Question 1

Melody Trust has $60,000 of DNI for the current year, $20,000 of rental income and $40,000 of corporate bond interest. The trust instrument requires the trustee to distribute 30% of the trust income to Lee and 70% to Sarah, annually. The trust instrument does not require an allocation of the different types of income to the two beneficiaries. What is the amount and composition of the income reported by Lee and Sarah, respectively?

Accepted Answer

The answer of Melody Trust has $60,000 of DNI for...

Question 2

Estates and trusts

Accepted Answer

A)  are taxed on state and municipal bond interest. 
B)  are not taxed on capital gains. 
C)  receive a deduction for administrative expenses not otherwise deducted on the estate tax return (Form 706). 
D)  receive a $1,000 personal exemption.

Question 3

Beneficiaries of a trust may receive

Accepted Answer

A)  an income interest only. 
B)  a remainder interest only. 
C)  both an income and a remainder interest. 
D)  Any of the above is correct.

Question 4

Revocable trusts means

Accepted Answer

A)  the transferor may not demand the assets be returned. 
B)  income or estate tax savings for the grantor. 
C)  the trust can be revoked. 
D)  the grantor is always the beneficiary.

Question 5

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

Accepted Answer

A)  a grantor. 
B)  a trustor. 
C)  an executor. 
D)  a transferor.

Question 6

A trust is required to distribute all of its income currently. Two years ago, it had a $10,000 capital loss. Last year, it had a $3,000 capital gain. This year, the trust is terminated. Albert has a 40% interest in the trust, and Barbara has a 60% interest. Barbara receives a capital loss pass-through of

Accepted Answer

A)  $0. 
B)  $2,400. 
C)  $4,200. 
D)  $7,000.

Question 7

Trusts are required to make estimated tax payments.

Accepted Answer

A) True 
 B)False

Question 8

Identify which of the following statements is true.

Accepted Answer

A)  Tax-exempt income is allocated among beneficiaries in the proportion that total tax-exempt income bears to total distributable net income (DNI). 
B)  Both income required to be distributed currently and discretionary income distributions are included in tier-1 distributions. 
C)  Under the tier system, tier-2 beneficiaries are the first to absorb income. 
D)  All of the above are false.

Question 9

The personal exemption available to a trust is adjusted annually based on changes in the consumer price index.

Accepted Answer

A) True 
 B)False

Question 10

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...

Question 11

The $3,000 limitation on deducting net capital losses does not apply to a trust.

Accepted Answer

A) True 
 B)False

Question 12

In which of the following situations will the grantor trust rules apply?

Accepted Answer

A)  The trust is revocable and mandates the distribution of income to the named beneficiary. 
B)  The trust is irrevocable, and the trustee, who is also the grantor, has the power to distribute or accumulate income for the named beneficiary. 
C)  The trust is irrevocable, the income must be paid out currently, and the trust assets will revert to the grantor at the end of nine years. 
D)  The grantor trust rules will apply in each of the situations.

Question 13

A trust has net accounting income and distributable net income (DNI) of $60,000, all from taxable sources. The trustee is required to distribute $40,000 of current income to Harry. In addition, the trustee makes a discretionary distribution to Harry of $10,000 and a discretionary distribution to Susan of $30,000. $20,000 of the $40,000 total discretionary distributions is from corpus. Gross income reportable by Harry is

Accepted Answer

A)  $50,000. 
B)  $45,000. 
C)  $37,500. 
D)  $30,000.

Question 14

Karly created a $300,000 trust that provided her mother with a lifetime income interest starting on January 1, with the remainder to go to her son. Karly expressly retained the power to revoke both the income and remainder interests at any time. Who will be taxed on the trust's income?

Accepted Answer

A)  Karly's mother 
B)  Karly's son 
C)  Karly 
D)  the trust

Question 15

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

A)  Gary has $25,000 of ordinary gross income. 
B)  Gary has $10,000 of taxable interest income and $15,000 of tax-free interest income. 
C)  Gary has no taxable income because the trust must pay the tax. 
D)  Gary has $10,000 of capital gain and $15,000 of tax-free interest income.

Question 16

Which of the following statements is incorrect?

Accepted Answer

A)  The income tax rules governing estates and trusts are generally identical. 
B)  Income generated by property owned by an estate or trust is reported on that entity's tax return. 
C)  Subchapter K contains the special rules applicable to estates and trusts. 
D)  All of the above are correct.

Question 17

Ebony Trust was established two years ago with Brent as the beneficiary. The trust instrument instructed the trustee last year to make discretionary distributions of income to Brent. Beginning in two years, the trustee is instructed to pay all of the trust income earned that year to Brent. What was the trust's personal exemption last year? What will the personal exemption be in two years?

Accepted Answer

The answer of Ebony Trust was established two years ago...

Question 18

A trust that is required to distribute all of its income annually receives a exemption for the year of

Accepted Answer

A)  $0, because it retains no income. 
B)  $100. 
C)  $300. 
D)  $600.

Question 19

Panther Trust has net accounting income and distributable net income of $100,000, $75,000 from taxable sources and $25,000 from tax-exempt sources. During the year, the trust makes a mandatory distribution to Julius and Steve of $50,000 each. How much of Steve's distribution is taxable?

Accepted Answer

A)  $12,500 
B)  $25,000 
C)  $37,500 
D)  $50,000

Question 20

Charitable contributions made by a fiduciary

Accepted Answer

A)  are limited to 50% of fiduciary income. 
B)  must be authorized in the trust instrument in order to be deductible. 
C)  flows through to be deducted on the beneficiary's tax return. 
D)  are subject to the 2% floor.

Exam 14: Income Taxation of Trusts and Estates

Estates and trusts

Beneficiaries of a trust may receive

Revocable trusts means

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

Trusts are required to make estimated tax payments.

Identify which of the following statements is true.

The personal exemption available to a trust is adjusted annually based on changes in the consumer price index.

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?

The $3,000 limitation on deducting net capital losses does not apply to a trust.

In which of the following situations will the grantor trust rules apply?

Karly created a $300,000 trust that provided her mother with a lifetime income interest starting on January 1, with the remainder to go to her son. Karly expressly retained the power to revoke both the income and remainder interests at any time. Who will be taxed on the trust's income?

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?

Which of the following statements is incorrect?

A trust that is required to distribute all of its income annually receives a exemption for the year of

Panther Trust has net accounting income and distributable net income of $100,000, $75,000 from taxable sources and $25,000 from tax-exempt sources. During the year, the trust makes a mandatory distribution to Julius and Steve of $50,000 each. How much of Steve's distribution is taxable?

Charitable contributions made by a fiduciary