Deck 28: Income Taxation of Trusts and Estates

Question 1

The Bard Estate incurs a $25,000 fee in disposing of the real property of the decedent. The executor can decide to claim a $5,000 deduction against the Federal estate tax, and a $20,000 deduction on the estate's income tax return.

Answer 1

True

Question 2

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

Answer 2

False

Question 3

A complex trust automatically is exempt from the Federal AMT.

Answer 3

False

Question 4

Generally, capital gains are allocated to fiduciary income, because they arise from current-year transactions as directed by the trustee.

Question 5

Estates and trusts can claim Federal income tax deductions for costs incurred in maintaining investments in U.S.state and local bonds.

Question 6

When a trust operates a trade or business, it can claim a deduction for wages paid to employees.

Question 7

Trusts can select any fiscal Federal income tax year.

Question 8

Like a corporation, the fiduciary reports and pays its own Federal income tax liability.

Question 9

An example of income in respect of a decedent is the taxpayer's last paycheck, uncollected at death.

Question 10

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

Question 11

A trust might be used by one running for a political office.

Question 12

If provided for in the controlling agreement, a trust might terminate when the income beneficiary reaches age 35.

Question 13

A realized loss is recognized by a trust when it distributes a non-cash asset.

Question 14

The Bard Estate incurs a $25,000 fee in disposing of the real property of the decedent. The deduction is claimed against the Federal estate tax, unless by election it is claimed on the estate's income tax return.

Question 15

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

Question 16

A complex trust pays tax on the income that it retains and adds to corpus.

Question 17

Tax planning motivations usually are secondary to other objectives in deciding whether to create a trust.

Question 18

The decedent's estate must terminate within four years of the date of death.

Question 19

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

Question 20

A decedent's income in respect of a decedent is subject to the Federal income tax, but it is excluded from the estate tax.

Question 21

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 22

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 of net tax-exempt income.

Question 23

A fiduciary's distribution deduction shifts the tax burden for current-year income from the entity to the beneficiary.

Question 24

An estate operates a manufacturing business. It can claim a domestic production activities deduction (DPAD).

Question 25

Judy can claim one-third of the Sweet Estate's cost recovery deductions, because she received one-third of the fiduciary's distributable net income (DNI).

Question 26

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 (DNI) includes $9,000 for the interest income.

Question 27

The Whitmer Trust operates a manufacturing business and distributes the profits to its income beneficiaries. Whitmer passes through to the income beneficiaries the data needed to compute their domestic production activities deduction.

Question 28

One-fourth of the Cruger Estate's distributable net income consists of net long-term capital gains.Thus, when income beneficiary Susie receives a $40,000 income distribution from the estate, $10,000 of it qualifies for the 15% tax rate.

Question 29

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

Question 30

The Julius Trust made a gift to the United Charity on April 1, Year Two, from its Year One business profits. The trust's charitable contribution deduction can be claimed in either Year One or Year Two.

Question 31

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 32

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 33

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 34

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

Question 35

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 36

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

Question 37

The Griffin Trust makes a gift to a qualifying charity. Griffin's entity-level deduction is allowed only to the extent of 50% of distributable net 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 includes $10,000 for the interest income.

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 $60,000.

Question 40

The Whitmer Trust operates a manufacturing business. When Whitmer incurs a net operating loss, the current-year deduction passes through to the income beneficiaries.

Question 41

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)Complex trust.
B)Partnership.
C)S corporation.
D)All of the above taxpayers use Schedules K and K-1.

Question 42

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 43

Kip and his wife Biddie file calendar-year Form 1040 joint returns. Kip died this year on April 16. The Form 1040 is filed as a joint return, signed by Biddie and by Kip's executor.

Question 44

Which of the following taxpayers can be subject to an entity-level Federal income tax?

A)Complex trust.
B)Partnership.
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 45

Generally, an administrative expense attributable to municipal bond interest should be claimed on the estate's Form 706.

Question 46

The Rodriguez Trust generated $300,000 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)33%.
D)35%.

Question 47

The Prakash Trust is required to pay its entire annual accounting income to beneficiaries Sam and Janet.The trust's personal exemption is:

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

Question 48

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

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

Question 49

The Prakash Trust is required to pay its entire annual accounting income to the Daytona Museum, a qualifying charity.The trust's personal exemption is:

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

Question 50

Which of the following is a typical duty of a trustee?

A)File the entity's state and Federal income tax returns.
B)Invest the assets that comprise the corpus of the entity.
C)Distribute entity accounting income to the beneficiaries in accordance with the provisions of the trust instrument.
D)All of the above.

Question 51

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 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 which must distribute its accounting income every year.
D)One whose grantor was a living individual.

Question 53

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

Question 54

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 55

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 56

Three months after Brianna Timkin died, her executor received the final $40,000 installment from a sale of land that Brianna completed several years ago.Which of the following statements is true?

A)The $40,000 is both included in Brianna's gross estate, and subject to tax on her estate's income tax return.
B)The $40,000 is subject to neither income nor estate tax, because it was received after Brianna's death.
C)The $40,000 is subject to tax only on her estate's income tax return.
D)The $40,000 is included only in Brianna's gross estate.

Question 57

The Prakash Estate is required to pay its entire annual accounting income to beneficiaries Sam and Janet.The estate's personal exemption is:

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

Question 58

Which of the following is a typical duty of a trustee?

A)Modify the language of the trust instrument so as to lower the entity's Federal income tax.
B)Make decisions as to how to invest the trust corpus portfolio.
C)Allocate items between income and corpus using Subchapter J rules.
D)All of the above.

Question 59

The Chen Trust is required to distribute its accounting income every year, one-half to Missy Chen, and one-half to the local church's homeless shelter.What is the Chen Trust's personal exemption?

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

Question 60

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

Question 61

The Ulrich 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 $60,000 to Roger and $60,000 to Sally.After paying these amounts, the trustee is empowered to make additional distributions at its discretion.Exercising this authority, the Ulrich trustee distributes an additional $15,000 to Roger and $15,000 to Sally.How much gross income from the trust must Roger recognize?

A)$15,000.
B)$50,000.
C)$60,000.
D)$75,000.

Question 62

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)$60,000.
B)$50,000.
C)$40,000.
D)$0.

Question 63

The Doyle Trust reports 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 $20,000 to Roger and $20,000 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 $25,000 to Roger and $50,000 to Sally.How much gross income from the trust must Roger recognize?

A)$50,000.
B)$45,000.
C)$40,000.
D)$20,000.

Question 64

To reduce trustee commissions, the Sigrid 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 Sigrid trustee distributed $100,000 to Grandma this year: $40,000 as her one-half share of the entity's income, and $60,000 as a distribution of principal.Skippy received no distribution. How much of the year's distributable net income is assigned to Grandma?

A)$40,000.
B)$50,000.
C)$80,000.
D)$100,000.

Question 65

The Doyle Trust reports 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 $25,000 to Roger and $25,000 to Sally.How much income from the trust must Sally recognize?

A)$25,000.
B)$30,000.
C)$50,000.
D)$55,000.

Question 66

The Zhao 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 Zhao, 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)$75,000 long-term capital gain, $25,000 exempt interest.
B)$50,000 long-term capital gain, $50,000 exempt interest.
C)$75,000 long-term capital gain, $25,000 ordinary income.
D)$93,750 long-term capital gain, $31,250 exempt interest.

Question 67

The Doyle Trust reports 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 $20,000 to Roger and $20,000 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 $25,000 to Roger and $50,000 to Sally.How much gross income from the trust must Sally recognize?

A)$70,000.
B)$60,000.
C)$40,000.
D)$20,000.

Question 68

During the current year, the Santo Trust received $30,000 of taxable interest income, paid trustee's commissions of $3,000, and had no other income or expenses.The Santo 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)$15,000 by Marilyn and $15,000 by Domingo.
C)$13,500 by Marilyn and $13,500 by Domingo.
D)$9,000 by Marilyn and $18,000 by Domingo.

Question 69

The Suarez Trust generated distributable net income (DNI) this year of $150,000, one-third of which was portfolio income, and the balance of which was exempt interest.Under the terms of the trust, Clara Suarez is to receive an annual income distribution of $30,000.At the discretion of the trustee, additional distributions can be made to Clara, or to Clark Suarez III.This year, the trustee's distributions to Clara totaled $90,000.Clark also received $90,000.How much of the trust's DNI is assigned to Clark?

A)$0, only first-tier distributions are subject to Federal income tax.
B)$72,000.
C)$75,000.
D)$90,000.

Question 70

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 71

Beneficiary Terry received $30,000 from the Urgent Trust.Trust accounting income for the year was $50,000.The trust generated $20,000 in cost recovery deductions.How much can Terry deduct with respect to the cost recovery deductions that Urgent generated?

A)$0.
B)$8,000.
C)$12,000.
D)$20,000.

Question 72

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

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

Question 73

The Suarez Trust generated distributable net income (DNI) this year of $150,000, one-third of which was portfolio income, and the balance of which was exempt interest.Under the terms of the trust, Clara Suarez is to receive an annual income distribution of $30,000.At the discretion of the trustee, additional distributions can be made to Clara or to Clark Suarez III.This year, the trustee's distributions to Clara totaled $90,000.Clark also received $90,000.How much of the trust's DNI is assigned to Clara?

A)$90,000.
B)$78,000.
C)$48,000.
D)$30,000.

Question 74

The Brighton 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 $25,000 to Roger and $50,000 to Sally.After payment of these amounts, the trustee is empowered to make additional distributions at its discretion.Exercising this authority, the Brighton trustee distributes an additional $20,000 to Roger, and $30,000 to Sally.How much income from the trust must Sally recognize?

A)$80,000.
B)$65,000.
C)$50,000.
D)$30,000.

Question 75

The Ulrich 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 $60,000 to Roger and $60,000 to Sally.After paying these amounts, the trustee is empowered to make additional distributions at its discretion.Exercising this authority, the Ulrich trustee distributes an additional $20,000 to Roger and $20,000 to Sally.How much gross income from the trust must Sally recognize?

A)$80,000.
B)$60,000.
C)$50,000.
D)$20,000.

Question 76

Three weeks after Abed died, his brother Tony properly received Abed's last paycheck from his employer.The gross amount of the check was $4,000, and a $300 deduction for state income taxes was subtracted in computing the net amount of the payment.Which of the following statements is true?

A)The $300 is deductible on neither Tony's income tax return nor on Abed's estate tax return.
B)The $300 is deductible both on Tony's income tax return and on Abed's estate tax return.
C)The $300 is deductible only in computing Abed's taxable estate.
D)The $300 is deductible only on the income tax return of Abed's estate.

Question 77

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 78

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 79

This year, the Huang Trust distributed all of its accounting income and $1,000 from corpus.Huang's taxable income for the year is:

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

Question 80

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