Question 1

Which of the following statements is false with regard to spousal trusts?&#10;A) Property is deemed to have been sold at its cost amount when transferred to the trust.&#10;B) The trust property is deemed to be sold at market value upon the death of the beneficiary (the spouse).&#10;C)Both the spouse and any adult children may receive the capital of the trust prior to the spouse's death.&#10;D) The 21-year rule is waived for the trust's first 21-year anniversary.

Accepted Answer

The false statement regarding spousal trusts is that both the spouse and any adult children may receive the capital of the trust prior to the spouse's death. In a spousal trust, typically only the spouse is entitled to receive the income and sometimes the capital of the trust during their lifetime.

Question 2

Briefly answer the following questions:
With regard to non-spousal trusts:

A) What is the purpose of the 21-Year Rule?
B) What event occurs on the 21^st anniversary of a trust?
C) What types of properties are subject to the 21-Year Rule?
D) How can the consequences of the 21-Year Rule be avoided?
With regard to spousal trusts:
E) What is the exception to the 21-Year Rule for spousal trusts?

Accepted Answer

A) The 21 Year Rule prevents trusts from escaping tax on specific types of property held for long periods of time. B) The specific properties of the trust are deemed to be sold and reacquired at their market values, realizing tax gains and losses on the deemed disposition. C) Capital properties (non-depreciable), depreciable properties, land that is inventory, and resource property are subject to the 21 Year Rule. D) Properties can be transferred to the beneficiaries prior to the 21^st anniversary, at their tax cost, thereby deferring the tax effects. E) Spousal trusts are exempt from realizing a deemed disposition of the properties at the first 21 Year anniversary.

Question 3

Walter passed away this year, leaving a will bequeathing his wife with $80,000 in cash, in addition to his stocks and land, to be held in a spousal trust on her behalf. The trust will pay her the annual income generated by the trust during her lifetime.
Additionally, Walter's-33-year old son, Steven, is to receive a building to be held in a trust until Steven reaches the age of 45. Steven will also receive the assets in his mother's (Walter's wife) trust upon her death.
The assets transferred to Walter's wife consist of land with an ACB of $100,000 and a FMV of $300,000, and stocks valued at $200,000 with a cost base of $150,000.
The building transferred to Steven has an ACB of $200,000, UCC of $180,000, and FMV of $300,000.
Required:

A) What are the immediate tax consequences (identify the income type and amount) for Walter? Show calculations.
B) What are the immediate tax consequences for the assets received by the trust for Walter's wife?

Accepted Answer

A) Walter's estate will have a taxable capital gain of $50,000 and recapture of $20,000 upon the disposal of the building bequeathed to Steven. Building transferred to Steven's testamentary trust:   B) There will be no tax consequence on the $80,000 cash received by Walter's wife. The other assets will be transferred to the testamentary spousal trust at their tax values, resulting in no immediate tax effects.

Question 4

Jasmine is the beneficiary of an inter vivos trust. During 20x4 the trust received the following income:
Capital gains: $16,000
Interest: $10,000
Non-eligible dividends: $8,000
One half of the trust's income from 20x4 was paid to Jasmine, who does not currently have any other sources of income. The remainder of the income remained in the trust.
Required:
a) Determine Jasmine's personal federal tax.
b) Calculate the federal tax for the trust.
(Round all amounts to zero decimal places. Apply rates for 2019.)

Accepted Answer

The answer of Jasmine is the beneficiary of an inter...

Question 5

Which of the following statements is TRUE regarding trusts?&#10;A) Losses that exceed income in a trust are allocated to the beneficiary at the end of the year.&#10;B)The allocation of income from a trust is discretionary.&#10;C) Income that is payable to a beneficiary cannot be deducted from the trust's income.&#10;D) The residence of a trust is determined by the residence of the trustees.

Accepted Answer

The allocation of income from a trust is discretionary, meaning that the trustee has the discretion to decide which beneficiary receives the trust's income. Option A is incorrect because losses that exceed income in a trust cannot be allocated to the beneficiary; they are carried forward to future years. Option C is incorrect because income that is payable to a beneficiary is deducted from the trust's income before it is allocated to the beneficiary. Option D is incorrect because the residence of the trust is determined by the location of its administration and management, not by the residence of the trustees.

Question 6

Which of the following applies to a testamentary trust that is designated as a graduated rate estate (GRE)?&#10;A) Tax instalments are required.&#10;B)A non-calendar year may be used for tax purposes.&#10;C) The highest rate of tax will apply to all income.&#10;D) The GRE will become a normal testamentary trust after 48 months.

Accepted Answer

A GRE can use a non-calendar year for tax purposes to align its tax year with its estate administration. Option A is incorrect as tax instalments are not required for GREs. Option C is incorrect as a GRE is subject to graduated tax rates, similar to an individual. Option D is incorrect as the GRE status will continue until the end of the 36-month period following the individual's death.

Deck 17: Trusts