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Exam 20: Income Taxation of Trusts and Estates

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Question 41

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If the grantor of a trust retains the right to receive borrowed funds from the trust at a zero interest rate, the entity ____________________ (is, is not) treated as a grantor trust.

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Question 42

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Which of the following is a typical duty of an executor?

A) Pay funeral expenses.
B) Pay off the decedent's financial liabilities.
C) Distribute the net assets of the probate estate.
D) Manage the decedent's assets until they are liquidated or distributed.
E) All of the above

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

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Question 43

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In the year in which an estate terminates, its beneficiaries receive and can use as their own any unexpired NOL carryforwards proportionately to the corpus assets that they received.

The Winston Trust is classified as a grantor trust, because the donor can revoke the trust. Consequently, Winston need not file an annual Form 1041, and he reports the trust items on his own Form 1040.

With respect to a timely filed Form 1041 for a trust based in Delaware, the IRS will accept:

The Purple Trust incurred the following items this year. Compute Purple's tentative minimum tax for the year. Purple does not have any credits available to reduce the AMT liability.

The Booker Trust is your client. Complete the chart below, indicating Booker's trust accounting income for each of the alternatives.

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 includes $10,000 for the interest income.

The Rodriguez Trust generated $100,000 in alternative minimum taxable income (AMTI) this year. The trust is subject to a marginal Federal income tax rate of:

The LMN Trust is a simple trust that correctly uses the calendar year for tax purposes. Its income beneficiaries (Kathie, Lynn, Mark, and Norelle) are entitled to the trust's annual accounting income in shares of one-fourth each. For the current calendar year, the trust has ordinary business income of $30,000, a long-term capital gain of $20,000 (allocable to income), and a trustee commission expense of $4,000 (allocable to corpus). Use the format of Figure 20.3 in the text to address the following items.

Income beneficiary Molly wants to receive all of the municipal bond interest income of the Brenner Trust. A ____________________ of this sort must be supported by a non-tax economic effect.

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?

Your client Ming is a complex trust that operates exclusively in the U.S. Make a list of five or more tax planning opportunities that you might suggest to Ming. Where fiduciary entities are used to shift income among taxpayers, the following planning objectives should be kept in mind.

Like a limited liability company, the fiduciary is a tax-reporting, but not a separate tax-paying entity.

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

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

Beneficiary Terry received $30,000 from the Urgent Trust. Trust accounting income for the year was $50,000. The trust generated $20,000 in cost recovery deductions. How much can Terry deduct with respect to the cost recovery deductions that Urgent generated?

The Ulrich Trust has 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 $60,000 to Roger and $60,000 to Sally. After paying these amounts, the trustee is empowered to make additional distributions at its discretion. Exercising this authority, the Ulrich trustee distributes an additional $20,000 to Roger and $20,000 to Sally. How much gross income from the trust must Sally recognize?

Tax planning motivations usually are secondary to other objectives in deciding whether to create a trust.

The trustee of the Miguel Trust can distribute any amount of accounting income and corpus to the trust's income beneficiaries, Paula and George. This year, the trust incurred the following. The trustee distributed $40,000 to Paula and $40,000 to George.