Deck 28: Income Taxation of Trusts and Estates

Question 1

The fiduciary entity pays tax on the income that it retains and adds to corpus.

Answer 1

True

Question 2

An estate claims an ordinary business deduction for wages paid to employees.

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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

Question 5

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 6

A complex trust may incur a liability for the AMT.

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 recognized by Globe 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

Trusts are created exclusively to reduce tax liabilities.

Question 9

Trusts typically use a calendar tax year.

Question 10

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

Question 11

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

Question 12

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

Question 13

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 706 only if the executor waives the corresponding deduction in computing the estate's Federal income tax.

Question 14

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

Question 15

A trust might be used by a newly elected politician.

Question 16

If provided for in the trust agreement,a trust might terminate when the income beneficiary reaches age 30.

Question 17

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

Question 18

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

Question 19

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

Question 20

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

Question 21

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

Question 22

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 23

Cost recovery deductions are assigned pro rata to the recipients of an estate's accounting income.

Question 24

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

Question 25

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 26

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

Question 27

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 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 $30,000.Harry's AGI can increase by as much as $40,000.

Question 29

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

Question 30

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 31

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

Question 32

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

Question 33

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 34

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 35

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

Question 36

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

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 $9,000 for the interest income.

Question 38

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 39

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 $40,000.

Question 40

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 41

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

A)
B)J.
C)
C)K.
D)S.

Question 42

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

Question 43

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 44

Beneficiary Terry received $40,000 from the Urgent Trust.Trust accounting income for the year was $50,000.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)$24,000.
C)$6,000.
D)$0.

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

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 47

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 48

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 49

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

Question 50

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 51

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 52

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 53

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 54

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 55

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 56

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

Question 57

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 58

The Rodriguez Trust generated $200,000 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)38.5%.

Question 59

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 60

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 61

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 $20,000 to Roger and $20,000 to Sally.How much gross income from the trust must Roger recognize?

A)$100,000.
B)$80,000.
C)$50,000.
D)$20,000.

Question 62

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

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

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 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.

Question 64

To reduce trustee commissions,the Emily 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 trustee distributed $90,000 to Grandma this year: $40,000 as her one-half share of the entity's income,and $50,000 as a distribution of principal.How much of the year's distributable net income is assigned to Grandma?

A)$90,000.
B)$80,000.
C)$50,000.
D)$40,000.

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

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 67

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 68

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 69

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 70

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 $20,000 to Roger and $20,000 to Sally.How much gross income from the trust must Sally recognize?

A)$20,000.
B)$50,000.
C)$80,000.
D)$100,000.

Question 71

The 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 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.How much income is taxable to Tamara for the current year?

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

Question 72

The Eagleton Trust generated distributable net income (DNI)this year of $120,000,one-third of which was portfolio income,and the balance of which was exempt interest.Under the terms of the trust,Clara Eagleton is to receive an annual income distribution of $40,000.At the discretion of the trustee,additional distributions can be made to Clara or to Clark Eagleton III.This year,the trustee's distributions to Clara totaled $60,000.Clark also received $60,000.How much of the trust's DNI is assigned to Clara?

A)$80,000.
B)$60,000.
C)$50,000.
D)$40,000.

Question 73

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 74

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 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)$30,000.
B)$40,000.
C)$50,000.
D)$0.Because the distributions of a complex trust are discretionary,no deduction is allowed.

Question 76

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 77

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 78

The Eagleton Trust generated distributable net income (DNI)this year of $120,000,one-third of which was portfolio income,and the balance of which was exempt interest.Under the terms of the trust,Clara Eagleton is to receive an annual income distribution of $40,000.At the discretion of the trustee,additional distributions can be made to Clara,or to Clark Eagleton III.This year,the trustee's distributions to Clara totaled $60,000.Clark also received $60,000.How much of the trust's DNI is assigned to Clark?

A)$40,000.
B)$60,000.
C)$70,000.
D)$100,000.

Question 79

Delphi is a complex trust.This year it distributed all of its accounting income and $1,000 from corpus.Delphi's taxable income for the year is:

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

Question 80

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.