True/False
Indicate whether the
statement is true or false.
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1.
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A trust might be used when a
married couple is divorcing.
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2.
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An estate’s remainder
beneficiary generally must wait until the entity is terminated by the executor to receive any
distributions.
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3.
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With respect to a trust, the terms creator, donor, and
grantor are synonyms
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4.
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. Corpus, principal,
and assets of the trust are synonyms.
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5.
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If provided for in the
controlling agreement, a trust might terminate when the income beneficiary reaches age
35.
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6.
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Under IRS regulations, the decedent’s estate must terminate within
four years of the date of death, so as to minimize income-shifting techniques
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7.
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Trusts can select any Federal income tax year-end.
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8.
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A complex trust pays tax
on the income that it accumulates (i.e., that it does not distribute).
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9.
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A complex trust automatically is
exempt from the Federal AMT.
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10.
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The first step in computing an estate’s taxable income is the
determination of its fiduciary accounting income for the year.
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11.
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. Generally, capital gains are allocated to fiduciary income, because they
arise from current-year transactions as directed by the trustee.
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12.
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Usually, a beneficiary takes a
carryover basis when a trust distributes a non-cash asset.
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13.
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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.
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14.
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An example of income in
respect of a decedent is the taxpayer’s last paycheck, uncollected at death.
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15.
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When a trust operates a trade or business, it can claim a deduction for wages
paid to employees.
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16.
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Estates and trusts can claim
Federal income tax deductions for costs incurred in maintaining investments in U.S. state and local
bonds.
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17.
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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.
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18.
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Judy 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).
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19.
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The Malik Estate operates a
manufacturing business. Malik made no income distributions this year. It can claim a domestic
production activities deduction (DPAD).
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20.
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The Whitmer Trust operates a manufacturing business. When Whitmer incurs a net
operating loss, the current-year deduction passes through to the income beneficiaries.
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Multiple Choice
Identify the
choice that best completes the statement or answers the question.
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21.
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Which of the following is a typical duty of an executor of an estate?
a. | Pay funeral expenses. | d. | Manage the decedent’s assets until they are liquidated or
distributed. | b. | Pay off the decedent’s financial liabilities. | e. | All of the above | c. | Distribute the net
assets of the probate estate.All of the above |
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22.
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Which of the following is a typical duty of a trustee?
a. | Which of the following is a typical duty of a trustee? | d. | All of the
above. | b. | Modify the language of the trust instrument so as to lower the entity’s Federal
income tax. | e. | All of the
above. | c. | Allocate items between income and corpus using Subchapter J
rules. |
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23.
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The Code defines a “simple trust” as which of the
following?
a. | One which is allowed to file Form 1041-EZ. | c. | One whose grantor was an individual
who still is alive. | b. | One which has only one income
beneficiary. | d. | One which must
distribute its accounting income every year. |
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24.
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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 | c. | S corporation. | b. | Partnership. | d. | All of the above taxpayers use Schedules K and
K-1. |
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25.
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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:
a. | $0. | c. | $300. | b. | $100. | d. | $600. |
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26.
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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:
a. | $0. | c. | $300. | b. | $100. | d. | $600. |
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27.
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The trustee of the Epsilon Trust
distributed an asset to Telly, a qualifying income beneficiary. The asset’s basis to the trust
was $10,000, and its fair market value on the distribution date was $25,000. Which of the following
statements is true?
a. | Assuming that the trustee made an election under § 643(e), the trust is allowed
a $10,000 distribution deduction for this transaction. | d. | Lacking any election by the
trustee, Telly’s basis in the asset is $10,000. | b. | Assuming that the trustee made an election
under § 643(e), Telly recognizes $10,000 gross income on the distribution. | e. | Lacking any election by the trustee,
Telly’s basis in the asset is stepped up to $25,000. | c. | Lacking any election
by the trustee, the trust recognizes $15,000 gross income on the
distribution. |
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28.
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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, and subject to tax on
her estate’s income tax return. | c. | The $40,000 is subject to tax only on her estate’s income tax
return. | b. | The $40,000 is subject to neither income nor estate tax, because it was received
after Brianna’s death. | d. | The $40,000 is included only in Brianna’s gross
estate. |
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29.
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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 of the following statements is true?
a. | The $300 is deductible on neither Tony’s income tax return nor on Abed’s
estate tax return. | c. | The $300 is deductible only in computing Abed’s taxable
estate. | b. | The $300 is deductible both on Tony’s income tax return and on Abed’s
estate tax return. | d. | The $300
is deductible only on the income tax return of Abed’s estate. |
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30.
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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?
a. | $0 | c. | $3,000 | b. | $2,000 | d. | $5,000 |
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31.
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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. | c. | The entity is required to distribute all of its income currently to its
beneficiaries. | b. | The entity must use the same tax year as its creator (i.e., grantor,
decedent). | d. | In the year of
its termination, the entity’s net operating loss carryovers are passed through to its
beneficiaries. |
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32.
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The distributable net income (DNI) of a fiduciary taxpayer:
a. | Constitutes the maximum amount for the fiduciary’s distribution
deduction. | c. | Marks the maximum amount of gross income that income beneficiaries must report when
receiving distributions. | b. | Specifies the character of the distributions in
the hands of the year’s income beneficiaries. | d. | All of the
above. |
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33.
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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:
a. | $50,000. | c. | $30,000. | b. | $40,000. | d. | $0. Because the distributions of a complex
trust are discretionary, no deduction is allowed. |
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34.
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The Drabb Trust owns a plot of
business-related land, basis of $50,000, fair market value of $35,000. Drabb is subject to a 35%
marginal income tax rate. Its sole beneficiary, Eddie, is subject to a 15% marginal income tax rate.
Drabb’s current-year distributable net income is $95,000. What is the most preferable action
for the trustee of Drabb to take, considering only the related tax consequences?
a. | Distribute the land to Eddie and make a § 643(e) election. | c. | Sell the land to a
third party. | b. | Distribute the land to Eddie and make no § 643(e) election. | d. | Neither sell nor distribute the
land. |
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35.
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With respect to a trust's timely filed Form 1041, the IRS will
accept:
a. | Only paper returns. | c. | Returns either on paper or in electronic form. | b. | Only e-filed
returns. | d. | Only e-filed
returns if gross income exceeds $5,000 for the tax year. |
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36.
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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.
?9· $5,000 to income
beneficiary Larry
?9· $4,000 to pay part of the high school tuition bills for Carrie, the
daughter of Yellow’s grantor Marcia
How much gross income does Marcia include with respect to
these trust activities?
a. | $0 | c. | $9,000 | b. | $4,000 | d. | $10,000 |
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37.
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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 include with respect to these trust activities?
a. | $10,000 | c. | $1,000 | b. | $9,000 | d. | $800 |
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38.
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The Testa Trust was terminated
this year and Chip, the beneficiary of the corpus, received all of the trust assets. The trust
reported a $10,000 net operating loss for the current tax year; this was the only tax year in which
the trust operated a business. Testa has one income beneficiary, Flo. As a result of these
transactions:
a. | Flo and Chip each report a $5,000 NOL on their Forms 1040. | c. | Flo claims the
$10,000 NOL on her Form 1040 | b. | Chip claims the $10,000 NOL on his Form
1040. | d. | The $10,000 NOL is
lost forever. |
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39.
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Which of the following
restrictions applies concerning distributions to trust beneficiaries?
a. | Special allocations are not allowed under Subchapter J. | c. | Special allocations
are allowed, but only for portfolio income items. | b. | Special allocations are allowed, but only in
the trust’s termination year. | d. | Special allocations of income types are allowed, assuming that they carry a
substantial economic effect. |
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40.
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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. During the current year, the trust reports distributable net
income (DNI) of $100,000, including $30,000 of net tax-exempt interest. In accordance with the trust
instrument, $40,000 is paid to Tamara. What is Tamara’s gross income from the Willis Trust for
the current year?
a. | $100,000 | c. | $40,000 | b. | $70,000 | d. | $28,000 |
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