Deck 18: Income Taxation of Trusts and Estates

Question 1

An estate is entitled to the standard deduction.

Answer 1

False
No standard deduction is available to an estate

Question 2

A simple trust must distribute all of its taxable income each year.

Answer 2

False
Accounting income must be distributed

Question 3

Only trusts with gross income of $600 or more during a tax year must file a federal income tax return.

Answer 3

False
If one or more beneficiaries of a trust are nonresident aliens or if the trust has taxable income, an income tax return must be filed even if gross income is below $600.

Question 4

A trust agreement may provide explicit instructions on how trust property is to be managed, invested, and paid out. Thus, a grantor may control from the grave what he could have controlled while he was alive.

Question 5

Income distributed to beneficiaries by an estate will retain the same character on the beneficiaries' income tax returns as it had on the estate's income tax return.

Question 6

All estates must file an estate income tax return regardless of gross income.

Question 7

A decedent is allowed a full personal exemption on a final income tax return regardless of date of death.

Question 8

Income in respect of the decedent can only be included on the decedent's final income tax return.

Question 9

For a normal tax year (not a leap year), the 65 day rule must be utilized for an estate by March 6 of the following calendar year.

Question 10

A joint income tax return which includes a decedent may not be filed if the surviving spouse has remarried before the end of the tax year in which the decedent dies.

Question 11

The executor of an estate can decide to take administration expenses on either the Form 706 or Form 1041.

Question 12

It is possible for one person to be both an income beneficiary and a remainder beneficiary of the same trust.

Question 13

No personal exemption is allowed on the final income tax return of a trust.

Question 14

In determining what is income to a trust, federal laws always take precedence over laws of the state in which the trust is created.

Question 15

All estates must file a Form 1041 when they have gross income of at least $500.

Question 16

The basis of trust assets would usually be a carryover basis from the trust grantor.

Question 17

The decedent's medical expenses paid by the estate can be treated as paid at the time they are incurred and deducted on the decedent's final income tax return as long as they are paid within two years of the decedent's death.

Question 18

The decedent's final income tax return is due four months after the date of death.

Question 19

The estate's first income tax return must cover a period of 12 months.

Question 20

When an estate or trust terminates all tax credits are lost.

Question 21

The trustee of the Dan Durrell trust is authorized to pay to the wife $10,000 per year and at, his or her discretion, distribute income or corpus to the beneficiary. In 2012, the trustee has DNI of $20,000 and distributes $10,000 to the wife and $25,000 to the beneficiary. What is the beneficiary taxed on in 2012?

A) $15,000
B) $10,000
C) $20,000
D) $20,500

Question 22

Income distributions from an estate to estate beneficiaries are recognized as income by beneficiaries on their tax returns for the year in which the:

A) Distribution is received.
B) Estate's tax year ends.
C) Income distribution was earned by the estate.
D) Income distribution was received by the estate.

Question 23

Charitable contributions can be deducted on an estate's income tax return but are limited to the following percentage of gross income:

A) 30 percent
B) 50 percent
C) 80 percent
D) No percentage limitation

Question 24

An estate that is established on September 1, 2012 will have a tax year of less than 12 months.

Question 25

A complex trust (not required to distribute any income) generated a long- term capital loss of $100,000 in 2012. It had taxable income of $100,000 from domestic dividends in 2012. What is the tax treatment of the capital loss to the trust?

A) Deduction of $3,000 and carryover of $97,000
B) Deduction of $100,000
C) Deduction of $6,000 and carryover of $94,000
D) Deduction of $3,000 and no carryover

Question 26

A complex trust (not required to distribute any income) generated a long- term capital loss of $100,000 in 2012. It had taxable income of $100,000 from domestic dividends in 2012. The trust terminated in 2012. What is the tax treatment of the capital loss to the remainderman beneficiary (who has no capital gains in 2012)?

A) Deduction of $100,000
B) Deduction of $3,000 and no carryover
C) Deduction of $3,000 and carryover of $97,000
D) Deduction of $6,000 and carryover of $94,000

Question 27

Charitable contributions cannot be made by a(n):

A) Testamentary trust
B) Inter vivos trust
C) Complex trust
D) Simple trust

Question 28

Business losses or capital losses incurred by a decedent prior to death:

A) Can be carried over to an estate's income tax return.
B) Can be deducted by estate beneficiaries on their income tax returns.
C) End with the decedent's final income tax return.
D) Are not deductible on a decedent's final income tax return.

Question 29

Medical expenses paid by the estate within one year of a taxpayer's death can be taken on either this decedent's final 1040 or the estate's 706 return.

Question 30

Charitable contributions can be deducted on an estate's income tax return up to what percentage of income?

A) 20 percent
B) 30 percent
C) 50 percent
D) Unlimited percentage of income

Question 31

All valid tax deductions paid by a cash basis decedent before death:

A) Can be deducted on the decedent's final income tax return.
B) Cannot be deducted on the decedent's final income tax return.
C) Can be deducted by the decedent's estate on its income tax return.
D) Can be deducted by beneficiaries of the decedent's estate.

Question 32

John Henry died on July 31, 2012. His final 1040 is due by 11/15/12 (3 ½ months after his date of death).

Question 33

The trustee of the Dan Durrell trust is authorized to pay to the wife $10,000 per year and at, his or her discretion, distribute income or corpus to the beneficiary. In 2012, the trustee has DNI of $20,000; the trustee distributes $10,000 to the wife as required and $25,000 at the trustee's discretion. How much is the wife taxed on?

A) $20,000
B) $35,000
C) $15,000
D) $10,000

Question 34

The income distribution system used to determine the taxation of estate income distributions to beneficiaries is a:

A) One-tier system
B) Two-tier system
C) Three-tier system
D) Four-tier system

Question 35

Each estate must file an estate income tax return if the estate has the following income:

A) $100
B) $300
C) $600
D) $1,000

Question 36

A trust that is funded and established on September 1, 2012 will have a tax year of less than 12 months.

Question 37

If named in a decedent's will, a fiduciary of an estate would be called an:

A) Administrator
B) Executor
C) Trustee
D) Advisor

Question 38

A simple trust is entitled to a personal exemption of:

A) $100
B) $300
C) $600
D) $1,000

Question 39

A trust created by a grantor during his own lifetime is called a:

A) Grantor trust
B) Inter vivos trust
C) Testamentary trust
D) Simple trust

Question 40

In 1989, Allen Davis established an irrevocable trust for 30 years, with the corpus reverting back to himself on termination. During the trust's existence, all capital gains go to corpus, and all the trust accounting income is to be distributed to his sons, George and Verne. What, if anything, is the grantor taxed on during the trust's existence?

A) All capital gains and trust accounting income
B) Nothing
C) Trust accounting income
D) Capital gains

Question 41

Hugh Humphrey creates a trust and provides that Donna Drums, a beneficiary, is to receive $10,000 from the corpus of the trust when she graduates from medical school, $20,000 when she marries, 1,000 shares of Candy stock on her thirtieth birthday, and a parcel of real estate on her fortieth birthday. Do the distributions qualify for exemption under Code Sec. 663(a)?

Question 42

The trust instrument requires the trustee to distribute $10,000 annually to X, the grantor's son. Any residual income may be distributed or accumulated for R, S and T in the trustee's discretion. Also, the trustee may invade corpus for the benefit of X, R, S, and T. The trust has distributable net income of $40,000. The trustee distributes $10,000 of income to X. Next he distributes $12,000 to R, $8000 each to S and T, and an additional $12,000 to X. How much is X taxed on?

A) $10,000
B) $15,000
C) $12,000
D) $19,000

Question 43

Patrick King dies on January 15, 2012. On the date of his death, Patrick had a bank account which pays interest on a quarterly basis. On March 31, 2012, $12,000 of interest income is credited to Patrick's bank account. (a.) If Patrick was on the cash basis of accounting at the date of his death, how much income would be included on his final income tax return?
(b)) Would your answer to (a) change if Patrick was on the accrual basis of accounting at the date of his death?
(c)) If Patrick does not recognize all of the interest income on his final income tax return in part (a) or (b), who would recognize the income?

Question 44

How much is T taxed on?

A) $8,000
B) $12,000
C) $0
D) None of the above

Question 45

A calendar year taxpayer, Gene Berry, died on March 28, 2012. What income tax returns need to be filed and by what date(s)?

Question 46

How much is R taxed on?

A) $10,000
B) $12,000
C) $9,000
D) None of the above

Question 47

Which of the following items is not normally in accounting income (State Law Income) for a trust?

A) Rental Income
B) Capital Gains
C) Dividends
D) All of the above.

Question 48

The trustee of a trust is required by the trust agreement to distribute $5,000 of income yearly to James Madison and $10,000 of income a year to Peter Madison. The trustee has the authority, per the trust agreement, to make additional distributions to the two beneficiaries at his discretion. During 2012, the trustee actually distributes a total of $20,000 of income to James and $20,000 of income to Peter. The trust has DNI of $30,000 in 2012. What would be the taxable amounts of the income distributions to James and to Peter?

Question 49

A calendar year taxpayer died on February 4, 2012. How many income tax returns must be filed for this taxpayer?

A) 1
B) 2
C) 0
D) None of the above.

Question 50

Which of the following deductions is not part of accounting income for a trust?

A) Charitable contributions
B) Rental expenses
C) Trustee fees allocated to income
D) None of the above

Question 51

How much is S taxed on?

A) $6,000
B) $8,000
C) $12,000
D) $0