Question 1

Revocable trusts means

Accepted Answer

Revocable trusts can be revoked or amended by the grantor at any time during their lifetime. This provides flexibility and control for the grantor. The other options are not necessarily true for revocable trusts.

Question 2

If a state has adopted the Revised Uniform Principal and Income Act, which of the following statements is correct?

Accepted Answer

The Revised Uniform Principal and Income Act allows the trust document to specify its own definitions of principal and income, which will take precedence over the state law definitions. This means that if the trust document defines trust income in a certain way, that definition will override any other definitions provided by state law.

Question 3

An inter vivos trust may be created by all of the following except

Accepted Answer

An executor is a person appointed by a court to administer a deceased person's estate. They do not have the power to create an inter vivos trust as the trust would need to be created while the grantor is still alive. The other options are all valid parties who can create an inter vivos trust.

Question 4

Identify which of the following statements is false.

Accepted Answer

State trust law does not preempt the trust document when defining income; the trust document typically governs unless it is silent or ambiguous, in which case state law may apply.

Question 5

Which of the following statements is incorrect?

Accepted Answer

Subchapter K of the Internal Revenue Code contains the special rules applicable to partnerships, not estates and trusts. The rules governing estates and trusts are primarily found in Subchapter J.

Question 6

The term "trust income" when not preceded by an explanatory word relates most closely to

Accepted Answer

The answer of The term "trust income" when not preceded...

Question 7

Beneficiaries of a trust may receive

Accepted Answer

Beneficiaries of a trust can receive different types of interests depending on the terms of the trust. They may receive an income interest only, a remainder interest only, or both an income and a remainder interest. Therefore, any of the options provided can be correct based on the specific trust arrangement.

Question 8

The executor or administrator is responsible for all the following estate duties except

Accepted Answer

The executor or administrator of an estate is responsible for collecting assets, paying debts and taxes, and distributing property to beneficiaries. However, preserving the estate's existence as a separate taxpayer is not a duty of the executor or administrator. This responsibility falls to the estate's accountant or tax lawyer.

Question 9

A tax entity, often called a fiduciary, includes all of the following except

Accepted Answer

All of the above options (estates, complex trusts, and testamentary trusts) are considered tax entities or fiduciaries. Therefore, none of them should be excluded from the options given.

Question 10

A trust has net accounting income of $15,000. In addition, the trust has a $10,000 capital gain, which is not included in net accounting income. The trust is required to distribute the trust income to the beneficiary. The beneficiary will receive

Accepted Answer

The beneficiary will receive $15,000, which is the net accounting income of the trust. Capital gains are typically not considered part of the distributable net income unless specified otherwise in the trust agreement or by law.

Question 11

For purposes of trust administration, the term "sprinkling" relates to the mandatory distribution of income among various beneficiaries.

Accepted Answer

The term "sprinkling" actually relates to the discretionary distribution of income among various beneficiaries.

Question 12

Which of the following statements regarding the taxation of a trust is incorrect?

Accepted Answer

The income of an irrevocable trust is not typically taxed to the grantor, but rather to the trust itself.

Question 13

Briefly discuss the reasons for establishing a trust.

Accepted Answer

The answer of Briefly discuss the reasons for establishing a...

Question 14

The conduit approach for fiduciary income tax means

Accepted Answer

The conduit approach for fiduciary income tax means that the distributed income has the same character (such as capital gains or ordinary income) in the hands of the beneficiary as it has to the trust. This approach avoids double taxation of the same income, as the beneficiary pays taxes on the income received from the trust. The other options listed are not accurate descriptions of the conduit approach.

Question 15

Identify which of the following statements is false.

Accepted Answer

Assets in a revocable trust do avoid probate, which is one of the benefits of creating a revocable trust.

Question 16

Briefly discuss some of the reasons for using a revocable trust.

Accepted Answer

The answer of Briefly discuss some of the reasons for...

Question 17

Identify which of the following statements is false.

Accepted Answer

Trusts do not receive a personal exemption for tax purposes, unlike individuals.

Question 18

Texas Trust receives $10,000 interest on U.S. Treasury bonds and $15,000 interest on State of New York bonds. All $25,000 is distributed to the trust beneficiary, Gary. Which of the following statements is correct?

Accepted Answer

The $10,000 interest received from U.S. Treasury bonds is taxable, while the $15,000 interest received from State of New York bonds may be tax-free, depending on the state where Gary resides. Therefore, Gary will have $10,000 of taxable interest income and $15,000 of tax-free interest income. The trust may have to pay taxes on its earnings, but Gary will still receive his portion of the earnings as taxable income. Therefore, options A, C, and D are incorrect.

Question 19

The governing instrument for the Lopez Trust contains no definitions of income and principal. The Trust is located in a state that has adopted the Uniform Act. In the current year, the trust reports the following receipts and disbursements:  What is the trust's net accounting income?

Accepted Answer

The answer of The governing instrument for the Lopez Trust...

Question 20

This year, the Huang Trust received $20,000 of dividends and $30,000 of tax-free interest. It distributes all of its receipts to its beneficiary. How should the beneficiary treat the distribution?

Accepted Answer

The answer of This year, the Huang Trust received $20,000...

Quiz 14: Income Taxation of Trusts and Estates

Revocable trusts means

If a state has adopted the Revised Uniform Principal and Income Act, which of the following statements is correct?

An inter vivos trust may be created by all of the following except

Identify which of the following statements is false.

Which of the following statements is incorrect?

The term "trust income" when not preceded by an explanatory word relates most closely to

Beneficiaries of a trust may receive

The executor or administrator is responsible for all the following estate duties except

A tax entity, often called a fiduciary, includes all of the following except

A trust has net accounting income of $15,000. In addition, the trust has a $10,000 capital gain, which is not included in net accounting income. The trust is required to distribute the trust income to the beneficiary. The beneficiary will receive

For purposes of trust administration, the term "sprinkling" relates to the mandatory distribution of income among various beneficiaries.

Which of the following statements regarding the taxation of a trust is incorrect?

Briefly discuss the reasons for establishing a trust.

The conduit approach for fiduciary income tax means

Identify which of the following statements is false.

Briefly discuss some of the reasons for using a revocable trust.

Identify which of the following statements is false.

Texas Trust receives $10,000 interest on U.S. Treasury bonds and $15,000 interest on State of New York bonds. All $25,000 is distributed to the trust beneficiary, Gary. Which of the following statements is correct?

The governing instrument for the Lopez Trust contains no definitions of income and principal. The Trust is located in a state that has adopted the Uniform Act. In the current year, the trust reports the following receipts and disbursements: What is the trust's net accounting income?

This year, the Huang Trust received $20,000 of dividends and $30,000 of tax-free interest. It distributes all of its receipts to its beneficiary. How should the beneficiary treat the distribution?