Deck 15: Income Taxation of Estates and Trusts

Question 1

There is no statutory period after which a decedent's estate must be terminated.

Answer 1

True

Question 2

Taxable income not available for distribution to income beneficiaries may still be included in distributable net income.

Answer 2

False

Question 3

The standard deduction available to a fiduciary is the same amount available to a married taxpayer filing separately.

Answer 3

False

Question 4

In the current taxable year, trust beneficiary B received a distribution exceeding DNI.B will generally not pay tax on the distribution.

Question 5

The Estate of X incurred administration expenses of $42,000.These expenses can be taken as an estate tax deduction to reduce X's taxable estate and can also be deducted for income tax purposes on the estate income tax return.

Question 6

Both estates and trusts may pay any income tax due for a year with a timely filed return.

Question 7

On February 9, 19X2 trustee T makes a $10,000 payment to a qualified charity out of the gross income of the Alpha trust, a calendar year taxpayer.T may elect to deduct the payment on Alpha's 19X1 or 19X2 income tax return.

Question 8

Since fiduciaries are generally only managing assets and not carrying on a business, their expenses are not deductible.

Question 9

Decedent D, a calendar year taxpayer, died on October 18 of the current year.The estate of D also must use a calendar year for income tax purposes.

Question 10

An executor may elect to include "income in respect of a decedent" either in the gross estate on the Federal estate tax return or in gross income on the fiduciary Federal income tax return.

Question 11

If a trust incurs a net operating loss or a capital loss, the trust beneficiaries may deduct the losses under the "conduit" theory for their taxable year within which the trust year ends.

Question 12

Under the terms of the governing trust instrument, the trustee of ABC trust is required to distribute all trust income annually to trust beneficiaries.In the current taxable year, the trust had taxable income of $100,000.However, because of an illness late in the year, the trustee failed to make any actual cash distributions to beneficiaries.The beneficiaries will report and pay tax on the $100,000 of current year trust income even though no actual distribution was made.

Question 13

The categorization of a trust as "simple" or "complex" may vary from year to year.

Question 14

A fiduciary can elect whether or not to recognize a gain for tax purposes on the distribution of appreciated property made in fulfillment of a pecuniary bequest to a beneficiary.

Question 15

Upon his death, individual T, a cash basis taxpayer, had an outstanding account receivable of $20,000 for services he had performed prior to death.Because of some uncertainty as to its collectability, this receivable was valued at $15,000 for estate tax purposes.The tax basis of this asset to T's estate is zero.

Question 16

Income accumulated in a trust for a child less than 19 is taxed at the parents' rates and not the trust's rates.

Question 17

Because a simple trust by definition is a trust that must distribute all income currently to beneficiaries, a simple trust will never have an income tax liability.

Question 18

As a general rule, tax provisions that apply to the income taxation of individuals also apply to the income taxation of fiduciaries.

Question 19

Estate E has a fiscal year ending September 30 of the current year.On October 15 of the current year, the executor distributed $10,000 out of current year income to beneficiary Q, a calendar year taxpayer.Q will report the taxable portion of this distribution on his current year's tax return.

Question 20

If a fiduciary does not elect to recognize gain or loss on the distribution to a beneficiary of appreciated or depreciated property (determined as if the property had been sold at fair market value), the fiduciary's tax basis in the property carries over to the beneficiary.

Question 21

Under the terms of Q's will, beneficiary X was to receive a cash (pecuniary) bequest of $25,000.X agreed to accept certain shares of corporate stock, FMV $25,000, out of the Estate of Q in satisfaction of this bequest.The basis of the shares to the Q Estate was $21,000, the value of the shares at the date of Q's death.Based on these facts,

A)The Estate of Q will recognize a $4,000 gain, and X will have a $25,000 basis in the shares.
B)The Estate of Q will recognize a $4,000 gain, and X will have a $21,000 basis in the shares.
C)The Estate of Q will not recognize any gain, and X will have a $21,000 basis in the shares.
D)The Estate of Q will not recognize any gain, and X will have a $25,000 basis in the shares.

Question 22

During the current year, the Estate of W had taxable income of $11,000.During the year, the executor of the estate distributed an automobile that had been owned by decedent W to W's daughter, D.The automobile was a specific bequest to D.The automobile had a basis to the estate of $10,000, and a fair market value at date of distribution of $14,000.Based on these facts, D has received an income distribution from the Estate of W of

A)$0
B)$10,000
C)$11,000
D)$14,000

Question 23

D, a country doctor, died suddenly.The doctor practiced as a sole proprietor using cash basis accounting.The decedent's final return reported cash basis income and expenses on Schedule C (Form 1040).D's former patients have continued to send checks in payment for services D performed.The landlord, phone company, and other creditors of his practice have sent their bills.The administrator of D's estate should

A)Treat the checks as nontaxable gifts and the bills as voidable because of D's death
B)Return the checks and bills to avoid burdening the decedent's estate with the possible tax consequences
C)Include the checks as income upon receipt and deduct the bills as expenses when paid on the estate income tax return (Form 1041)
D)File an amended tax return (Form 1040X) to recognize the income and deductions to D because the decedent's final return must use the accrual basis

Question 24

Which of the following may a fiduciary not deduct?

A)Net operating loss carryforwards
B)Capital losses to the extent of capital gains
C)Current losses from passive activities to the extent of current income from passive activities
D)A casualty loss already claimed as a deduction on an estate tax return

Question 25

In the current taxable year, Trust MN had DNI of $50,000, $10,000 of which was nontaxable.During the year, Trustee T made a $15,000 cash distribution to beneficiary M and a $30,000 cash distribution to beneficiary N.(The trust instrument does not require that all trust income be distributed to beneficiaries.) Based on these facts,

A)M should report taxable income of $15,000; N should report taxable income of $30,000.
B)M should report taxable income of $15,000; N should report taxable income of $25,000.
C)M should report taxable income of $16,667; N should report taxable income of $33,333.
D)M should report taxable income of $12,000; N should report taxable income of $24,000.

Question 26

In the current taxable year, Trust R has the following receipts and expenses: Tax-exempt interest income $\quad$$\$ 15,000$
Taxable interest income $\quad$ 7,000
Rent income $\quad$ 23,000
Long-term capital gain allocable to corpus $\quad 15,000$
Trustee fee $\quad 9,200$
Rent expense $\quad 12,000$ During the current taxable year, the trustee made payments to charity totaling $3,000.The trust may claim a charitable contribution deduction of

A)$0
B)$2,000
C)$2,250
D)$3,000

Question 27

A trust whose assets are stocks and bonds generates $13,000 of distributable net income (DNI) during its current taxable year; $2,500 of this amount is tax-exempt interest on municipal bonds, while the remaining amount is made up of dividends.According to the trust instrument, the trustee may make discretionary distributions of trust income; during the current year $1,000 is distributed to beneficiary B.The distribution made by the trust entitles the trust to a deduction of

A)$0
B)$808
C)$1,000
D)$708

Question 28

F transfers $100,000 in trust to trustee T.Under the terms of the trust instrument, S (F's son) is to receive the income of the trust for his lifetime.Upon S's death, the corpus will be distributed to GC, S's daughter.The beneficiaries of this trust are

A)S only
B)S and GC
C)T and S
D)T, S, and GC

Question 29

A trust whose assets are stocks and bonds generates $13,000 of distributable net income (DNI) during its current taxable year; $2,500 of this amount is tax-exempt interest on municipal bonds, while the remaining amount is made up of dividends.According to the trust instrument, the trustee may make discretionary distributions of trust income; during the current year $1,000 is distributed to beneficiary B.The taxable portion of this amount is

A)$0
B)$808
C)$1,000
D)$708

Question 30

The governing instrument for Trust S provides that the trustee will establish a reserve for depreciation of trust rental property of $10,000 per year.In the current year, Trust S's rental property generates a tax depreciation deduction of $18,000.During the current year, the trustee distributes 30 percent of S's DNI to beneficiaries.Based on these facts, Trust S may take a depreciation deduction of

A)$0
B)$12,600
C)$15,600
D)$18,000

Question 31

If the terms of a trust allocate one-third of the trustee's fee to corpus, which of the following is true?

A)The provision is void-the corpus can never be invaded.
B)The balance is charged against income.
C)The one-third of the fee allocable to corpus is not deductible for income tax purposes.
D)The trustee will have to wait until the corpus is distributed to the remaindermen to receive this portion of his fee.

Question 32

A fiduciary is instructed by a trust instrument to distribute currently all trust income equally between two beneficiaries.Furthermore, the corpus of the trust is to be preserved intact for the remainderman.The instrument states that no charitable contributions are allowed from either income or principal.During the year, the trust's DNI was $23,000: $22,000 from rents and $1,000 from interest on a tax-exempt debenture.Based on these facts, the trust is a(n)

A)Simple trust
B)Complex trust
C)Grantor trust
D)Income trust

Question 33

Which of the following statements is not a characteristic of DNI (distributable net income)?

A)DNI can be composed of both nontaxable and taxable amounts of income.
B)Any trust taxable income allocable to corpus under state law is not included in DNI.
C)In computing DNI, no deduction for a personal exemption is allowed.
D)DNI is the amount of fiduciary accounting income that the trustee may distribute under the terms of the governing instrument.

Question 34

The executor of D's estate, in accordance with the specific instructions of the testator, must distribute 50 percent of the income produced by the estate to A.The estate recognized $60,000 income, and the executor distributed $25,000 and a diamond ring worth $5,000.The ring belonged to the estate and had not been bequeathed to anyone.As a result of this distribution, A should report taxable income of

A)nothing-legacies and bequests are tax-free.
B)$25,000
C)$30,000
D)$5,000

Question 35

In the current taxable year, Trust J has the following receipts and expenses: Tax-exempt interest income $\quad \$ 5,000$
Taxable interest income $\quad 12,000$
Rent income $\quad 8,000$
Long-term capital gain allocable to corpus $\quad 25,000$
Trustee fee $\quad 2,000$
Rent expenses $\quad 1,100$ Based on these facts, the trust may deduct

A)$2,000 trustee fee and $1,100 rent expense
B)$1,800 trustee fee and $990 rent expense
C)$1,600 trustee fee and $880 rent expense
D)$ 1,600 trustee fee and $ 1,100 rent expense

Question 36

In the calculation of the distributable net income of a fiduciary, which of the following statements is true?

A)A deduction for a personal exemption is allowed.
B)Net tax-exempt income is excluded.
C)A deduction for trustee fees allocable to corpus is allowed.
D)A deduction for any net capital loss is allowed.

Question 37

The amount of personal exemption available to a complex trust is

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

Question 38

The amount of personal exemption available to a simple trust is

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

Question 39

For the current year, Trust J has the following receipts and expenses: Tax-exempt interest income $\quad\$ 12,000$
Dividends from domestic, taxable corporations $\quad 15,000$
Long-term capital gain (allocable to corpus under state law) $\quad 5,000$
Trustee fee (equally allocable to income and corpus under the trust instrument) $\quad ( 4000 )$ Based on the above facts, what is the trust's income for fiduciary accounting purposes?

A)$23,000
B)$25,000
C)$28,000
D)$32,000

Question 40

Fiduciary accounting income is

A)Determined by reference to the governing instrument (will or trust agreement) and applicable state law
B)The taxable DNI not distributed to beneficiaries
C)The trustee's fee for preparation of accounting reports
D)Always inclusive of stock dividends

Question 41

A complex trust has $70,000 in DNI for the current year.One-tenth of the income is from tax-exempt bonds.Distributions to beneficiaries total $7,000 for the current year.The trust must report taxable DNI of

A)$70,000
B)$63,000
C)$6,300
D)$56,700

Question 42

Which of the following statements is not a characteristic of a complex trust?

A)A complex trust may have both "first-tier" and "second-tier" beneficiaries.
B)A complex trust may not make any charitable contributions during the year.
C)A complex trust that is not required to distribute all income currently may only claim a $100 personal exemption.
D)A complex trust may make distributions of both trust income and corpus.

Question 43

When allocating DNI among beneficiaries who have received distributions during the taxable year exceeding DNI, the tier one distributions represent

A)Distributions other than those required to be paid currently
B)Distributions of tax-exempt income only
C)Distributions required to be paid currently
D)Distributions of taxable income only

Question 44

A fiduciary is instructed by a trust instrument to distribute currently all trust income equally between two beneficiaries.Furthermore, the corpus of the trust is to be preserved intact for the remainderman.The instrument states that no charitable contributions are allowed from either income or principal.During the year, the trust's DNI was $23,000: $22,000 from rents and $1,000 from interest on a tax-exempt debenture.Compute the reportable income for one of the beneficiaries (B), and the trust's deduction for distributions made to the beneficiaries.

A)$11,000 taxable to B; $22,000 deductible by trust
B)$11,000 taxable to B; $23,000 deductible by trust
C)$11,500 taxable to B; $22,000 deductible by trust
D)$11,500 taxable to B; $23,000 deductible by trust

Question 45

In the current taxable year, Trust XYZ had fully taxable DNI of $100,000.Under the terms of the trust instrument, the trustee was required to make a $60,000 income distribution to beneficiary X.In addition, the trustee made discretionary cash distributions in the current taxable year of $20,000 each to beneficiaries X, Y, and Z.Based on these facts,

A)X should report taxable income of $66,667; Y and Z should each report taxable income of $16,667.
B)X should report taxable income of $80,000; Y and Z should each report taxable income of $10,000.
C)X should report taxable income of $73,333; Y and Z should each report taxable income of $13,333.
D)All distributions are fully taxable to X, Y, and Z.

Question 46

During the current year, Trust S had the following receipts and expenses: Taxable interest $45,000
Tax-exempt interest from municipal bonds 15,000
Trustee fee (2,000)
During the year, $43,500 was distributed to X, the sole income beneficiary.The trust instrument does not require that all trust income be distributed to X annually.Based on these facts, the § 661 (a) distribution deduction available to the trust is

A)$58,000
B)$43,500
C)$33,750
D)$32,625