recognizes $10,000 gross income on the distribution.

Question 80

Three weeks after Tina died,her brother Tony properly received Tina's last paycheck from her employer.The gross amount of the check was $4,000,and a $700 deduction for state income taxes was subtracted in computing the net amount of the payment.Which of the following statements is true?

A)The $700 is deductible only in computing Tina's taxable estate.
B)The $700 is deductible only on the income tax return of Tina's estate.
C)The $700 is deductible both on Tony's income tax return and on Tina's estate tax return.
D)Tina's executor deducts the $700 only on Tina's last income tax return.