TAX 497 - Chapter 20

Tax planning motivations usually predominate over other objectives in deciding whether to create a trust.

False
Tax consequences are secondary to the decision to create a trust

A trust might me used when a married couple is divorcing.

True

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

True

An estate's remainder beneficiary generally must wait until the entity is terminated by the executor to receive any distributions.

True
Fiduciaries generally pay out income at least once each year.

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

True

Corpus, principal, and assets of the trust are synonyms

True

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

True

Under IRS regulations, the decedent's estate must terminate within 4 years of the date of death so as to minimize income-shifting techniques.

False
The termination date of an estate is somewhat discretionary. It occurs when all of the required asset and income distributions are made, when all of the decedent and estate liabilities are paid, and when all other work of the executor is completed.

Trusts can select any Federal income tax year-end.

False
Trusts usually must use a calendar tax year. Tax-exempt trusts need not follow this requirement

A complex trust pays tax on the income that it accumulates.

True

A complex trust is automatically exempt from the Federal AMT.

False
A fiduciary entity may be subject to the AMT

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

True
Fiduciary accounting income is computed first, then DNI and taxable income determinations are made

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

False
Almost always, capital gains/loss is allocated to corpus.

Usually, a beneficiary takes a carryover basis when a trust distributes a non-cash asset

True

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

False
IRD is subject to both taxes

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

True

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

True

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

False
Section 265 disallows such deductions, although the disallowed amount later constitutes an adjustment in computing DNI. State income tax treatment may differ.

The Stratford Estate incurs a $25,000 casualty loss 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.

True
The deduction can be assigned by either return but not both, with the deduction going to default to the Form 706

The Stratford Estate incurs a $25,000 legal 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.

True
Administrative expenses can be allocated between the returns as the executor directs bot no both for the same amount, with the deduction going by default to the Form 706.

Just 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)

False
Such amounts are assigned to recipients of entity accounting income (allocated based on the % of entity accounting income received (or retained by the entity)), including to the entity if it accumulated income.

The Malik Estate operates a manufacturing business. Malik made no income distributions this year. It can claim the full deduction for the MACRS depreciation of the assets of the business.

True
An entity-level deduction can be claimed, as it relates to the entity's retained accounting income.

the Whitmer Trust operates a manufacturing business and distributes the profits to its income beneficiaries. Whitmer also passes through to the income beneficiaries the data needed to compute their credit or deduction for foreign income taxes paid.

True

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

False
The entity itself retains the NOL and all related carryovers except for the year of termination of the entity in which current year losses and carryover losses flows through directly to the beneficiaries.

The Griffin Trust makes a gift of long-term capital gain property to a qualifying charity. Griffin's entity-level deduction cannot exceed 30% of distributable net income.

False
No such % limitation applies to fiduciaries

The Julius Trust made a gift to the United Charity on August 1, Year 2, from its Year 1 business profits. The trust's charitable contribution deduction can be claimed in either Year 1 or Year 2.

True
A one-year grace period is allowed by � 642(c)(1) but only where the contribution is paid from recognized gross income.

60% 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.

False
Section 265 disallows rules apply to the charitable contributions of a fiduciary. A proportionate share of the payment is deemed paid from the exempt income and is nondeductible. Here, the deduction is limited to $40,000

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

True

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.

False
The maximum AGI increase is $30,000, as it is limited by distributable net income.

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.

True
The AGI increase is limisted by the amount of the trust's distributable net income

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.

False
AGI cannot increase by more than the amount of the distribution.

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 15/20% tax rate.

True
The make-up of DNI passes through to the income beneficiary.

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

False
Corpus capital gain/loss is removed from DNI.

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.

True
DNI includes the $9,000 net exempt income ($10,000 exempt income-$1,000 (10,000/30,000) x 3,000) disallowed fiduciary fee.

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 building.

True
Credits generally are apportioned between the estate or trust and the beneficiaries on the basis of the entity accounting income allocable to each.

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.

False
DNI includes exempt income, net of related disallowable deductions.

The Gable Trust reports $20,000 business income and $10,000 exempt income, and it paid a $3,000 fiduciary fee. Gable's distributable net income includes $10,000 for the interest income.

False
DNI includes net exempt income

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

False
First-tier distributions are those required by the controlling document. Second-tier distributions are discretionary distributions.

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

True
The exempt nature of that part of DNI flows through to the beneficiary

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

False
A "blank" Form 1041 still is required of a grantor trust

Reyes contributed assets to a trust, designating daughter Maria as the income beneficiary, and grandson Julio as the remainder beneficiary. This year, fiduciary accounting income was $50,000. The trustee paid $5,000 of this amount as premiums for a life i

True
Grantor trust rules apply when the entity satisfies grantor obligations or applied to the payment of premiums on insurance policies on the life of the grantor or the grantor's spouse.

Reyes contributed assets to a trust, designating daughter Maria as the income beneficiary, and grandson Julio as the remainder beneficiary. This year, fiduciary accounting income was $50,000. The trustee paid $5,000 of this amount of Julio's high school t

True
Grantor trust rules apply when the entity satisfies grantor obligations.

Reyes contributed assets to a trust, designating daughter Maria as the income beneficiary, and Grandson Julio as the remainder beneficiary. This year, fiduciary accounting income was $50,000. The trustee accumulated $5,000 of this amount and added it to t

False
The trust usually is taxable on the retained entity accounting income.

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

False
The correct due date is April 15.

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

True
These parties should be assigned as second-tier beneficiaries to minimize their exposure to DNI, as they likely do not need the cash flow for living expenses.

When a trust distributes an in-kind asset with a realized loss, most likely this loss cannot be immediately deducted by the first-tier beneficiary.

True
The loss should be directed to the trust, which almost always is in a higher tax bracket than are the beneficiaries. Further, the related party rules likely disallow the loss for the beneficiary.

The Philmore Estate is subject to a 40% Federal estate tax rate and a 45% Federal and state income tax rate. Generally, an administrative expense should be claimed on the estate's income tax return.

True
There, the deduction is more valuable because a higher marginal tax typically applies.

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

True
The deduction is disallowed on the income tax return (Form 1041) so it should be claimed on the estate tax return.

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

J

Which of the following is a typical duty of an executor of an estate?
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 d

All of the above

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 corp

Make decisions as to how to invest the trust corpus portfolio

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

All of the above.

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 an individual who still is alive
d. One which must distribute its accounting in

One which must distribute its accounting income every year

Which of the following taxpayers can be subject to an entity-level Federal income tax?
a. Complex trust
b. Partnership
c. LLC
d. All of the above taxpayers are passthrough entities, and they never are subject to an entity-level Federal income tax

Complex trust

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

All of the above use Schedules K and K-1

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.

$300

The Prakash Estate has equal income beneficiaries Sam and Janet. As allowed by the terms of the will, the estate makes no income distributions during the current tax year. The estate's personal exemption is:

$600

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

$300

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:

$300
Only a complex trust can have a charitable contribution.

The Rodriguez Trust generated $300,000 in alternative minimum taxable income this year. Concerning the AMTI, the trust is subject to a marginal Federal income tax rate of:

28%

The trustee is the Epsilon Trust distributed an asset to Telly, a qualifying income beneficiary. The asset's basis to the trust was $10,000, and its FMV on the distribution date was $25,000. Which of the following statements is true?
a. Assuming that the

Lacking any election by the trustee, Telly's basis in the asset is $10,000

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,

The $40,000 is both included in Brianna's gross estate, and subject to tax on her estate's income tax return

Income beneficiary Turk received $30,000 from the Urgent Trust. Trust accounting income for the year was $100,000. The trust generated $20,000 in cost recovery deductions. How much can Turk deduct with respect to the cost recovery deductions that Urgent g

$6,000
$20,000 cost recovery deduction x $30,000 income received / $100,000 entity accounting income

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 o

The $300 deductible both on Tony's income tax return and on Abe's estate tax return

The Chen Trust incurred the following items during the year
Taxable interest received: $40,000
Tax-exempt interest received: $60,000
Tax preparation fees paid: $5,000
What is Chen's deduction for the tax preparation fees?

$2,000
The deduction is disallowed for the proportionate amount deemed paid from the exempt interest. $5,000 x 40,000 / 100,000 = 2,000

Which, if any, of the following statements relates to the tax treatment of both estates and trusts?
a. The termination date of the entity is specified in the controlling document
b. The entity must use the same tax year as its creator (ie grantor, deceden

In the year of its termination, the entity's net operating loss carryovers are passed through to its beneficiaries.

Ellie Chisum, a calendar-year individual, wants to make a gift to a charity that is deductible on her year 1 Form 1040. The gift must be made by Ellie:

During year 1
no grace period is allowed for individuals

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 a

All of the above

The Ellie Trust, a calendar-year entity, wants to make a gift to a charity that is deductible on its year 1 Form 1041. The gift must be made by Ellie:

During year 1 or 2
Fiduciaries have a one-year "grace period" for charitable gifts.

Ellie Ins, a calendar-year C Corporation, wants to make a gift to a charity that is deductible on its year 1 Form 1120. The gift must be made by Ellie:

On or before April 15, year 2.
The gift must be made by the unextended due date of the return

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. Entity taxable income
b. Entity adjusted gross income
c. Distributable net income
d. Fiduciary accounting inco

Distributable net income

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:

$30,000
The distribution deduction is the lesser of the deductible portion of DNI or the taxable amounts actually paid.

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:

$40,000
The distribution deduction of a simple trust is always equal to its DNI.

This year, the Huang Trust is a complex trust. This year, it distributed all of its accounting income and $5,000 from corpus, to its sole income beneficiary Kim. Huang's taxable income for the year is:

($100)
After computing DNI and the distribution deduction, a fiduciary entity that distributed all of its accounting income generally "wastes" its personal exemption.

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, th

$50,000
First Tier: 30,000 + 30,000 = 60,000
Total DNI 100,000 - 60,000 = 40,000 DNI available for 2nd tier
Second Tier: 25,000 + 25,000 = 50,000
Taxable to Roger 25/50 x $40,000 = 20,000
Taxable to Sally 25/50 x $40,000 = 20,000
Total taxable amount 30,0

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 tr

$60,000
First Tier: 20,000 + 20,000 = 40,000
100,000 - 40,000 = 60,000 available for 2nd tier
Second tier: 25,000 + 50,000 = 75,000
Roger: 25/75 x 60,000 = 20,000
Sally 50/75 x 60,000 = 40,000
Sally's gross income 20,000 + 40,000 = $60,000

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 tr

$40,000
First Tier: 20,000 + 20,000 = 40,000
100,000 - 40,000 = 60,000 available for 2nd tier
Second tier: 25,000 + 50,000 = 75,000
Roger: 25/75 x 60,000 = 20,000
Sally 50/75 x 60,000 = 40,000
Sally's gross income 20,000 + 20,000 = $40,000

The Uldis Trust reports distributable net income fro the year of $100,000 and no income from tax-exempt sources. Under the terms of the trust instrument, the trustee must distribute $75,000 to Roger and $75,000 to Sally. After paying these amounts, the tr

$50,000
75,000 / 150,000 = $50,000

The Uldis 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 $75,000 to Roger and $75,000 to Sally. After paying these amounts, the truste

$50,000
75,000 / 150,000 = $50,000

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 pa

$9,000 by Marilyn and $18,000 by Domingo
Total DNI - $27,000
20,000 + 40,000 = 60,000
20/60 x 27,000 = 9,000
40/60 x 27,000 = 18,000

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 am

$65,000
First Tier: 25,000 + 50,000 = 75,000
100,000 - 75,000 = 25,000
Second Tier: 20,000 + 30,000 = 50,000
Roger: 20/50 x 25,000 = 10,000
Sally: 30/50 x 25,000 = 15,000
50,000 + 15,000 = $65,000

The Zhao Estate generated distributable net income 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 th

$75,000 long-term capital gain, $25,000 exempt interest
The make-up of DNI carries through to the distribution amounts.
100,000 * 1/4 = 25,000 exempt interest
100,000 - 25,000 = $75,000 capital gain

The Suarez Trust generated distributable net income this year of $150,000, two thirds 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 $3

$60,000
First tier: 150,000 - 30,000 = 120,000 available DNI
Second tier: 60,000 + 90,000 = 150,000
Clara: 30/120 x 120,000 = 30,000
30,000 + 30,000 = 60,000

The Suarez Trust generated distributable net income this year of $150,000, two thirds 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 $3

$90,000
120,000 remaining DNI x 90/120 = 90,000

The Willis Trust instrument provides that Tamara, the sole income beneficiary, is to receive $40,000 annually. If trust accounting income is not sufficient to pay this amount, the Willis trustee is empowered to invade corpus to the extent necessary. Durin

$28,000
30,000 / 100,000 = 30% exempt income
40,000 x 30% = 12,000
40,000 - 12,000 = 28,000

Which of the following restrictions applies concerning distributions to trust beneficiaries?
a. Special allocations are not allowed under Subchapter J
b. Special allocations are allowed, but only in the trust's termination year
c. Special allocations are

Special allocations of income types are allowed, assuming that they carry a substantial economic effect.

The Jiang Trust operates a manufacturing business. Yan created the trust several years ago by contributing a successful sole proprietorship. The trust distributed one-half of its DNI this year to Yan. Yan can retain all of the trust's depreciation deducti

The depreciable assets were contributed by Yan when the trust was created.
This is an example of substantial economic effect.

The Jiant Trust manages investment assets that were contributed by Kong several years ago. The trust distributed one-half of its DNI this year to Kong. Kong can retain all of the trust's tax-exempt interest income if:
a. One-half of the exempt income belo

The tax-exempt bonds were contributed by Kong when the trust was created.

The Code defines a grantor trust as which of the following?
a. One which is required to file Form 1041-G
b. One which the grantor can revoke or otherwise amend
c. One in which a member of the grantor's family is the sole trustee
d. One which makes annual

One which the grantor can revoke or otherwise amend

The Yellow Trust incurred $10,000 of portfolio income. Its corporate trustee paid fiduciary fees of $1,000 therefrom, and also paid $1,000 in premiums for a life insurance policy on Marcia, the grantor of the trust. How much gross income does Marcia inclu

$1,000
The trust is not classified as a grantor trust merely because the trustee is empowered to pay the life insurance premiums. However, to the extent that trust income is used for this purpose, grantor Marcia is taxed thereon.

The Zhong Trust is a calendar-year taxpayer. Its Form 1041 is due on which date in the following year?

April 15

The present value of a trust's Federal income tax liability is reduced when:
a. The entity is classified as a simple trust
b. The trust invests in high-yield stocks
c. The trust invests in growth stocks
d. The trust collects income in respect of a deceden

The trust invests in growth stocks
The goal is a deferral of gross income; the other choices trigger

A trust holds assets that will generate net investment income and trigger the additional Medicare taxes. The trustee should:
a. Distribute all of the NII to trust beneficiaries
b. Retain all of the NII every tax year
c. Increase the turnover rate of the i

Distribute all of the NII to trust beneficiaries
The beneficiaries may not be subject to the NIIT on all of the income, as the threshold for fiduciary taxpayers is much lower

The Cai Trust is a calendar-year taxpayer. Its Form 1041 is due on which date in the following year?

April 15

The Yellow Trust incurred $10,000 of portfolio income. Its corporate trustee paid fiduciary fees of $1,000 therefrom. Yellow's accounting income is distributed as follows:
$5,000 to income beneficiary Larry
$4,000 to pay part of the high school tuition bi

$4,000
Marcia is taxed under the grantor trust rules only on the income used to satisfy her own legal obligations

Jose is subject to the top marginal Federal income tax rates. Carlita is considering establishing a trust in which Jose would be an income beneficiary. Considering only income tax consequences, Jose should be designated as:

A second-tier beneficiary
Jose would be assigned as a second-tier beneficiary to minimize his exposure to DNI as he likely does not need the cash flow for living expenses.

The Drabb Trust owns a plot of business-related land, basis of $50,000, FMV of $35,000. Drabb is subject to a 35% marginal income tax ate. Its sole beneficiary, Eddie, is subject to a 15% marginal income tax rate. Drabb's current-year distributable net in

Sell the land to a third-party
The loss will be most valuable to Drabb being in the highest tax bracket. A distribution of the land to Eddie will not trigger a deductible loss. The asset must be transferred to a third party, if Drabb is to generate a curr

Tax planning motivations usually predominate over other objectives in deciding whether to create a trust.

False
Tax consequences are secondary to the decision to create a trust

A trust might me used when a married couple is divorcing.

True

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

True

An estate's remainder beneficiary generally must wait until the entity is terminated by the executor to receive any distributions.

True
Fiduciaries generally pay out income at least once each year.

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

True

Corpus, principal, and assets of the trust are synonyms

True

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

True

Under IRS regulations, the decedent's estate must terminate within 4 years of the date of death so as to minimize income-shifting techniques.

False
The termination date of an estate is somewhat discretionary. It occurs when all of the required asset and income distributions are made, when all of the decedent and estate liabilities are paid, and when all other work of the executor is completed.

Trusts can select any Federal income tax year-end.

False
Trusts usually must use a calendar tax year. Tax-exempt trusts need not follow this requirement

A complex trust pays tax on the income that it accumulates.

True

A complex trust is automatically exempt from the Federal AMT.

False
A fiduciary entity may be subject to the AMT

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

True
Fiduciary accounting income is computed first, then DNI and taxable income determinations are made

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

False
Almost always, capital gains/loss is allocated to corpus.

Usually, a beneficiary takes a carryover basis when a trust distributes a non-cash asset

True

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

False
IRD is subject to both taxes

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

True

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

True

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

False
Section 265 disallows such deductions, although the disallowed amount later constitutes an adjustment in computing DNI. State income tax treatment may differ.

The Stratford Estate incurs a $25,000 casualty loss 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.

True
The deduction can be assigned by either return but not both, with the deduction going to default to the Form 706

The Stratford Estate incurs a $25,000 legal 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.

True
Administrative expenses can be allocated between the returns as the executor directs bot no both for the same amount, with the deduction going by default to the Form 706.

Just 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)

False
Such amounts are assigned to recipients of entity accounting income (allocated based on the % of entity accounting income received (or retained by the entity)), including to the entity if it accumulated income.

The Malik Estate operates a manufacturing business. Malik made no income distributions this year. It can claim the full deduction for the MACRS depreciation of the assets of the business.

True
An entity-level deduction can be claimed, as it relates to the entity's retained accounting income.

the Whitmer Trust operates a manufacturing business and distributes the profits to its income beneficiaries. Whitmer also passes through to the income beneficiaries the data needed to compute their credit or deduction for foreign income taxes paid.

True

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

False
The entity itself retains the NOL and all related carryovers except for the year of termination of the entity in which current year losses and carryover losses flows through directly to the beneficiaries.

The Griffin Trust makes a gift of long-term capital gain property to a qualifying charity. Griffin's entity-level deduction cannot exceed 30% of distributable net income.

False
No such % limitation applies to fiduciaries

The Julius Trust made a gift to the United Charity on August 1, Year 2, from its Year 1 business profits. The trust's charitable contribution deduction can be claimed in either Year 1 or Year 2.

True
A one-year grace period is allowed by � 642(c)(1) but only where the contribution is paid from recognized gross income.

60% 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.

False
Section 265 disallows rules apply to the charitable contributions of a fiduciary. A proportionate share of the payment is deemed paid from the exempt income and is nondeductible. Here, the deduction is limited to $40,000

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

True

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.

False
The maximum AGI increase is $30,000, as it is limited by distributable net income.

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.

True
The AGI increase is limisted by the amount of the trust's distributable net income

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.

False
AGI cannot increase by more than the amount of the distribution.

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 15/20% tax rate.

True
The make-up of DNI passes through to the income beneficiary.

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

False
Corpus capital gain/loss is removed from DNI.

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.

True
DNI includes the $9,000 net exempt income ($10,000 exempt income-$1,000 (10,000/30,000) x 3,000) disallowed fiduciary fee.

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 building.

True
Credits generally are apportioned between the estate or trust and the beneficiaries on the basis of the entity accounting income allocable to each.

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.

False
DNI includes exempt income, net of related disallowable deductions.

The Gable Trust reports $20,000 business income and $10,000 exempt income, and it paid a $3,000 fiduciary fee. Gable's distributable net income includes $10,000 for the interest income.

False
DNI includes net exempt income

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

False
First-tier distributions are those required by the controlling document. Second-tier distributions are discretionary distributions.

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

True
The exempt nature of that part of DNI flows through to the beneficiary

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

False
A "blank" Form 1041 still is required of a grantor trust

Reyes contributed assets to a trust, designating daughter Maria as the income beneficiary, and grandson Julio as the remainder beneficiary. This year, fiduciary accounting income was $50,000. The trustee paid $5,000 of this amount as premiums for a life i

True
Grantor trust rules apply when the entity satisfies grantor obligations or applied to the payment of premiums on insurance policies on the life of the grantor or the grantor's spouse.

Reyes contributed assets to a trust, designating daughter Maria as the income beneficiary, and grandson Julio as the remainder beneficiary. This year, fiduciary accounting income was $50,000. The trustee paid $5,000 of this amount of Julio's high school t

True
Grantor trust rules apply when the entity satisfies grantor obligations.

Reyes contributed assets to a trust, designating daughter Maria as the income beneficiary, and Grandson Julio as the remainder beneficiary. This year, fiduciary accounting income was $50,000. The trustee accumulated $5,000 of this amount and added it to t

False
The trust usually is taxable on the retained entity accounting income.

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

False
The correct due date is April 15.

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

True
These parties should be assigned as second-tier beneficiaries to minimize their exposure to DNI, as they likely do not need the cash flow for living expenses.

When a trust distributes an in-kind asset with a realized loss, most likely this loss cannot be immediately deducted by the first-tier beneficiary.

True
The loss should be directed to the trust, which almost always is in a higher tax bracket than are the beneficiaries. Further, the related party rules likely disallow the loss for the beneficiary.

The Philmore Estate is subject to a 40% Federal estate tax rate and a 45% Federal and state income tax rate. Generally, an administrative expense should be claimed on the estate's income tax return.

True
There, the deduction is more valuable because a higher marginal tax typically applies.

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

True
The deduction is disallowed on the income tax return (Form 1041) so it should be claimed on the estate tax return.

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

J

Which of the following is a typical duty of an executor of an estate?
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 d

All of the above

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 corp

Make decisions as to how to invest the trust corpus portfolio

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

All of the above.

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 an individual who still is alive
d. One which must distribute its accounting in

One which must distribute its accounting income every year

Which of the following taxpayers can be subject to an entity-level Federal income tax?
a. Complex trust
b. Partnership
c. LLC
d. All of the above taxpayers are passthrough entities, and they never are subject to an entity-level Federal income tax

Complex trust

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

All of the above use Schedules K and K-1

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.

$300

The Prakash Estate has equal income beneficiaries Sam and Janet. As allowed by the terms of the will, the estate makes no income distributions during the current tax year. The estate's personal exemption is:

$600

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

$300

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:

$300
Only a complex trust can have a charitable contribution.

The Rodriguez Trust generated $300,000 in alternative minimum taxable income this year. Concerning the AMTI, the trust is subject to a marginal Federal income tax rate of:

28%

The trustee is the Epsilon Trust distributed an asset to Telly, a qualifying income beneficiary. The asset's basis to the trust was $10,000, and its FMV on the distribution date was $25,000. Which of the following statements is true?
a. Assuming that the

Lacking any election by the trustee, Telly's basis in the asset is $10,000

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,

The $40,000 is both included in Brianna's gross estate, and subject to tax on her estate's income tax return

Income beneficiary Turk received $30,000 from the Urgent Trust. Trust accounting income for the year was $100,000. The trust generated $20,000 in cost recovery deductions. How much can Turk deduct with respect to the cost recovery deductions that Urgent g

$6,000
$20,000 cost recovery deduction x $30,000 income received / $100,000 entity accounting income

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 o

The $300 deductible both on Tony's income tax return and on Abe's estate tax return

The Chen Trust incurred the following items during the year
Taxable interest received: $40,000
Tax-exempt interest received: $60,000
Tax preparation fees paid: $5,000
What is Chen's deduction for the tax preparation fees?

$2,000
The deduction is disallowed for the proportionate amount deemed paid from the exempt interest. $5,000 x 40,000 / 100,000 = 2,000

Which, if any, of the following statements relates to the tax treatment of both estates and trusts?
a. The termination date of the entity is specified in the controlling document
b. The entity must use the same tax year as its creator (ie grantor, deceden

In the year of its termination, the entity's net operating loss carryovers are passed through to its beneficiaries.

Ellie Chisum, a calendar-year individual, wants to make a gift to a charity that is deductible on her year 1 Form 1040. The gift must be made by Ellie:

During year 1
no grace period is allowed for individuals

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 a

All of the above

The Ellie Trust, a calendar-year entity, wants to make a gift to a charity that is deductible on its year 1 Form 1041. The gift must be made by Ellie:

During year 1 or 2
Fiduciaries have a one-year "grace period" for charitable gifts.

Ellie Ins, a calendar-year C Corporation, wants to make a gift to a charity that is deductible on its year 1 Form 1120. The gift must be made by Ellie:

On or before April 15, year 2.
The gift must be made by the unextended due date of the return

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. Entity taxable income
b. Entity adjusted gross income
c. Distributable net income
d. Fiduciary accounting inco

Distributable net income

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:

$30,000
The distribution deduction is the lesser of the deductible portion of DNI or the taxable amounts actually paid.

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:

$40,000
The distribution deduction of a simple trust is always equal to its DNI.

This year, the Huang Trust is a complex trust. This year, it distributed all of its accounting income and $5,000 from corpus, to its sole income beneficiary Kim. Huang's taxable income for the year is:

($100)
After computing DNI and the distribution deduction, a fiduciary entity that distributed all of its accounting income generally "wastes" its personal exemption.

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, th

$50,000
First Tier: 30,000 + 30,000 = 60,000
Total DNI 100,000 - 60,000 = 40,000 DNI available for 2nd tier
Second Tier: 25,000 + 25,000 = 50,000
Taxable to Roger 25/50 x $40,000 = 20,000
Taxable to Sally 25/50 x $40,000 = 20,000
Total taxable amount 30,0

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 tr

$60,000
First Tier: 20,000 + 20,000 = 40,000
100,000 - 40,000 = 60,000 available for 2nd tier
Second tier: 25,000 + 50,000 = 75,000
Roger: 25/75 x 60,000 = 20,000
Sally 50/75 x 60,000 = 40,000
Sally's gross income 20,000 + 40,000 = $60,000

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 tr

$40,000
First Tier: 20,000 + 20,000 = 40,000
100,000 - 40,000 = 60,000 available for 2nd tier
Second tier: 25,000 + 50,000 = 75,000
Roger: 25/75 x 60,000 = 20,000
Sally 50/75 x 60,000 = 40,000
Sally's gross income 20,000 + 20,000 = $40,000

The Uldis Trust reports distributable net income fro the year of $100,000 and no income from tax-exempt sources. Under the terms of the trust instrument, the trustee must distribute $75,000 to Roger and $75,000 to Sally. After paying these amounts, the tr

$50,000
75,000 / 150,000 = $50,000

The Uldis 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 $75,000 to Roger and $75,000 to Sally. After paying these amounts, the truste

$50,000
75,000 / 150,000 = $50,000

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 pa

$9,000 by Marilyn and $18,000 by Domingo
Total DNI - $27,000
20,000 + 40,000 = 60,000
20/60 x 27,000 = 9,000
40/60 x 27,000 = 18,000

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 am

$65,000
First Tier: 25,000 + 50,000 = 75,000
100,000 - 75,000 = 25,000
Second Tier: 20,000 + 30,000 = 50,000
Roger: 20/50 x 25,000 = 10,000
Sally: 30/50 x 25,000 = 15,000
50,000 + 15,000 = $65,000

The Zhao Estate generated distributable net income 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 th

$75,000 long-term capital gain, $25,000 exempt interest
The make-up of DNI carries through to the distribution amounts.
100,000 * 1/4 = 25,000 exempt interest
100,000 - 25,000 = $75,000 capital gain

The Suarez Trust generated distributable net income this year of $150,000, two thirds 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 $3

$60,000
First tier: 150,000 - 30,000 = 120,000 available DNI
Second tier: 60,000 + 90,000 = 150,000
Clara: 30/120 x 120,000 = 30,000
30,000 + 30,000 = 60,000

The Suarez Trust generated distributable net income this year of $150,000, two thirds 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 $3

$90,000
120,000 remaining DNI x 90/120 = 90,000

The Willis Trust instrument provides that Tamara, the sole income beneficiary, is to receive $40,000 annually. If trust accounting income is not sufficient to pay this amount, the Willis trustee is empowered to invade corpus to the extent necessary. Durin

$28,000
30,000 / 100,000 = 30% exempt income
40,000 x 30% = 12,000
40,000 - 12,000 = 28,000

Which of the following restrictions applies concerning distributions to trust beneficiaries?
a. Special allocations are not allowed under Subchapter J
b. Special allocations are allowed, but only in the trust's termination year
c. Special allocations are

Special allocations of income types are allowed, assuming that they carry a substantial economic effect.

The Jiang Trust operates a manufacturing business. Yan created the trust several years ago by contributing a successful sole proprietorship. The trust distributed one-half of its DNI this year to Yan. Yan can retain all of the trust's depreciation deducti

The depreciable assets were contributed by Yan when the trust was created.
This is an example of substantial economic effect.

The Jiant Trust manages investment assets that were contributed by Kong several years ago. The trust distributed one-half of its DNI this year to Kong. Kong can retain all of the trust's tax-exempt interest income if:
a. One-half of the exempt income belo

The tax-exempt bonds were contributed by Kong when the trust was created.

The Code defines a grantor trust as which of the following?
a. One which is required to file Form 1041-G
b. One which the grantor can revoke or otherwise amend
c. One in which a member of the grantor's family is the sole trustee
d. One which makes annual

One which the grantor can revoke or otherwise amend

The Yellow Trust incurred $10,000 of portfolio income. Its corporate trustee paid fiduciary fees of $1,000 therefrom, and also paid $1,000 in premiums for a life insurance policy on Marcia, the grantor of the trust. How much gross income does Marcia inclu

$1,000
The trust is not classified as a grantor trust merely because the trustee is empowered to pay the life insurance premiums. However, to the extent that trust income is used for this purpose, grantor Marcia is taxed thereon.

The Zhong Trust is a calendar-year taxpayer. Its Form 1041 is due on which date in the following year?

April 15

The present value of a trust's Federal income tax liability is reduced when:
a. The entity is classified as a simple trust
b. The trust invests in high-yield stocks
c. The trust invests in growth stocks
d. The trust collects income in respect of a deceden

The trust invests in growth stocks
The goal is a deferral of gross income; the other choices trigger

A trust holds assets that will generate net investment income and trigger the additional Medicare taxes. The trustee should:
a. Distribute all of the NII to trust beneficiaries
b. Retain all of the NII every tax year
c. Increase the turnover rate of the i

Distribute all of the NII to trust beneficiaries
The beneficiaries may not be subject to the NIIT on all of the income, as the threshold for fiduciary taxpayers is much lower

The Cai Trust is a calendar-year taxpayer. Its Form 1041 is due on which date in the following year?

April 15

The Yellow Trust incurred $10,000 of portfolio income. Its corporate trustee paid fiduciary fees of $1,000 therefrom. Yellow's accounting income is distributed as follows:
$5,000 to income beneficiary Larry
$4,000 to pay part of the high school tuition bi

$4,000
Marcia is taxed under the grantor trust rules only on the income used to satisfy her own legal obligations

Jose is subject to the top marginal Federal income tax rates. Carlita is considering establishing a trust in which Jose would be an income beneficiary. Considering only income tax consequences, Jose should be designated as:

A second-tier beneficiary
Jose would be assigned as a second-tier beneficiary to minimize his exposure to DNI as he likely does not need the cash flow for living expenses.

The Drabb Trust owns a plot of business-related land, basis of $50,000, FMV of $35,000. Drabb is subject to a 35% marginal income tax ate. Its sole beneficiary, Eddie, is subject to a 15% marginal income tax rate. Drabb's current-year distributable net in

Sell the land to a third-party
The loss will be most valuable to Drabb being in the highest tax bracket. A distribution of the land to Eddie will not trigger a deductible loss. The asset must be transferred to a third party, if Drabb is to generate a curr