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Exam 20: Income Taxation of Trusts and Estates

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Question 1

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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 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.

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Question 2

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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.

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Question 3

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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:

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 $9,000 for the interest income.

Once the distributable net income (DNI)of a trust or estate is known,how does the entity compute its deduction for distributions to beneficiaries?

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?

The Eagleton Trust generated distributable net income (DNI) this year of $120,000,one-third of which was portfolio income,and the balance of which was exempt interest.Under the terms of the trust,Clara Eagleton is to receive an annual income distribution of $40,000.At the discretion of the trustee,additional distributions can be made to Clara,or to Clark Eagleton III.This year,the trustee's distributions to Clara totaled $60,000.Clark also received $60,000.How much of the trust's DNI is assigned to Clark?

Three weeks after Tina died,her brother Tony properly received Tina's last paycheck from her employer.The gross amount of the check was $4,000,and a $700 deduction for state income taxes was subtracted in computing the net amount of the payment.Which of the following statements is true?

Generally,an administrative expense attributable to municipal bond interest should be claimed on the estate's Form 706.

The Jain Trust is required to pay its entire annual accounting income to the Daytona Museum,a qualifying charity.The trust's personal exemption is:

If provided for in the trust agreement,a trust might terminate when the income beneficiary reaches age 30.

Beneficiary Terry received $40,000 from the Urgent Trust.Trust accounting income for the year was $50,000.The trust generated $30,000 in cost recovery deductions.How much can Terry deduct with respect to the cost recovery deductions that Urgent generated?

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

Can an estate or trust claim any tax credits against its Federal income tax liability? Explain.

During the current year,the Madison Trust received $40,000 of taxable interest income,paid trustee's commissions of $4,000,and had no other income or expenses.The trust instrument requires that $20,000 be paid annually to Marilyn,and $40,000 be paid annually to Domingo.How much gross income must Marilyn and Domingo recognize?

List some of the most commonly encountered motivations for creating fiduciary entities.

The Eagleton Trust generated distributable net income (DNI) this year of $120,000,one-third of which was portfolio income,and the balance of which was exempt interest.Under the terms of the trust,Clara Eagleton is to receive an annual income distribution of $40,000.At the discretion of the trustee,additional distributions can be made to Clara or to Clark Eagleton III.This year,the trustee's distributions to Clara totaled $60,000.Clark also received $60,000.How much of the trust's DNI is assigned to Clara?

The Circle Trust has some exempt interest income for the year.How does this investment income affect Circle's deduction of its fiduciary fees? Charitable contributions?

When a trust distributes an in-kind asset with a realized loss,most likely this loss should be allocated to and immediately deducted by the first-tier beneficiaries.

A grantor trust results when the donor of the entity's corpus retains "too much" control over the trust income and assets.Name at least three powers that can trigger grantor trust status.