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Exam 28: Income Taxation of Trusts and Estates

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Question 71

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A (first-, second-, third-) tier distribution is one that the trust agreement requires to be made by the trustee to the income beneficiary.

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Question 72

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For each of the following independent statements, choose the best answer. -The entity can choose between the cash and accrual methods of reporting its income and deductions.

A) Tax attribute of complex trusts only
B) Tax attribute of estates only
C) Tax attribute of estates and complex trusts
D) Tax attribute of neither estates nor complex trusts

E) A) and B)
F) C) and D)

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Question 73

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

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 increases by $40,000.

The Stratford Estate incurs a $25,000 legal fee in disposing of the decedent's real property. 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.

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

List and discuss the three major functions of distributable net income (DNI) as that amount is used under Federal income tax law.

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

Tax professionals use the terms simple trust and complex trust when dealing with fiduciary arrangements. How does one know whether a trust is simple or complex? When is this determination made?

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

The Gable Trust reports $20,000 business income and $10,000 exempt interest income, and it paid a $3,000 fiduciary fee. Gable's distributable net income (DNI) includes $9,000 for the interest income.

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

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

For the year, the Brighton Trust has distributable net income of $100,000 and no income from tax-exempt sources. Under the terms of the trust instrument, the trustee is required to distribute $25,000 to Roger and $50,000 to Sally. After payment of these amounts, the trustee can make additional distributions at its discretion. Exercising this authority, the Brighton trustee distributes an additional $20,000 to Roger, and $30,000 to Sally. How much income from the trust must Sally recognize?

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:

The Doyle Trust reports distributable net income of $100,000 for the year and no income from tax-exempt sources. Under the terms of the trust instrument, the trustee must distribute $20,000 to Roger and $20,000 to Sally. After paying these amounts, the trustee can make additional distributions at its discretion. Exercising this authority, the trustee distributes an additional $25,000 to Roger and $50,000 to Sally. How much gross income from the trust must Sally recognize?

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:

For each of the following independent statements, choose the best answer. -The entity has a legal identity separate from its beneficiaries.

For each of the following independent statements, choose the best answer. -Distributable net income is used to account for the entity's distributions to its beneficiaries.

Your client Ming is a complex trust that operates exclusively in the United States. Make a list of five or more tax planning opportunities that you might suggest to Ming.