Deck 20: Income Taxation of Trusts and Estates

Question 1

Generally,capital gains are allocated to fiduciary corpus,because they relate to investment assets.

Answer 1

True

Question 2

Trusts typically use a calendar tax year.

Answer 2

True

Question 3

The decedent's estate must terminate by the third anniversary of the date of death.

Answer 3

False

Question 4

A complex trust may incur a liability for the AMT.

Question 5

The fiduciary entity pays tax on the income that it retains and adds to corpus.

Question 6

Distribution of an appreciated asset triggers immediate gain recognition to the trust.

Question 7

The executor of the Globe Estate has reported a $10 million gross estate for the entity,and a taxable estate that exceeds the exemption equivalent by $10,000.The estate incurred a $50,000 sales commission in disposing of the decedent's assets.There was no exempt income recognized by Globe this year.The executor can claim a $10,000 deduction for the commission against the taxable estate,thereby eliminating the estate tax liability.The remaining $40,000 can be deducted on the Form 1041 for the year of the expenditure.

Question 8

If provided for in the trust agreement,a trust might terminate when the income beneficiary reaches age 30.

Question 9

Like a partnership,the fiduciary is a tax-reporting,but not a separate tax-paying entity.

Question 10

Income in respect of a decedent can be subject to both income and estate tax at the Federal level.

Question 11

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

Question 12

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

Question 13

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

Question 14

Trusts are created exclusively to reduce tax liabilities.

Question 15

An estate claims an ordinary business deduction for wages paid to employees.

Question 16

An example of an expense in respect of a decedent is the state income taxes attributable to the taxpayer's last paycheck,uncollected at death.

Question 17

A trust might be used by a newly elected politician.

Question 18

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

Question 19

Estates and trusts can claim deductions for their costs incurred in maintaining investments in municipal bonds.

Question 20

With respect to a selling expense incurred by an estate in disposing of the decedent's property,a deduction can be claimed on the Form 706 only if the executor waives the corresponding deduction in computing the estate's Federal income tax.

Question 21

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 $9,000 for the interest income.

Question 22

A trust passes through to its income beneficiaries the data needed to compute the domestic production activities deduction.

Question 23

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 24

Cost recovery deductions are assigned pro rata to the recipients of an estate's accounting income.

Question 25

An estate cannot claim a § 199 domestic production activities deduction,as the deduction passes through to the income beneficiaries.

Question 26

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 27

One-third of the Hermann Estate's distributable net income consists of qualifying dividends.Thus,when income beneficiary Susie receives a $30,000 income distribution from the estate,$10,000 of it qualifies for the 15% tax rate.

Question 28

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 29

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 30

When a trust makes a gift to a qualifying charity,the entity-level deduction is allowed only to the extent of 10% of distributable net income.

Question 31

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

Question 32

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

Question 33

When a trust incurs a net operating loss,the current-year deduction passes through to the income beneficiaries.

Question 34

A fiduciary's distribution deduction assures that current-year income is taxed only once.

Question 35

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 36

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 37

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

Question 38

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 $40,000.

Question 39

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 is computed net of the full $3,000 deduction for the fees.

Question 40

A complex trust can claim a Year 1 deduction for a gift to charity,where the contribution was made in October of Year 2 out of gross income recognized in Year 1.

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)Partnership.
B)Trust.
C)S corporation.
D)All of the above taxpayers use Schedule K and K-1.

Question 42

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

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

Question 43

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

Question 44

The Winston Trust is classified as a grantor trust,because the donor can revoke the trust.Consequently,Winston need not file an annual Form 1041,and he reports the trust items on his own Form 1040.

Question 45

The grantor set up a trust,income to a daughter,remainder to a grandson.To the extent that trust income is used to satisfy the grantor's legal obligation to pay for his daughter's high school education,Subchapter J rules are ignored,and the income is taxed to the grantor.

Question 46

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

Question 47

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

A)Take title to the assets belonging to the entity.
B)File the entity's tax returns.
C)Invest the assets that comprise the corpus of the entity.
D)Distribute trust income of the beneficiaries in accordance with the provisions of the trust instrument.
E)All of the above.

Question 48

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

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

Question 49

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 50

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 51

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

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

Question 52

The Rodriguez Trust generated $200,000 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)35%.
D)38.5%.

Question 53

The grantor set up a trust,income to a daughter,remainder to a grandson.To the extent that trust income is accumulated for a later distribution to the grandson,Subchapter J rules are ignored,and the income is taxed to the grantor.

Question 54

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 55

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

A)Determine the date on which trust terminates.
B)Modify the language of the trust instrument so as to lower the entity's Federal income tax.
C)Pay the estate taxes of the grantor.
D)Allocate items between income and corpus using Subchapter J rules.
E)All of the above.

Question 56

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 whose grantor was not a corporation.
D)One which must distribute its accounting income every year.

Question 57

The grantor set up a trust,income to a daughter,remainder to a grandson.To the extent that trust income is used to pay a life insurance premium on the grantor's spouse,Subchapter J rules are ignored,and the income is taxed to the grantor.

Question 58

The Wilson Trust is required to distribute its accounting income every year,one-half to Missy Wilson,and one-half to the Lung Cancer Research Center.What is the Trust's personal exemption?

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

Question 59

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

A)Partnership.
B)Trust.
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 60

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

Question 61

The Roz 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 $30,000 to Roger and $60,000 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 $40,000 to Roger,and $40,000 to Sally.How much income from the trust must Sally recognize?

A)$70,000.
B)$65,000.
C)$60,000.
D)$30,000.

Question 62

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

Question 63

The Roz 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 $80,000 to Roger and $80,000 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 $20,000 to Roger and $20,000 to Sally.How much gross income from the trust must Roger recognize?

A)$100,000.
B)$80,000.
C)$50,000.
D)$20,000.

Question 64

The Eagleton Trust generated distributable net income (DNI)this year of $120,000,one-third of which was portfolio income,and the balance of which was exempt interest.Under the terms of the trust,Clara Eagleton is to receive an annual income distribution of $40,000.At the discretion of the trustee,additional distributions can be made to Clara or to Clark Eagleton III.This year,the trustee's distributions to Clara totaled $60,000.Clark also received $60,000.How much of the trust's DNI is assigned to Clara?

A)$80,000.
B)$60,000.
C)$50,000.
D)$40,000.

Question 65

The Roz 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 $30,000 to Roger and $30,000 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 $10,000 to Roger and $30,000 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 66

Delphi is a complex trust.This year it distributed all of its accounting income and $1,000 from corpus.Delphi's taxable income for the year is:

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

Question 67

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

Question 68

Beneficiary Terry received $40,000 from the Urgent Trust.Trust accounting income for the year was $50,000.The trust generated $30,000 in cost recovery deductions.How much can Terry deduct with respect to the cost recovery deductions that Urgent generated?

A)$30,000.
B)$24,000.
C)$6,000.
D)$0.

Question 69

Three weeks after Tina died,her brother Tony properly received Tina's last paycheck from her employer.The gross amount of the check was $4,000,and a $700 deduction for state income taxes was subtracted in computing the net amount of the payment.Which of the following statements is true?

A)The $700 is deductible both on Tony's income tax return and on Tina's estate tax return.
B)The $700 is deductible on neither Tony's income tax return nor on Tina's estate tax return.
C)The $700 is deductible only in computing Tina's taxable estate.
D)The $700 is deductible only on the income tax return of Tina's estate.

Question 70

The Edgerton 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 Edgerton,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)$100,000 ordinary income.
B)$125,000 ordinary income.
C)$50,000 long-term capital gain,$50,000 exempt interest.
D)$75,000 long-term capital gain,$25,000 exempt interest.

Question 71

During the current year,the Madison Trust received $40,000 of taxable interest income,paid trustee's commissions of $4,000,and had no other income or expenses.The 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)$20,000 by Marilyn and $20,000 by Domingo.
C)$12,000 by Marilyn and $24,000 by Domingo.
D)$18,000 by Marilyn and $18,000 by Domingo.

Question 72

The Roz 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 $80,000 to Roger and $80,000 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 $20,000 to Roger and $20,000 to Sally.How much gross income from the trust must Sally recognize?

A)$20,000.
B)$50,000.
C)$80,000.
D)$100,000.

Question 73

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 74

The Watson Trust incurred the following items during the year.

What is Watson's deduction for the tax preparation fees?

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

Question 75

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 76

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 77

The Roz 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 $30,000 to Roger and $30,000 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 $10,000 to Roger and $30,000 to Sally.How much gross income from the trust must Roger recognize?

A)$60,000.
B)$50,000.
C)$40,000.
D)$30,000.

Question 78

The Roz 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 $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 $40,000 to Roger and $40,000 to Sally.How much income from the trust must Sally recognize?

A)$90,000.
B)$60,000.
C)$50,000.
D)$40,000.

Question 79

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 80

Three months after Emma died,her executor received the final $10,000 installment of Emma's Super Lottery winnings from the state.Which of the following statements is true?

A)The $10,000 is both included in Emma's gross estate,and subject to tax on her estate's income tax return.
B)The $10,000 is subject to tax only on her estate's income tax return.
C)The $10,000 is included only in Emma's gross estate.
D)The $10,000 is subject to neither income nor estate tax,because it was received after Emma's death.