Question 1

Corpus, principal, and assets of the trust are synonyms.

Accepted Answer

True

Question 2

Under IRS regulations, the decedent's estate must terminate within four years of the date of death, to minimize income-shifting techniques.

Accepted Answer

The IRS does not mandate that a decedent's estate must terminate within four years of the date of death. The duration for settling an estate can vary widely depending on the complexity of the estate, state laws, and other factors. There is no specific IRS rule requiring estate termination within four years to minimize income-shifting techniques.

Question 3

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

Accepted Answer

False

Question 4

Trusts can select any Federal income tax year-end.

Accepted Answer

Trusts generally must adopt a calendar year for tax purposes unless they meet specific requirements to elect a fiscal year, such as being a qualified revocable trust or meeting the requirements to be a tax-exempt organization.

Question 5

When a trust operates a trade or business, it can claim a deduction for wages paid to employees.

Accepted Answer

Trusts operating a trade or business are allowed to deduct ordinary and necessary expenses incurred in the operation of that business, including wages paid to employees, similar to individual and corporate taxpayers.

Question 6

An example of income in respect of a decedent is the taxpayer's last paycheck uncollected at death.

Accepted Answer

Income in respect of a decedent (IRD) refers to income that was earned by a deceased person but not received before their death, which includes items like the deceased's last paycheck that was uncollected at the time of death.

Question 7

A trust might be used when a married couple is divorcing.

Accepted Answer

A trust can be used during a divorce to manage and distribute assets in a controlled manner, ensuring financial arrangements are handled according to the couple's wishes or agreements made during the divorce process.

Question 8

A complex trust pays tax on the income that it accumulates (i.e., that it does not distribute).

Accepted Answer

A complex trust is taxed on any income it retains rather than distributes to beneficiaries. Income distributed to beneficiaries is typically taxed to the beneficiaries themselves.

Question 9

The first step in computing an estate's taxable income is the determination of its fiduciary accounting income for the year.

Accepted Answer

Fiduciary accounting income is used to determine the amount of income that is distributable to beneficiaries, which is a necessary step before calculating the estate's taxable income.

Question 10

The Stratford Estate incurs a $25,000 legal fee in disposing of the decedent's real property. The executor can decide to claim a $5,000 deduction against the Federal estate tax and a $20,000 deduction on the estate's income tax return.

Accepted Answer

The executor of an estate has the discretion to allocate certain expenses between the estate tax return and the income tax return of the estate, as long as the total deduction does not exceed the actual amount spent. This strategy can be used to minimize the overall tax liability of the estate.

Question 11

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

Accepted Answer

Income in respect of a decedent is subject to both Federal income tax and estate tax.

Question 12

An estate's remainder beneficiary generally must wait until the entity is terminated by the executor to receive any distributions.

Accepted Answer

The remainder beneficiary of an estate typically receives their distribution after the estate's debts, taxes, and specific bequests have been fully paid out, which usually occurs at the termination of the estate's administration by the executor.

Question 13

Tax planning motivations usually predominate over other objectives in deciding whether to create a trust.

Accepted Answer

While tax planning can be an important consideration, trusts are often created for a variety of reasons including estate planning, asset protection, privacy, and managing assets for beneficiaries, not solely for tax benefits.

Question 14

Usually, a beneficiary takes a carryover basis when a trust distributes a noncash asset.

Accepted Answer

A carryover basis means that the beneficiary's basis in the asset is the same as the trust's basis in the asset. This is generally the case when a trust distributes a noncash asset to a beneficiary.

Question 15

If provided for in the controlling agreement, a trust might terminate when the income beneficiary reaches age 35.

Accepted Answer

A trust can be designed with terms that specify its termination upon certain conditions, such as the income beneficiary reaching a specific age, like 35, if such a provision is included in the controlling agreement.

Question 16

Like a corporation, the fiduciary reports and pays its own Federal income tax liability.

Accepted Answer

A fiduciary is a person or organization that manages assets on behalf of another person or organization. Fiduciaries are required to file their own tax returns and pay their own taxes on the income they earn from managing the assets.

Question 17

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).

Accepted Answer

The ability to claim cost recovery deductions from an estate is not directly tied to the proportion of distributable net income (DNI) received. It depends on the specific details of the estate's operation and tax structure, not just the distribution of DNI.

Question 18

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

Accepted Answer

These terms are used interchangeably to refer to the person who establishes the trust by transferring assets into it.

Question 19

The Stratford Estate incurs a $25,000 casualty loss in disposing of the decedent's real property. The deduction is claimed against the Federal estate tax unless by election it is claimed on the estate's income tax return.

Accepted Answer

The tax code allows an estate to claim a casualty loss deduction against the Federal estate tax, but it can elect to claim this deduction on the estate's income tax return instead. This provides flexibility in managing the tax liabilities of the estate.

Question 20

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

Accepted Answer

Capital gains are typically allocated to the corpus or principal of the trust, not to fiduciary income, unless the trust document specifically directs otherwise or state law allows for such allocation to income.

Quiz 28: Income Taxation of Trusts and Estates