Deck 14: Income Taxation of Trusts and Estates

Question 1

The executor or administrator is responsible for all the following estate duties except

A)preserving the estate's existence as a separate taxpayer.
B)collecting the assets.
C)paying the debts and taxes.
D)distributing the property.

Answer 1

A

Question 2

The term "trust income" when not preceded by an explanatory word relates most closely to

A)gross income.
B)taxable income.
C)distributable net income.
D)net accounting income.

Answer 2

D

Question 3

An inter vivos trust may be created by all of the following except

A)a grantor.
B)a trustor.
C)an executor.
D)a transferor.

Answer 3

C

Question 4

A trust has net accounting income of $15,000.In addition,the trust has a $10,000 capital gain,which is not included in net accounting income.The trust is required to distribute the trust income to the beneficiary.The beneficiary will receive

A)$10,000.
B)$15,000.
C)$24,700.
D)$25,000.

Question 5

Revocable trusts means

A)the transferor may not demand the assets be returned.
B)income or estate tax savings for the grantor.
C)the trust can be revoked.
D)the grantor is always the beneficiary.

Question 6

A tax entity,often called a fiduciary,includes all of the following except

A)estates.
B)complex trusts.
C)testamentary trusts.
D)All of the above are fiduciaries.

Question 7

For purposes of trust administration,the term "sprinkling" relates to the mandatory distribution of income among various beneficiaries.

Question 8

If a state has adopted the Revised Uniform Principal and Income Act,which of the following statements is correct?

A)The state law definition of trust income will preempt any other definitions.
B)The definition of trust income in the trust document will preempt all other definitions.
C)Under state law,tax-exempt interest will not be allocated to income.
D)The definition of principal in the trust document must classify capital gains as principal.

Question 9

Texas Trust receives $10,000 interest on U.S.Treasury bonds and $15,000 interest on State of New York bonds.All $25,000 is distributed to the trust beneficiary,Gary.Which of the following statements is correct?

A)Gary has $25,000 of ordinary gross income.
B)Gary has $10,000 of taxable interest income and $15,000 of tax-free interest income.
C)Gary has no taxable income because the trust must pay the tax.
D)Gary has $10,000 of capital gain and $15,000 of tax-free interest income.

Question 10

Identify which of the following statements is false.

A)A conduit approach-that is,the income has the same character in the hands of the beneficiary as it has to the trust-governs for fiduciary income taxation.
B)Essentially,an estate or trust is taxed on any income it earns,whether retained or distributed.
C)Many of the same rules that determine the calculation of taxable income for individuals apply to trusts.
D)Trusts receive a personal exemption.

Question 11

Which of the following statements regarding the taxation of a trust is incorrect?

A)An irrevocable trust's income is taxed to the grantor.
B)Trusts are generally not taxed at favorable rates for income shifting.
C)Trusts are not subject to double taxation.
D)A trust's long-term capital gains are taxed at a top rate of 15%.

Question 12

List some common examples of principal and income items.

Question 13

A complex trust permits accumulation of current income,provides for charitable contributions,or distributes principal during the taxable year.

Question 14

Identify which of the following statements is false.

A)State trust law preempts the trust document when defining income.
B)The Uniform Act on principal and income requires depreciation to be charged against income.
C)A statement in the trust instrument concerning the allocation of depreciation to principal or income overrides a provision of state law.
D)The Uniform Act allocates royalties to both principal and income.

Question 15

The personal exemption available to a trust is adjusted annually based on changes in the consumer price index.

Question 16

A trust receives no standard deduction when computing taxable income.

Question 17

Beneficiaries of a trust may receive

A)an income interest only.
B)a remainder interest only.
C)both an income and a remainder interest.
D)Any of the above is correct.

Question 18

Identify which of the following statements is false.

A)For purposes of trust administration,the term "sprinkling" relates to the discretionary authority of the trustee to distribute income among various beneficiaries.
B)The IRS may terminate an estate as a taxpayer after the expiration of a reasonable period of time for performance of the administrative duties.
C)Assets in a revocable trust do not avoid probate.
D)Assets in a revocable trust are included in the gross estate.

Question 19

Which of the following statements is incorrect?

A)The income tax rules governing estates and trusts are generally identical.
B)Income generated by property owned by an estate or trust is reported on that entity's tax return.
C)Subchapter K contains the special rules applicable to estates and trusts.
D)All of the above are correct.

Question 20

The conduit approach for fiduciary income tax means

A)the distributed income has the same character in the hands of the beneficiary as it has to the trust.
B)the distributed income goes to all beneficiaries proportionately.
C)the distributed income is determined by the trustee annually.
D)the distributed income of a remainder interest is determined by the property.

Question 21

Charitable contributions made by a fiduciary

A)are limited to 50% of fiduciary income.
B)must be authorized in the trust instrument in order to be deductible.
C)flows through to be deducted on the beneficiary's tax return.
D)are subject to the 2% floor.

Question 22

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

A)$0.
B)$2,400.
C)$4,200.
D)$7,000.

Question 23

A simple trust

A)may make charitable distributions.
B)may make discretionary distributions of principal.
C)may accumulate income.
D)is required to distribute all of its income currently.

Question 24

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

Question 25

Identify which of the following statements is true.

A)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.
B)The income received by the beneficiaries of the trust loses its character once it is distributed.
C)Capital losses remaining in the final year of a trust do not pass through to the beneficiaries succeeding to the trust property.
D)All of the above are false.

Question 26

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

A)$0,because it retains no income.
B)$100.
C)$300.
D)$600.

Question 27

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)$30,000.
B)$15,000.
C)$10,000.
D)$5,000.

Question 28

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)The trust is a complex trust and is allowed a $300 exemption.
B)The trust is a complex trust and is allowed a $100 exemption.
C)The trust is a simple trust and is allowed a $300 exemption.
D)The trust is a simple trust and is allowed a $100 exemption.

Question 29

Identify which of the following statements is false.

A)A trust receives no standard deduction when computing taxable income.
B)Trust tax preparation fees are miscellaneous itemized deductions and subject to the 2% nondeductible floor.
C)There is no limit on a fiduciary's charitable contribution deduction if such a contribution is authorized in the trust instrument.
D)All of the above are false.

Question 30

Yellow Trust must distribute 33% of its income annually to Patrick.In addition,the trustee in its discretion may distribute additional income to Minna or Patrick.In the current year,the trust has net accounting income and distributable net income of $150,000,none from tax-exempt sources.The trust makes a $50,000 mandatory distribution to Patrick and a discretionary distribution of $20,000 each to Patrick and Minna.What amounts of income do Patrick and Minna report?

A) $$\begin{array} { | l | l | } \hline \text { Patrick } & \text { Minna } \\\hline \$ 50,000 & \$ 0 \\\hline\end{array}$$
B) $$\begin{array} { | l | l | } \hline \text { Patrick } & \text { Minna } \\\hline \$ 70,000 & \$ 20,000 \\\hline\end{array}$$
C) $$\begin{array} { |l |l | } \hline \text { Patrick } & \text { Minna } \\\hline \$ 170,000 & \$ 0 \\\hline\end{array}$$
D) $$\begin{array} {| l| l| } \hline\text { Patrick } & \text { Minna } \\\hline \$ 150,000 & \$ 20,000 \\\hline\end{array}$$

Question 31

Estates and trusts

A)are taxed on state and municipal bond interest.
B)are not taxed on capital gains.
C)receive a deduction for administrative expenses not otherwise deducted on the estate tax return (Form 706).
D)receive a $1,000 personal exemption.

Question 32

A trust has the following results: $$\begin{array} { | l | r | } \hline \text { Net tax-exempt interest } & \$ 10,000 \\\hline \text { Net accounting income } & 64,000 \\\hline \text { Trustee fees charged to corpus } & 2,000 \\\hline\end{array}$$ 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?

A)$74,000
B)$72,000
C)$64,000
D)$62,000

Question 33

Identify which of the following statements is false.

A)The personal exemption for a trust provides a tax savings when some income is allocated to principal.
B)Distributable net income (DNI)sets the ceiling on the amount of distributions taxed to the beneficiaries.
C)A complex trust must distribute all its income annually.
D)The beneficiaries of a simple trust are taxed on their share of DNI irrespective of the amount they receive.

Question 34

Identify which of the following statements is true.

A)The personal exemption available to a trust is adjusted annually based on changes in the consumer price index.
B)Income received by a trust beneficiary has the same character it had at the trust level.
C)Distributable net income (DNI)excludes tax-exempt income.
D)All of the above are false.

Question 35

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

A)distribution deduction
B)capital gains allocated to principal
C)tax-exempt interest
D)personal exemption

Question 36

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

A)$0.
B)$49,700.
C)$50,000.
D)$60,000.

Question 37

A trust is required to distribute 10% of its income to Eleanor.In addition,the trustee in his discretion may distribute income to Eleanor and/or Marshall.The trust has net accounting income of $50,000,none of which is tax-exempt.The trust distributes the $5,000 mandatory payment to Eleanor and also distributes discretionary amounts of $5,000 to Eleanor and $5,000 to Marshall.How much must Eleanor include in income?

A)$5,000
B)$10,000
C)$50,000
D)none of the above

Question 38

The exemption amount for an estate is

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

Question 39

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

Question 40

A trust distributes 30% of its income to Mark and 20% to Nancy.The remaining 50% is accumulated.The trust's depreciation is $1,000.The trust instrument is silent regarding the depreciation deduction.State law requires the depreciation be charged to principal.What part of the depreciation deduction will be allocated to Mark?

A)$0
B)$200
C)$300
D)$1,000

Question 41

An estate made a distribution to its sole beneficiary of $15,000 for the year.This distribution was not the result of a specific bequest.The estate had $40,000 of taxable interest and $34,000 of expenses attributable to earning that interest.What amount of the distribution is taxable to the beneficiary?

A)$40,000
B)$15,000
C)$6,000
D)$0

Question 42

Identify which of the following statements is true.

A)Tax-exempt income is allocated among beneficiaries in the proportion that total tax-exempt income bears to total distributable net income (DNI).
B)Both income required to be distributed currently and discretionary income distributions are included in tier-1 distributions.
C)Under the tier system,tier-2 beneficiaries are the first to absorb income.
D)All of the above are false.

Question 43

Income in respect of a decedent (IRD)is included in the decedent's final income tax return.

Question 44

The distribution deduction for a complex trust is the lesser of the amount distributed or distributable net income,reduced by net tax-exempt income.

Question 45

Martha died and by her will,specifically bequeathed,and the executor distributed,$20,000 cash and a $70,000 house to Harold.The distributions were made in a year in which the estate had $65,000 of DNI,all from taxable sources.The maximum Harold will be required to report as gross income as a result of these distributions is

A)$0.
B)$20,000.
C)$65,000.
D)$70,000.

Question 46

Distributable net income (DNI)is not reduced by the charitable contribution deduction when calculating the deductible discretionary distributions for a complex trust.

Question 47

Identify which of the following statements is true.

A)Income in respect of a decedent (IRD)is the gross income the decedent earned before death but had not collected before death.
B)An estate may deduct up to $5,000 of capital losses against the ordinary income taxable in the estate.
C)An example of income in respect of a decedent (IRD)is the gain recognized on property sold by the estate after the decedent's death.
D)All of the above are false.

Question 48

Fred,a cash-basis taxpayer,died on January 15,2018.In 2019,the estate made a $9,000 distribution from estate income to Fred's sole heir.The estate had $20,000 of taxable interest and a $10,000 net long-term capital gain allocable to corpus.The estate incurred $5,000 in expenses attributable to the estate income.What is the estate's distributable net income (DNI)?

A)$15,000
B)$20,000
C)$25,000
D)$30,000

Question 49

A trust has net accounting income of $30,000,but distributable net income (DNI)of only $25,000 because certain expenses are charged to principal.The trust is required to distribute $10,000 to Alice and it makes a discretionary distribution of $20,000 to Ben.The trust has no tax-exempt income.The amount that Ben reports as gross income is

A)$20,000.
B)$16,667.
C)$15,000.
D)none of the above

Question 50

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?

A)$12,500
B)$25,000
C)$37,500
D)$50,000

Question 51

Income in respect of a decedent (IRD)includes interest earned by a cash-basis taxpayer but not received by the taxpayer before death.

Question 52

Identify which of the following statements is true.

A)In a complex trust,distributable net income (DNI)does not act as a ceiling on the amount of the distribution deduction.
B)Distributable net income (DNI)is not reduced by the charitable contribution deduction when calculating the deductible discretionary distributions for a complex trust.
C)In a complex trust,distributable net income (DNI)is not reduced by the charitable contribution deduction when comparing DNI with the mandatory distributions in order to determine the amount of the distribution deduction.
D)All of the above are false.

Question 53

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)$25,000.
B)$50,000.
C)$75,000.
D)$100,000.

Question 54

Apple Trust reports net accounting income of $40,000,all from taxable sources.The trustee is required to distribute $15,000 annually to Megan.The trustee also makes discretionary distributions of $30,000,$7,500 to Megan and $22,500 to Caroline.The trust pays $5,000 of the discretionary distributions from corpus.What is the amount of the distribution deduction?

A)$40,000
B)$45,000
C)$15,000
D)$30,000

Question 55

Identify which of the following statements is false.

A)Federal estate taxes related to income in respect of a decedent (IRD)is deductible by the estate in the year the IRD is includible in the estate's gross income.
B)An example of deductions in respect of a decedent (DRD)are property taxes that accrued prior to the decedent's death but were not paid until after death.
C)Items of IRD receive a step-up in basis as a result of the decedent's death.
D)Interest earned but not received before death is IRD.

Question 56

A trust has net accounting income and distributable net income (DNI)of $60,000,all from taxable sources.The trustee is required to distribute $40,000 of current income to Harry.In addition,the trustee makes a discretionary distribution to Harry of $10,000 and a discretionary distribution to Susan of $30,000.$20,000 of the $40,000 total discretionary distributions is from corpus.Gross income reportable by Harry is

A)$50,000.
B)$45,000.
C)$37,500.
D)$30,000.

Question 57

Joyce passed away on January 3 while on an extended holiday cruise celebrating a very successful,and most profitable,previous year.Joyce was the chief executive officer of the Quillip Corporation.After the independent audit of Quillip's last year's financial statements was completed in February of this year,Joyce's estate received a $1,000,000 bonus check resulting from last year's corporate profits.Joyce's estate also sold Quillip stock for $500,000 in February of this year.Joyce originally purchased this stock eight years ago for $10,000.The stock was valued at $495,000 on her date of death.Solely based on the above facts,how much income in respect of a decedent should Joyce's estate report in the current year?

A)$1,485,000
B)$1,000,000
C)$485,000
D)$5,000

Question 58

An example of income in respect to a decedent (IRD)for a cash method of accounting taxpayer is

A)interest earned but not received prior to death.
B)salary earned but not received prior to death.
C)gain from an installment sale entered into before death.
D)All of the above are examples.

Question 59

Identify which of the following statements is true.

A)An individual cannot be both a tier-1 and tier-2 beneficiary in the same year.
B)Tier-2 beneficiaries potentially can receive more favorable tax treatment than tier-1 beneficiaries.
C)Bequests of specific sums of money when distributed out of an estate result in the recognition of gross income by the beneficiary receiving the bequest.
D)All of the above are false.

Question 60

Apple Trust reports net accounting income of $40,000,all from taxable sources.The trustee is required to distribute $15,000 annually to Megan.The trustee also makes discretionary distributions of $30,000,$7,500 to Megan and $22,500 to Caroline.The trust pays $5,000 of the discretionary distributions from corpus.What is the taxable amount of the Megan's tier-2 distribution?

A)$7,500
B)$6,250
C)$15,000
D)$22,500

Question 61

Grantor trusts are taxed as complex trusts.

Question 62

All of the following are advantages of a sprinkling trust,except

A)the trustee can choose the amount to distribute among multiple beneficiaries.
B)the trustee can determine the amount to retain in the trust.
C)the trustee can determine the amount to distribute to the sole trust beneficiary.
D)the trustee can consider the tax rates of the beneficiaries and trust.

Question 63

In which of the following situations will the grantor trust rules apply?

A)The trust is revocable and mandates the distribution of income to the named beneficiary.
B)The trust is irrevocable,and the trustee,who is also the grantor,has the power to distribute or accumulate income for the named beneficiary.
C)The trust is irrevocable,the income must be paid out currently,and the trust assets will revert to the grantor at the end of nine years.
D)The grantor trust rules will apply in each of the situations.

Question 64

Five years ago,Jon transferred stock to an irrevocable trust with First Bank named as trustee,and provided that the trustee is to pay some or all of the trust income to the beneficiary Dan for 15 years.At the end of the 15th year,the trust property,including any undistributed income,will revert to Jon.In the current year,the trust collected $52,000 of dividend income,and distributed $30,000 of this amount to Dan.In addition,the trust sold some of the stock at a $6,000 capital gain.For the current year,the tax results occurred?

A)Dan is taxed on $30,000 of dividends and the trust on the remaining dividends,plus the capital gain,less the $100 personal exemption.
B)The trust is taxed on the $52,000 of dividends less the $100 personal exemption,and Jon is taxed on the capital gain.
C)Dan is taxed on $30,000 of dividends,and the remaining dividends plus the capital gain are taxed to Jon.
D)Jon is taxed on all of the dividends and on the capital gain.

Question 65

Michael died in 2013 with a taxable estate and estate tax base of $6,000,000.Michael's estate owed no state death taxes.Michael's estate includes $250,000 of income in respect of a decedent (IRD),none of which is received by his surviving spouse.His estate had no DRD.The estate collects $200,000 of the IRD during its current tax year.The Sec.691(c)deduction for the estate in current year is

A)$153,000.
B)$122,400.
C)$90,000.
D)$80,000.

Question 66

Identify which of the following statements is true.

A)Under the grantor trust rules,a grantor may be taxed on all or a portion of the trust's income even though the income is distributed to the named beneficiary or someone else.
B)An irrevocable trust cannot be a grantor trust.
C)Large amounts of income can be shifted to children under the age of 18 through the use of trusts that make distributions,and the income will be taxed at the lower rates of the children.
D)All of the above are false.

Question 67

Identify which of the following statements is true.

A)All trusts and estates must use a calendar year-end.
B)All estates with gross income of at least $500 must file an income tax return.
C)Trusts are required to make estimated tax payments.
D)All of the above are false.

Question 68

Mary died this year.Her will creates a trust for the benefit of her children.A portion of the estate's assets are placed in this trust.The estate has income from assets it will transfer to other beneficiaries at a later date.Mary's brother Joe is the trustee of the trust and executor of the estate.Which of the following statements is true?

A)Joe must choose December 31 as the tax year-end for both the estate and trust.
B)Joe is free to choose any tax year-end for both the trust and estate.
C)Joe must choose December 31 as the estate tax year-end but is free to choose any tax year-end for the trust.
D)Joe must choose December 31 as the trust tax year-end but is free to choose any tax year-end for the estate.

Question 69

Administration expenses incurred by an estate

A)are deductions in respect of a decedent and may be deducted on both the estate tax return (Form 706)and the estate income tax return (Form 1041).
B)an executor must elect where to deduct administration expenses (Form 706 or Form 1041).
C)such expenses are only deductible on Form 706.
D)such expenses are only deductible on Form 1041.

Question 70

Sally transfers property to a revocable trust.Under the terms of the trust agreement,Allison is to receive income for ten years at which time the remainder is to go to Tom.During the year,the trust earns $10,000 in corporate bond interest income and recognizes a capital gain of $20,000.The interest is distributed to Allison and the capital gain is properly allocated to principal.Allison (not Sally)will pay tax on

A)$0.
B)$10,000.
C)$20,000.
D)$30,000.

Question 71

Trusts are required to make estimated tax payments.

Question 72

Which of the following is the most accurate statement concerning the use of trusts in tax planning?

A)The grantor trust rules allow grantors to shift income into trusts and reduce their own taxes.
B)Nontax reasons for the use of trusts (such as avoidance of probate)typically outweigh tax reasons for creating trusts today.
C)The large 15% tax bracket available to trusts allows complex trusts to be used as an income-shifting device.
D)None of the above statements are correct.

Question 73

Marge died on August 24 of the current year.Her estate collected taxable bond interest of $10,000 per month beginning in September.The only beneficiary of Marge's estate is Art,a calendar-year taxpayer.Which of the following statements is correct?

A)If the estate selects November 30 as a year-end and makes no distributions prior to that date,the estate will be taxed on $30,000 less a $600 personal exemption for its first tax year.
B)If the estate selects January 31 of next year at its year-end and distributes $40,000 to Art in December of this year and nothing in January,the $40,000 will be taxed on Art's next year's tax return.
C)If the estate selects December 31 as its year-end and distributes nothing to Art in December and $40,000 in January of next year,$40,000 less the $600 personal exemption will be taxed on the estate's first tax return.
D)All of the above are correct.

Question 74

Karly created a $300,000 trust that provided her mother with a lifetime income interest starting on January 1,with the remainder to go to her son.Karly expressly retained the power to revoke both the income and remainder interests at any time.Who will be taxed on the trust's income?

A)Karly's mother
B)Karly's son
C)Karly
D)the trust