Deck 28: Income Taxation of Trusts and Estates

Question 1

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

Answer 1

False

Question 2

Gain or loss is recognized by a trust when it distributes a non-cash asset.

Answer 2

False

Question 3

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.

Answer 3

True

Question 4

Generally,capital gains are allocated to fiduciary income,because they relate to investment assets.

Question 5

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

Question 6

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

Question 7

A complex trust may incur a liability for the AMT.

Question 8

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

Question 9

Trusts usually are required to use a calendar tax year

Question 10

A trust might be used by the parties to an impending divorce.

Question 11

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

Question 12

If provided for in the controlling agreement,a trust might terminate when the income beneficiary graduates with a law degree.

Question 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

The Bard Estate incurs a $25,000 fee in disposing of the real property of the decedent.The deduction can be claimed $10,000 against the Federal estate tax,and $15,000 on the estate's income tax return.

Question 18

Like a limited liability company,the fiduciary is a tax-reporting,but not a separate tax-paying entity.

Question 19

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

Question 20

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

Question 21

Sixty percent of the income received by the Atom Trust this year 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 22

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

Question 23

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 24

The Griffin Trust makes a gift to a qualifying charity.Griffin's entity-level deduction is allowed only to the extent of 50% of distributable net income.

Question 25

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 26

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 27

The Whitmer Trust operates a manufacturing business and distributes the profits to its income beneficiaries.Whitmer passes through to the income beneficiaries the data needed to compute their domestic production activities deduction.

Question 28

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 29

A complex trust can claim a Year 1 deduction for a gift to charity,where the contribution was made on October 20 of Year 2 out of gross income recognized in Year 1.

Question 30

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

Question 31

In computing distributable net income (DNI)for a trust,one removes any corpus net capital gain or loss.

Question 32

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 33

Cost recovery deductions are assigned pro rata to the recipients of an estate's distributable net income (DNI).

Question 34

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 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 for the interest income.

Question 36

An estate operates a manufacturing business.It can claim a domestic production activities deduction (DPAD).

Question 37

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

Question 38

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 39

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 40

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 41

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

A) Make decisions as to how to invest the trust corpus portfolio.
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 42

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

Question 43

Three months after Emma Timkin 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 subject to neither income nor estate tax, because it was received after Emma's death.
B) The $10,000 is both included in Emma's gross estate, and subject to tax on her estate's income tax return.
C) The $10,000 is subject to tax only on her estate's income tax return.
D) The $10,000 is included only in Emma's gross estate.

Question 44

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

Question 45

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

A) File the entity's returns for the local property tax on real estate.
B) File the entity's state and Federal income tax returns.
C) Invest the assets that comprise the corpus of the entity.
D) Distribute entity accounting income to the beneficiaries in accordance with the provisions of the trust instrument.
E) All of the above.

Question 46

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 § 643(e), the trust is allowed a $10,000 distribution deduction for this transaction.
B) Assuming that the trustee made an election under § 643(e), 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 47

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

Question 48

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 49

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 50

The Rodriguez Trust generated $100,000 in alternative minimum taxable income (AMTI)this year.The trust is subject to a marginal Federal income tax rate of:

A) 26%.
B) 28%.
C) 35%.
D) 39.6%.

Question 51

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 52

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 the above taxpayers use Schedule K and K-1.

Question 53

The Zhang Trust incurred the following items during the year. What is Zhang's deduction for the tax preparation fees?

A) $0.
B) $4,000.
C) $6,000.
D) $10,000.

Question 54

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 which must distribute its accounting income every year.
D) One whose grantor was a living individual.

Question 55

Beneficiary Terry received $30,000 from the Urgent Trust.Trust accounting income for the year was $50,000.The trust generated $20,000 in cost recovery deductions.How much can Terry deduct with respect to the cost recovery deductions that Urgent generated?

A) $0.
B) $8,000.
C) $12,000.
D) $20,000.

Question 56

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 both on Tony's income tax return and on Tina's estate tax return.
B) The $700 is deductible on neither Tony's income tax return nor on Tina's estate tax return.
C) The $700 is deductible only in computing Tina's taxable estate.
D) The $700 is deductible only on the income tax return of Tina's estate.

Question 57

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

Question 58

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 59

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 the above taxpayers are passthrough entities, and they never are subject to an entity-level Federal income tax.

Question 60

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 61

The Exeter Trust instrument provides that Tamara,the sole income beneficiary,is to receive $30,000 annually.If trust accounting income is not sufficient to pay this amount,the Exeter trustee is empowered to invade corpus to the extent necessary.During the current year,the trust has distributable net income (DNI)of $100,000,including $20,000 of tax-exempt interest.In accordance with the trust instrument,$30,000 is paid to Tamara.What is Tamara's gross income from Exeter for the current year?

A) $100,000.
B) $30,000.
C) $24,000.
D) $10,000.

Question 62

The Ulrich 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 $60,000 to Roger and $60,000 to Sally.After paying these amounts,the trustee is empowered to make additional distributions at its discretion.Exercising this authority,the Ulrich trustee distributes an additional $15,000 to Roger and $15,000 to Sally.How much gross income from the trust must Roger recognize?

A) $15,000.
B) $50,000.
C) $60,000.
D) $75,000.

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 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 64

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 65

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 66

The Suarez Trust generated distributable net income (DNI)this year of $150,000,one-third of which was portfolio income,and the balance of which was exempt interest.Under the terms of the trust,Clara Suarez is to receive an annual income distribution of $30,000.At the discretion of the trustee,additional distributions can be made to Clara,or to Clark Suarez III.This year,the trustee's distributions to Clara totaled $90,000.Clark also received $90,000.How much of the trust's DNI is assigned to Clark?

A) $0, only first-tier distributions are subject to Federal income tax.
B) $72,000.
C) $75,000.
D) $90,000.

Question 67

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 $125,000 accounting income of the entity.How does Kyle report the distribution?

A) $100,000 ordinary income.
B) $125,000 ordinary income.
C) $50,000 long-term capital gain, $50,000 exempt interest.
D) $75,000 long-term capital gain, $25,000 exempt interest.

Question 68

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

Question 70

The Bedford 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 Bedford 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.

Question 71

To reduce trustee commissions,the Sigrid Trust is operated as though it were two trusts (i.e.,with 70-year-old Grandma and 7-year old Skippy each holding equal shares).This year the trust generated distributable net income (DNI)of $80,000.The Sigrid trustee distributed $100,000 to Grandma this year: $40,000 as her one-half share of the entity's income,and $60,000 as a distribution of principal.Skippy received no distribution.How much of the year's distributable net income is assigned to Grandma?

A) $40,000.
B) $50,000.
C) $80,000.
D) $100,000.

Question 72

Which of the following restrictions applies concerning distributions to trust beneficiaries?

A) Special allocations are not allowed under Subchapter J.
B) Special allocations are allowed, but only in the trust's termination year.
C) Special allocations are allowed, but only for portfolio income items.
D) Special allocations of income types are allowed, assuming that they carry substantial economic effect.

Question 73

The Ulrich 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 $60,000 to Roger and $60,000 to Sally.After paying these amounts,the trustee is empowered to make additional distributions at its discretion.Exercising this authority,the Ulrich trustee distributes an additional $20,000 to Roger and $20,000 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 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 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 75

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 the above.

Question 76

The Williamson Estate generated distributable net income (DNI)this year of $120,000,one-third of which was tax-exempt interest,and the balance of which was long-term capital gain.Muffy Williamson,the sole income beneficiary of the estate,received a distribution of the entire $150,000 accounting income of the entity.How is this distribution accounted for by Muffy?

A) $150,000 ordinary income.
B) $120,000 ordinary income.
C) $80,000 long-term capital gain, $40,000 exempt interest.
D) $100,000 long-term capital gain, $50,000 exempt interest.

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) The termination date of the entity is specified in the controlling document.

Question 78

This year,the Huang Trust distributed all of its accounting income and $1,000 from corpus.Huang's taxable income for the year is:

A) $0.
B) ($100).
C) ($300).
D) ($1,000).

Question 79

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 80

The Suarez Trust generated distributable net income (DNI)this year of $150,000,one-third of which was portfolio income,and the balance of which was exempt interest.Under the terms of the trust,Clara Suarez is to receive an annual income distribution of $30,000.At the discretion of the trustee,additional distributions can be made to Clara or to Clark Suarez III.This year,the trustee's distributions to Clara totaled $90,000.Clark also received $90,000.How much of the trust's DNI is assigned to Clara?

A) $90,000.
B) $78,000.
C) $48,000.
D) $30,000.