Question 1

The trust instrument indicates whether cost recovery is ________________ to fiduciary accounting income, thereby reducing the amount of the distribution to the income beneficiary.

Accepted Answer

The answer of The trust instrument indicates whether cost recovery...

Question 2

Every simple trust is allowed a ________________ $ personal exemption.

Accepted Answer

The answer of Every simple trust is allowed a ________________...

Question 3

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:

Accepted Answer

The answer of Jose is subject to the top marginal...

Question 4

A trust holds assets that will generate net investment income (NII) and trigger the additional Medicare taxes. The trustee should:

Accepted Answer

By distributing all of the NII to trust beneficiaries, the trust will avoid triggering the additional Medicare taxes. This is because the additional taxes only apply to the undistributed NII retained by the trust. However, the trustee should ensure that the distribution is done in a manner that is equitable and fair to all beneficiaries of the trust.

Question 5

The present value of a trust's Federal income tax liability is reduced when:

Accepted Answer

The answer of The present value of a trust's Federal...

Question 6

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

Accepted Answer

The answer of The rental income of a trust usually...

Question 7

The Jiang Trust manages investment assets that were contributed by Kong several years ago. The trust distributed one-half of its DNI this year to Kong. Kong can retain all of the trust's tax-exempt interest income if:

Accepted Answer

Kong can retain all of the trust's tax-exempt interest income if the tax-exempt bonds were contributed by Kong when the trust was created, as this would allow for the income to be allocated to Kong.

Question 8

Under the Federal income tax rules for trusts and estates, a(n) ________________ generally must use a calendar tax year, but a(n)________________ can select any tax year-end.

Accepted Answer

The answer of Under the Federal income tax rules for...

Question 9

Entity accounting income is controlled by the terms of the for an estate or the____________________ for a trust.

Accepted Answer

The answer of Entity accounting income is controlled by the...

Question 10

In computing the Federal taxable income of a trust, the ________________ (first, last) step is to determine its fiduciary accounting income.

Accepted Answer

The answer of In computing the Federal taxable income of...

Question 11

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 12% marginal income tax rate. Drabb's current-year 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?

Accepted Answer

Selling the land to a third party would realize a loss in the amount of the difference between the basis and the fair market value, which Drabb can use to offset its current-year taxable income, resulting in tax savings. Additionally, if the land is distributed to Eddie, he would incur a capital gain tax on the difference between the fair market value at the time of distribution and his own basis, and the trust would also lose the ability to use the loss to offset taxable income. The § 643(e) election would simply allow the trust to allocate the capital gain arising from the sale of the land to Eddie as the beneficiary, but this would not be beneficial in this scenario since there is no capital gain to allocate. Therefore, selling the land to a third party would result in the most tax savings for both the trust and its beneficiary.

Question 12

In computing the Federal taxable income of a trust, a modified ________________ approach is used.

Accepted Answer

The answer of In computing the Federal taxable income of...

Question 13

Generally, an estate's taxable income is computed in a manner similar to that used for a(n)____________________.

Accepted Answer

The answer of Generally, an estate's taxable income is computed...

Question 14

The trust usually makes a distribution to the income beneficiaries in the amount of its fiduciary____________________ income.

Accepted Answer

The answer of The trust usually makes a distribution to...

Question 15

The Cai Trust is a calendar-year taxpayer. Its Form 1041 is due on which date in the following year?

Accepted Answer

The due date for a Form 1041 for a calendar year taxpayer is April 15 of the following year.

Question 16

The Zhong Trust is a calendar-year taxpayer. Its Form 1041 is due on which date in the following year?

Accepted Answer

The Form 1041 for a calendar-year taxpayer is due on April 15th of the following year, unless that day falls on a weekend or holiday, in which case it is due on the next business day.

Question 17

When a beneficiary receives a distribution from a trust of an asset other than cash, generally a(n)____________________ basis is assigned to the asset.

Accepted Answer

The answer of When a beneficiary receives a distribution from...

Question 18

The grantor of a trust generally designates both ____________________ and ____________________beneficiaries under the controlling agreement.

Accepted Answer

The answer of The grantor of a trust generally designates...

Question 19

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

Accepted Answer

The answer of The interest income of a trust usually...

Question 20

The Jiang Trust operates a manufacturing business. Yan created the trust several years ago by contributing a successful sole proprietorship. The trust distributed one-half of its DNI this year to Yan. Yan can retain all of the trust's depreciation deductions if:

Accepted Answer

The key to the question is that Yan created the trust and contributed the assets. If the depreciable assets were contributed by Yan when the trust was created, then Yan is entitled to retain all of the depreciation deductions because Yan is the grantor of the trust. This is because the grantor of a trust is not subject to the income tax rules applicable to trusts. Therefore, options A, B, and D are incorrect.

Quiz 28: Income Taxation of Trusts and Estates