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Exam 28: Income Taxation of Trusts and Estates

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Question 61

True/False

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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.

A) True
B) False

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Question 62

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To reduce trustee commissions, the Sigrid Trust is operated as though it were two trusts (i.e., with 70-year-old Grandma and 7-year old Skippy each holding equal shares) . This year the trust generated distributable net income (DNI) of $80,000. The Sigrid trustee distributed $100,000 to Grandma this year: $40,000 as her one-half share of the entity's income, and $60,000 as a distribution of principal. Skippy received no distribution. How much of the year's distributable net income is assigned to Grandma?

A) $40,000.
B) $50,000.
C) $80,000.
D) $100,000.

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

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Question 63

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

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 trustee is empowered to 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?

For each of the following items, insert the best term or phrase. An answer choice may be used more than once, but only one choice is the best for each descriptive phrase. -A trust that might be used to reduce probate costs, but not Federal estate and gift tax.

The rental income of a trust usually is allocable to (income, remainder) beneficiaries.

The IRS encourages (paper, electronic, composite) filing for Forms 1041.

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 fiduciary's distribution deduction shifts the tax burden for the distributed amount of current­year income from the entity to the beneficiary.

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, the trustee is empowered to make additional distributions at its discretion. Exercising this authority, the trustee distributes an additional $25,000 to Roger and $25,000 to Sally. How much 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:

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

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 domestic production activities deduction.

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.

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.

A single trust that is operated independently for each of its three beneficiaries might be taxed using the ____________________ rule.

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:

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

The Prasad Trust incurred the following items for 2014. $\begin{array}{lr}\text { Taxable interest income } & \$ 50,000 \\\text { Tax-exempt interest income, not on private activity bonds } & 25,000 \\\text { Tax-exempt interest income, on private activity bonds } & 5,000\end{array}$ Compute Prasad's tentative minimum tax for the year. Prasad does not hold any credits available to reduce the AMT liability. $\begin{array}{lc}\text { AMT income }(\$ 50,000+\$ 5,000) & \$ 55,000 \\\text { AMT exemption } & \underline{(23,500)} \\\text { AMT tax base } & \$ 31,500 \\\text { Tentative minimum tax }(\$ 31,500 \times .26)& \$ 8,190\end{array}$ $\begin{array}{lc}\text { AMT income }(\$ 50,000+\$ 5,000) & \$ 55,000 \\\text { AMT exemption } & \underline{(23,500)} \\\text { AMT tax base } & \$ 31,500 \\\text { Tentative minimum tax }(\$ 31,500 \times .26)& \$ 8,190\end{array}$

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.