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Exam 20: Income Taxation of Trusts and Estates

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Question 1

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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.
B) The $40,000 is subject to neither income nor estate tax, because it was received after Brianna's death.
C) The $40,000 is subject to tax only on her estate's income tax return.
D) The $40,000 is included only in Brianna's gross estate.

E) B) and C)
F) A) and B)

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Question 2

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Remainder beneficiary Shelley receives a $50,000 net operating loss carryover when the Malone Trust terminates. Shelley deducts this amount (for/from) AGI on her Form 1040.

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Question 3

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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. Complex b. Decedent c. Executor d. Grantor e. Living f. Reversionary g. Simple h. Sprinkling i. Trustee -The fiduciary in charge of a trust.

You are responsible for the Federal income tax filings of the Tyrone Trust. Summarize the relevant due dates and filing requirements for Tyrone.

Income beneficiary Turk received $30,000 from the Urgent Trust. Trust accounting income for the year was $100,000. The trust generated $20,000 in cost recovery deductions. How much can Turk deduct with respect to the cost recovery deductions that Urgent generated?

Marcus has been determined to be a grantor trust by the IRS. Your partner explains that this probably happened because the donor of the trust assets retained excessive powers over the operation of the trust or the use of its assets and income. To what powers is your partner referring?

Counsell 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 one­fourth each. For the current calendar year, the trust has ordinary business income of $40,000, a long-term capital gain of $20,000 (allocable to corpus), 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. a. How much income is each beneficiary entitled to receive? b. What is the trust's DNI? c. What is the trust's taxable income? d. How much is taxed to each of the beneficiaries?

Olsen has been determined to be a grantor trust by the IRS. What are the tax consequences of this tax status? What are the tax return filing requirements for Olsen and for Peggy, the donor of the trust's assets?

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 current­year 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?

Generally, capital gains are allocated to fiduciary income, because they arise from current-year transactions as directed by the trustee.

When the Holloway Trust terminated this year, it held a $1 million NOL carryforward. How is the loss carryforward treated? Does it expire with the trust or can another taxpayer use it? Be specific.

Counsell 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 one­fourth each. For the current calendar year, the trust has ordinary business income of $40,000, 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. a. How much income is each beneficiary entitled to receive? b. What is the trust's DNI? c. What is the trust's taxable income? d. How much is taxed to each of the beneficiaries?

The Brighton 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 is required to distribute $25,000 to Roger and $50,000 to Sally. After payment of these amounts, the trustee is empowered to make additional distributions at its discretion. Exercising this authority, the Brighton trustee distributes an additional $20,000 to Roger, and $30,000 to Sally. How much income from the trust must Sally recognize?

The Suarez Trust generated distributable net income (DNI) this year of $150,000, two-thirds of which was portfolio income, and the balance of which was exempt interest. Under the terms of the trust, Clara Suarez is to receive an annual income distribution of $30,000. At the discretion of the trustee, additional distributions can be made to Clara, or to Clark Suarez III. This year, the trustee's distributions to Clara totaled $60,000. Clark received $90,000. How much of the trust's DNI is assigned to Clark?

The Raja Trust operates a welding business. Its current-year cost recovery deductions properly amount to $75,000. Raja's accounting income was $100,000, of which $40,000 was distributed to first­tier beneficiary Chuck, $25,000 was distributed to second-tier beneficiary Ruby, and $35,000 was accumulated by the trustee. Ruby also received a $25,000 discretionary corpus distribution. Raja's DNI was $80,000. Identify the treatment of Raja's cost recovery deductions.

The Gomez Trust is required to distribute $80,000 annually, split equally between its two income beneficiaries, Lara and Byron. If trust income is not sufficient to pay these amounts, the trustee can invade corpus to the extent necessary. During the current year, the trust has DNI of $60,000. Byron receives an additional $30,000 discretionary corpus distribution. a. How much of the $40,000 distributed to Lara is included in her gross income? b. How much of the $70,000 distributed to Byron is included in his gross income? c. How much of these distributions are first-tier distributions or second-tier distributions?

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 (DNI) includes $9,000 for the interest income.

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. Complex b. Decedent c. Executor d. Grantor e. Living f. Reversionary g. Simple h. Sprinkling i. Trustee -A trust whose remainder beneficiary is its grantor.

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.

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