Question 1

What is the benefit of the 65- day rule?

Accepted Answer

The benefit of the 65- day rule is that it allows estates or trusts to shift income from being taxed on the fiduciary's tax return to a beneficiary's (or beneficiaries') tax return(s). Sometimes by the end of the year, the exact amount of the fiduciary's income will not be known nor will the tax situation of the beneficiaries necessarily be known. The 65- day rule lets fiduciaries postpone making distributions until early in the next year so that the tax situation of the fiduciary and the beneficiaries can be assessed and an intelligent decision made concerning whether to have income taxed at the fiduciary or the beneficiary level.

Question 2

Michael died in 2013 with a taxable estate and estate tax base of $6,000,000. Michael's estate owed no state death taxes. Michael's estate includes $250,000 of income in respect of a decedent (IRD), none of which is received by his surviving spouse. His estate had no DRD. The estate collects $200,000 of the IRD during its current tax year. The Sec. 691(c) deduction for the estate in current year is

Accepted Answer

A)   $90,000.
B)   $80,000.
C)   $122,400.
D)   $153,000. B

Question 3

A trust document does not define income or principal. The state in which the trust is operated has adopted the U Act, including allocation of depreciation to income. The trust reports the following: $\begin{array}{lr}
\text { Net business profits } & \$ 20,000 \
\text { Net rental income } & 5,000 \
\text { Proceeds from stock sale } &\
\text { (including } \$ 10,000 \text { gain) } & 50,000 \
\text { Trustee fee (charged to income) } & 2,000 \
\text { Depreciation } & 3,000
\end{array}$ What is the amount of the trust's net accounting income?

Accepted Answer

$20,000 + $5,000 - $2,000 - $3,000 = $20,000

Question 4

Estates and trusts

Accepted Answer

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

Question 5

Explain how to determine the deductible portion of trustee's fees.

Accepted Answer

The answer of Explain how to determine the deductible portion...

Question 6

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)   the trust
C)   Karly
D)   Karly's son

Question 7

Identify which of the following statements is true.

Accepted Answer

A)   An estate may deduct up to $5,000 of capital losses against the ordinary income taxable in the estate.
B)   An example of income in respect of a decedent (IR
D)   is the gain recognized on property sold by the estate after the decedent's death.
C)   Income in respect of a decedent (IR
D)   is the gross income the decedent earned before death but had not collected before death.
D)   All of the above are false.

Question 8

Distributable net income (DNI) is not reduced by the charitable contribution deduction when calculating the deductible discretionary distributions for a complex trust.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following is not an addition to trust taxable income when computing distributable net income (DNI)?

Accepted Answer

A)   tax- exempt interest
B)   personal exemption
C)   distribution deduction
D)   capital gains allocated to principal

Question 10

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

Accepted Answer

A)   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.
B)   The grantor trust rules will apply in each of the situations.
C)   The trust is irrevocable, and the trustee, who is also the grantor, has the power to distribute or accumulate income for the named beneficiary.
D)   The trust is revocable and mandates the distribution of income to the named beneficiary.

Question 11

Charitable contributions made by a fiduciary

Accepted Answer

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

Question 12

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

Accepted Answer

A)   complex trusts.
B)   estates.
C)   testamentary trusts.
D)   All of the above are fiduciaries.

Question 13

Identify which of the following statements is false.

Accepted Answer

A)   Essentially, an estate or trust is taxed on any income it earns, whether retained or distributed.
B)   Trusts receive a personal exemption.
C)   Many of the same rules that determine the calculation of taxable income for individuals apply to trusts.
D)   A conduit approach-that is, the income has the same character in the hands of the beneficiary as it has to the trust-governs for fiduciary income taxation.

Question 14

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

Accepted Answer

A)   gross income.
B)   distributable net income.
C)   net accounting income.
D)   taxable income.

Question 15

For the first five months of its existence (August through December 2008), the Estate of Christine Lowry had gross income (net of expenses) of $7,000 per month. For January through July 2009, the executor estimates that the estate will have gross income (net of expenses) totaling $5,000. The estate's sole beneficiary is Christine's son, Jonathan, who is a calendar- year taxpayer. Jonathan incurred a large NOL from his sole proprietorship years ago, and $34,000 of the NOL carryover remains but expires at the end of 2008. During 2008, Jonathan received only $5,000 of income from part- time employment. What tax issues should the executor of Christine's estate consider with respect to the reporting of the estate's income?

Accepted Answer

The answer of For the first five months of its...

Question 16

A simple trust

Accepted Answer

A)   may make charitable distributions.
B)   is required to distribute all of its income currently.
C)   may make discretionary distributions of principal.
D)   may accumulate income.

Question 17

Mary died this year. Her will creates a trust for the benefit of her children. A portion of the estate's assets are placed in this trust. The estate has income from assets it will transfer to other beneficiaries at a later date. Mary's brother Joe is the trustee of the trust and executor of the estate. Which of the following statements is true?

Accepted Answer

A)   Joe is free to choose any tax year- end for both the trust and estate.
B)   Joe must choose December 31 as the estate tax year- end but is free to choose any tax year- end for the trust.
C)   Joe must choose December 31 as the tax year- end for both the estate and trust.
D)   Joe must choose December 31 as the trust tax year- end but is free to choose any tax year- end for the estate.

Question 18

Describe the double taxation of income in respect of a decedent and how it can be reduced.

Accepted Answer

The answer of Describe the double taxation of income in...

Question 19

What is the basis of inherited IRD items to the beneficiary?

Accepted Answer

The answer of What is the basis of inherited IRD...

Question 20

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

Accepted Answer

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

Exam 14: Income Taxation of Trusts and Estates