Question 1

D's grandmother places $50,000 in a trust for D at her birth.The trustee may distribute income to D at his discretion.Which of the following is a true statement about the tax consequences of this arrangement?

Accepted Answer

The "kiddie tax" applies to children under the age of 19 (or full-time students under the age of 24) for any unearned income over a certain amount. Since the trustee may distribute income to D at their discretion, any distributed amounts may be subject to the "kiddie tax" as long as D is under the specified age limits. Option A is incorrect because accumulated amounts are not subject to the "kiddie tax" until they are distributed. Option C is incorrect because the trust income is taxed to the trust, not D's parents. Option D is incorrect because income generated by a gift to a minor is taxable.

Question 2

T incorporated his candy business as a C corporation.Several family members work for the corporation.Which technique will not avoid double taxation?

Accepted Answer

Paying dividends to family shareholders will not avoid double taxation because the corporation will already have paid taxes on the profits before distributing them as dividends.

Additionally, Option A (employing family shareholders and paying them reasonable salaries) and Option B (loaning money to the corporation and receiving fair market interest) may help reduce the corporation's taxable income and therefore decrease the amount of double taxation. Option D (leasing land to the corporation) may also provide rental income that can offset some of the corporation's profits and reduce the amount of double taxation. However, Option C is the only one that will not avoid double taxation.

Question 3

Which of the following is not a characteristic of a Crummey trust?

Accepted Answer

A Crummey trust is not necessarily a grantor trust. While it is common for a Crummey trust to be structured as a grantor trust, it is not required.

Question 4

The advantages of a private trust include all of the following except

Accepted Answer

The advantages of a private trust typically include placing legal title in the hands of a single entity, ensuring prudent management of trust assets, and allowing property to be given in sequence. However, accumulating income to take advantage of lower marginal tax rates is not a primary function or advantage of a private trust, as trusts often face higher tax rates compared to individuals.

Question 5

Which of the following is not a characteristic of a § 2503(c) trust?

Accepted Answer

This statement is not true of a § 2503(c) trust. If an income beneficiary under the age of 21 dies before reaching that age, his or her share of the trust assets would pass to the contingent beneficiaries of the trust, not back to the donor.

Question 6

During the 2012, taxpayer C (age 17 on the last day of the taxable year and a dependent on his widowed mother's tax return) receives $350 of interest on a savings account and $900 earned income from baby-sitting.Based on these facts, which one of the following statements is correct?

Accepted Answer

For a dependent minor with both earned and unearned income, the standard deduction for unearned income is $1,100 (as of the tax year in question, though this amount can change with tax law updates). Taxpayer C has $350 of unearned income (interest) and $900 of earned income (baby-sitting), totaling $1,250 in income. The standard deduction for earned income is the earned income amount plus $350, but not more than the standard deduction for an individual, which is $12,550 for 2021 (this amount changes annually). However, since C's total income does not exceed the sum of $1,100 plus earned income, only the unearned income above $1,100 is taxable. Since C's unearned income is $350, which is less than $1,100, C technically has no taxable unearned income. However, considering the specific options provided and the rules for dependents' filing requirements, the closest correct option based on the information given and typical tax rules would be that C has some taxable income due to the specific amounts and types of income received, but the explanation provided in the choices does not accurately reflect standard tax calculations for dependents. Therefore, the explanation here corrects the misunderstanding: C should not have taxable income based on the standard deduction rules for dependents, but given the options, A seems to imply C has some taxable income, which aligns with misunderstanding the standard deduction application. However, this explanation clarifies that based on standard tax rules, C's income should not be taxable, indicating a need for correction in the provided choices.

Question 7

In the current year, donor D transfers $200,000 of income-producing assets into a trust.D's father, F, age 85, is given an income interest in the trust for the rest of his life.Upon F's death, the assets will revert to D.F's life expectancy is three years.In the current year, the trust has ordinary income of $18,000, which is distributed to F, and a capital gain allocable to corpus of $4,500.Based on these facts,

Accepted Answer

The answer of In the current year, donor D transfers...

Question 8

Taxpayer F owns and operates a cash basis bookkeeping service as a sole proprietor.Capital is not a material income-producing factor in the business.F would like to "shift" some of the income he earns in the business to his son, S, who is 25 years old.Which of the following techniques will accomplish F's goal?

Accepted Answer

The best option to shift income to S would be to hire him as an employee and pay him a reasonable salary for services actually performed. This salary would be deductible for F's business and taxable income for S. The other options of giving S ownership in the business or making a gift of accounts receivable would result in potential gift tax consequences and may not be effective in shifting income to S.

Question 9

Which of the following is not an advantage of the irrevocable trust form of ownership?

Accepted Answer

Paying tax on current trust income at the fiduciary rate even if such income is distributed to beneficiaries in a higher individual income tax bracket is not an advantage. This can lead to higher taxes and potentially negative consequences for beneficiaries.

Question 10

Theta Partnership, a calendar year taxpayer, operates a business in which capital is a material income-producing factor.On January 1 of the current year, T, a 70 percent partner in Theta, sells half of his capital interest to his son S for its fair market value of $250,000.(This transfer gives S a 35 percent interest in partnership capital.) For the current year, Theta earns taxable income of $600,000.The maximum amount of this income that may be allocated to son S is

Accepted Answer

Since capital is a material income-producing factor, the income allocation to S is based on his capital interest. S has a 35% interest, so he can be allocated 35% of $600,000, which is $210,000.

Question 11

Which of the following is a false statement concerning an asset "freeze" as part of an estate plan?

Accepted Answer

An asset "freeze" typically involves irrevocable transfers or mechanisms that lock in the current value of an estate for tax purposes, preventing future appreciation from being subject to estate taxes. A revocable transfer to a trust does not constitute an asset "freeze" because the transferor retains the ability to revoke the trust and regain control of the assets, meaning the value of the assets can still be included in the transferor's estate for estate tax purposes.

Question 12

U puts $50,000 in a trust to provide funds for his nephew's education.Any assets remaining in the trust when the nephew reaches 30 revert to U.The nephew is 28 and in medical school.The gift tax consequences are which of the following?

Accepted Answer

The value of the income interest given to the nephew is considered a gift and is subject to gift tax, as it is a transfer of property for less than full consideration.

Question 13

D puts $100,000 into First Bank Trust to establish an irrevocable discretionary trust with his children as income beneficiaries; the principal goes to D's grandchildren at the death of the last surviving child.D divorces his children's mother and severs all ties with his family.The independent trustee distributes income only to pay for the support of the children.Which of the following is a true statement?

Accepted Answer

The answer of D puts $100,000 into First Bank Trust...

Question 14

Father employs Son as a carpenter in Father's construction business.Son only works June, July, and August, and uses his salary to pay his college tuition.Father may

Accepted Answer

Father may deduct Son's wages to the extent the amount paid was reasonable payment for services rendered. As long as the wages are reasonable for the services provided, the fact that Son is a family member does not prevent the deduction. However, Father cannot deduct the amount of Son's tuition unless he can establish that he is legally obligated to pay it. And there is no ownership interest involved here.

Question 15

In the current year, sole proprietor Z (a single taxpayer) incorporates his business and becomes the sole shareholder in Z Corporation.The business has consistently generated $70,000 annual income to Z.Which of the following statements concerning the newly formed C corporation is not accurate?

Accepted Answer

This statement is not accurate. A C corporation's net income is subject to double taxation: first at the corporate level and again at the shareholder level when distributed as dividends. Therefore, Z Corporation's net income is not nontaxable when distributed to its shareholder as dividends.

Question 16

Dad gives his five-year-old child a certificate of deposit.The $2,000 in interest income received this year is taxed in which of the follow ways?

Accepted Answer

The interest income from the certificate of deposit would be taxed as a part of Dad's income. As per the Kiddie Tax Law, if the child's unearned income exceeds a certain threshold (currently $2,200 for the tax year 2019), then the excess income is taxed at the parent's marginal tax rate. In this case, $100 of the interest income would be taxed at Dad's marginal rate and the remaining $1,900 ($2,000 - $100) would be taxed at the child's rate, which is 10%. Therefore, $950 ($1,900 x 0.10) would be taxed at 10%.

Question 17

A "gift-leaseback" generally occurs when the owner of a trade or business asset transfers the asset as a gift in trust for the benefit of the children (or other low-bracket family members) and then has the independent trustee lease back the asset to the business for fair rental value.The rent is deducted as a §162 business expense according to the terms of a written lease.IRS argues that this is not a business expense because

Accepted Answer

The IRS argues that there is no valid business purpose for a gift-leaseback arrangement, as a legitimate business would typically purchase an asset rather than lease it, and the trust cannot engage in business transactions without potentially breaching its fiduciary duty to prudently manage the trust corpus. Therefore, the deduction for rental payments in a gift-leaseback arrangement is disallowed as a non-business expense.

Question 18

Which of the following is not an advantage of inter vivos giving as compared with testamentary transfers?

Accepted Answer

Inter vivos gifts are subject to the same tax rates as testamentary transfers, so the advantage mentioned in A does not exist. The other options (B, C, D) correctly identify advantages of inter vivos giving.

Question 19

Dad gratuitously transfers 50 percent of the stock in a shipbuilding corporation valued at $10 million to Son.What are the tax consequences of this transfer to both Dad and Son?

Accepted Answer

Dad is subject to gift tax on the fair market value (FMV) of the stock transferred, which is $5 million in this case. Son does not have any income tax liability because the receipt of a gift is not considered taxable income to the recipient under U.S. tax law.

Question 20

This year G transferred property to a trust.Under the terms of the trust, a qualified charity is to receive the income from the trust for 10 years at which time the property is returned to G.Which of the following statements is true?

Accepted Answer

The answer of This year G transferred property to a...

Quiz 16: Family Tax Planning