5G Trust

Question 1

On January 1, Year 3, Dix transferred certain assets into a trust. The assets consisted of Lux Corp. bonds with a face amount of $500,000 and an interest rate of 12%. The trust instrument named Dix as trustee, Dix’s child as life beneficiary, and Dix’s grandchild as remainderman. Interest on the bonds is payable semiannually on May 1 and November 1. Dix had purchased the bonds at their face amount. As of Ja­nuary 1, Year 3, the bonds had a fair market value of $600,000. The accounting period selected for the trust is a calendar year. The trust instrument is silent as to whether Dix may revoke the trust. Assuming that the trust is valid, how should the amount of interest received in Year 3 be allocated between principal and income if the trust instrument is otherwise silent?

Principal: $10,000; Income $50,000….WHY

Answer 1

The initial principal placed in the trust is $500,000. The fair market value of the principal has grown to $600,000. The interest received by the trust in Year 3 is $60,000 (($500,000 × 12% × 1/2 year) × 2). The principal has grown $100,000 since the inception of the trust. Therefore, 1/6 ($100,000 ÷ $600,000) of the interest ($10,000 = 1/6 × $60,000) would be allocated to the principal and the remainder of the interest would be allocated to the income ($50,000 = 5/6 × $60,000).

Question 2

Estates and trusts are separate taxable entities T/F

. The taxable income from these entities, however, is taxed to either the entity or to its beneficiaries according to the income allocable to each party T/F

Answer 2

True

True

Question 3

A___files when it has either $600 of gross income or any amount of taxable income.

An __files when gross income is $600 or more.

The return is due by the \_\_\_month following the close of the entity's tax year.

__must use the calendar year as their tax year.
__may use either a fiscal or a calendar year.

Estimated tax payments are generally required by both estates and trusts. T/F

However, an ___may be exempt from making such payments during its first two tax years.

Answer 3

trust

Estate

15th day of the fourth

Trust
Estate

True

estate

Question 4

Gross income for an estate or trust is basically the same as for an __

\_\_\_\_by estates and trusts when property is transferred to a beneficiary in lieu of cash to satisfy a specific cash bequest.

No gain or loss will be recognized when \_\_\_is transferred to a beneficiary under a specific bequest

___ is income that was earned by the decedent at the time of death but was not reportable on the decedent’s final income tax return because of the accounting method utilized.

Answer 4

individual.

Gains and losses will be recognized

specified property

Income in Respect of a Decedent

Question 5

Trust receipts that are normally allocated to ___would be any receipts that are one-time in nature, such as stock splits, stock dividends, and settlement of claims on property damage.

Trust receipts that are normally allocated to ___would be any receipts that are routine in nature and usually received on an annual basis, such as cash dividends, royalties, rents, and interest.

Answer 5

principal

Income

Question 6

DEDUCTIONS
An ___may elect to claim administration expenses and casualty losses as either an __tax deduction (IRS Form 706) or as an income tax deduction

Personal Exemption is $___ for estates and $___ for trusts that is required to distribute ___ currently. Note: these do not distribute from a ___

How much is the charitable contribution deduction?

Answer 6

estate

$600, $300, income, corpus

Unlimited IF paid out of gross income

Question 7

DEDUCTIONS
Distributions of income to beneficiaries are allowed as a deduction to both estates and trusts. This deduction, however, cannot exceed -__

DNI sets the \_\_\_on the amount of the distribution that is deductible by the estate or trust for the tax year. DNI also \_\_\_the amount and character of the income to be reported by the beneficiaries.

Answer 7

distributable net income (DNI).

limit
determines

Question 8

DEDUCTIONS
Medical expenses and funeral expenses of a decedent are deductible on the estate’s income tax return under the following rules:

Medical expenses of a decedent that are paid within \_\_\_of the decedent's death are deductible on the decedent's final income tax return if they are not claimed as an estate tax deduction.

Medical expenses that are not paid within one year of death are deductible only on the ___tax return

Funeral expenses may be deducted on the ___tax return

Answer 8

12 months

estate

estate

Question 9

DEDUCTIONS

How long is the carry forward period for capital losses/biz lossess?

A ___trust is one that is required to distribute all of its income and no amount is paid or set aside for charitable contributions.

Answer 9

None - they are not carried forward. They are deducted on the estates income tax return

simple

Question 10

Orsen, a U.S. citizen and the sole income beneficiary of a simple trust, is entitled to receive current distributions of the trust income. During the current year, the trust reported the following:

Dividend income $8,000
Accounting fees allocable to income (2,000)
Net short-term capital gain allocable to corpus 3,000
What amount of the trust income is includible in Orsen’s gross income?

Answer 10

$6K

Capital gains, if any, are typically taxable to the trust (i.e., allocated to corpus) rather than the beneficiary, except for the year of a trust termination. Beneficiaries are taxed on the income that is required to be distributed to them, whether or not it is actually distributed during the taxable year.

Question 11

SIMPLE TRUSTS
In a simple trust, beneficiaries are taxed on the
income that is required to be distributed to them, whether or not ____. The amount that is taxable, however, is limited to the trust’s ___

Answer 11

it is actually distributed during the taxable year. , distributable net income (DNI).

Question 12

COMPLEX TRUST
Beneficiaries of estates and complex trusts must also pay taxes on the income required to be distributed currently (whether or not it is actually distributed) plus any other amounts that are paid, credited, or required to be distributed for the year. T/F

Distributions in excess of DNI are generally not ___.
When a distribution from a complex trust exceeds the trust’s DNI for the year, the beneficiary may be required to ___.
This additional tax applies only when a complex trust has not distributed all of its ___in prior years.

Beneficiaries of estates and simple trusts are subject to the throwback rules. T/F

Answer 12

True

taxable
pay an additional income tax.
DNI

False - they are NOT subject to throwback rule

Question 13

When there is more than one beneficiary receiving a distribution from the trust or estate, DNI is divided between the beneficiaries using ___

First tier—DNI is allocated proportionately between all \_\_\_\_
Second tier—Any remaining DNI is allocated proportionately between all \_\_\_

Distributions from DNI are taxable. T/F

Answer 13

a two-tier system of allocation.

required income distributions.
other income distributions.

False - they are taxable. GENERALLY, not taxable if exceeds DNI

Question 14

Which of the following describes a testamentary trust?

A trust created by a grantor who is still alive at the time the trust is created
A trust that may be amended, altered, or revoked by its grantor at any time, provided the grantor is not mentally incapacitated
A trust created by an individual’s will at or following the date of the grantor’s death
A trust that may not be amended, altered, or revoked by its grantor at any time until the terms or purposes of the trust have been completed

Answer 14

A trust created by an individual’s will at or following the date of the grantor’s death

A testamentary trust is created by an individual’s will at or following the date of the grantor’s death.

Question 15

A trust created by a grantor who is still alive at the time the trust is created is a ____trust.

A trust that may be amended, altered, or revoked by its grantor at any time, provided the grantor is not mentally incapacitated, is a __

A trust that may not be amended, altered, or revoked by its grantor at any time until the terms or purposes of the trust have been completed is an ___

Answer 15

living (inter vivos)

revocable trust

irrevocable trust.

Question 16

Which of the following parties is necessary to create an express trust?

Remainderman: Yes; Successor trustee: Yes
Remainderman: Yes; Successor trustee: No
Remainderman: No; Successor trustee: Yes
Remainderman: No; Successor trustee: No

Answer 16

Remainderman: No; Successor trustee: No

Neither a remainderman nor a successor trustee is needed to create an express trust.

Question 17

A ___refers to the person who gets the remainder of the items in a trust.

Answer 17

remainderman

Question 18

WHEN ESTATE/TRUSTS TERMINATE
A personal exemption may be claimed on the final income tax return of an estate or trust.

Unused carryovers of capital losses and net operating losses pass through to the beneficiaries who succeed to the estate or trust property. These carryovers will be used as ____by the beneficiaries (individuals).

In the last tax year of existence, current deductions in excess of gross income will be allowed to the beneficiaries as \_\_\_

Answer 18

False - it may NOT be claimed

deductions for AGI

miscellaneous itemized deductions.

Question 19

SPECIAL TAX SITUATIONS

When the grantor of a trust retains beneficial enjoyment or substantial control over the trust property or income, the trust is \_\_\_and the \_\_\_is taxed on the trust income.

When appreciated property is transferred to a trust and subsequently sold at a gain within two years, a \_\_\_

Answer 19

disregarded , grantor

special tax applies.

Question 20

___allow a donor to transfer property to a minor.
These last as long as ___

A Crummey trust transfer qualifies for the annual gift tax exclusion if the trust is properly structured where the beneficiary has the power to ___
The right to the trust income is only up to $___in 2018 per donee, per year.

Answer 20

Crummey trusts
the donor requests

withdraw annual contributions.
15,000

Question 21

Astor, a cash-basis taxpayer, died on February 3. During the year, the estate’s executor made a distribution of $12,000 from estate income to Astor’s sole heir and adopted a calendar year to determine the estate’s taxable income. The following additional information pertains to the estate’s income and disbursements for the year:

Estate income:

Taxable interest $65,000
Net long-term capital gains allocable to corpus 5,000
Estate disbursements:

Administrative expenses attributable to taxable income $14,000
Charitable contributions from gross income to a public
charity made under the terms of the will 9,000
For the calendar year, what was the estate’s distributable net income (DNI)?

Answer 21

$42K

The $12,000 was distributed, not distributable. Do not include this figure in your calculations.

Taxable interest is not the only component of DNI.

The taxable interest less expenses and charitable contributions ($65,000 − $14,000 − $9,000) is distributable net income.

Question 22

Internal Revenue Code Section 651 defines a simple trust as one that meets three conditions during the year. Which of the following is not one of those conditions?

Distributes all income currently
Does not distribute from trust corpus
Does not deduct charitable contributions
Does not have tax-exempt income

Answer 22

Does NOT have to tax-exempt income

Simple trusts may have tax-exempt income, but the other three conditions listed must be met for the current year for a trust to be considered simple and not complex.

Question 23

In a written trust containing no specific powers, the trustee will have all of the following implied powers except:

sell trust property.
pay management expenses.
accumulate income.
employ a CPA to prepare trust tax returns.

Answer 23

Accumulate Income

Generally, a trustee would have the power to sell trust property, pay management expenses, and employ a CPA to prepare trust tax returns. The trustee would not typically accumulate income because the income would then be taxed at a very high tax rate.

Question 24

A decedent’s will provided that the estate was to be divided among the decedent’s issue, per capita and not per stirpes. If there are two surviving children and three grandchildren who are children of a predeceased child at the time the will is probated, how will the estate be divided?

1/2 to each surviving child
1/3 to each surviving child and 1/9 to each grandchild
1/4 to each surviving child and 1/6 to each grandchild
1/5 to each surviving child and grandchild

Answer 24

1/5 to each surviving child and grandchild

Per capita is a legal term that is used in wills to indicate that each surviving relative receives an equal part of the estate. In this case, there are two children and three grandchildren, or five survivors. Each will receive 1/5 of the estate.

Question 25

___ is a legal term that is used in wills to indicate that each surviving relative receives an equal part of the estate.

___ designates that each branch of the family receives an equal share of the estate. If used in this example, the decedent had three children, so each of the three children receive 1/3 of the estate. Where one of the children was predeceased, then the children of the predeceased receive the 1/3 share or the 1/3 is split among the three grandchildren.

Answer 25

Per capita

per stirpes

Question 26

To what extent is the fee paid to a trustee of a trust deductible on Form 1041?

Fully deductible
Not deductible
Deductible to the extent of ratio of taxable income to total income
50% deductible

Answer 26

Deductible to the extent of ratio of taxable income to total income

For example, if a trust had total income of $20,000, of which $15,000 was taxable and $5,000 was tax-exempt interest, then 75% of the trustee fees would be deductible ($15,000 taxable ÷ $20,000 total = 0.75).

Question 27

For the current year, the AB Trust had DNI of $30,000, fiduciary accounting income of $50,000, and distributed $40,000 to beneficiaries. What amount should the sole beneficiary of the AB Trust report as taxable income from the trust?

Answer 27

$30k

Beneficiaries are taxed on their share of the trusts income distributed to them, but not more than their share of DNI of the trust.

Question 28

A distribution to an estate’s sole beneficiary for the current calendar year equaled $15,000, the amount currently required to be distributed by the will. The estate’s current-year records were as follows:

Estate income:

$40,000 Taxable interest
Estate disbursements:

$34,000 Expenses attributable to taxable interest
What amount of the distribution was taxable to the beneficiary?

Answer 28

$6K

Taxable interest $40,000
Less: Expenses attributable
to taxable interest 34,000
Taxable to the beneficiary $ 6,000

: In this example, $6,000 is the distributable net income of the estate. Distributable net income is an amount that sets the limit on the deduction of a domestic estate or trust for distributions to beneficiaries. It also limits the amount of the distribution taxable to the beneficiary.

Question 29

The Simone Trust reported distributable net income of $120,000 for the current year. The trustee is required to distribute $60,000 to Kent and $90,000 to Lind each year. If the trustee distributes these amounts, what amount is includible in Lind’s gross income?

Answer 29

$72k

The Simone Trust is required to distribute $60,000 to Ken and $90,000 to Lind for a total of $150,000 each year. Kent receives 40% of the total distribution ($60,000 ÷ $150,000 = 0.40). Lind receives 60% of the total distribution ($90,000 ÷ $150,000 = 0.60). Since the trust reported distributable net income of $120,000, 60% ($72,000) should be included in Lind’s gross income.

Question 30

Distributable net income (DNI) is basically the entity’s taxable income before the __

Answer 30

distribution deduction.

Question 31

Distributable net income (DNI) is basically the entity’s taxable income before the distribution deduction. DNI is decreased by which of the following?

The personal exemption
Net tax-exempt interest
Net capital loss deduction
Net capital gains taxable to the entity

Answer 31

Net capital gains taxable to the entity

Distributable net income (DNI) is increased by the personal exemption, net tax-exempt interest, and net capital loss deduction.

It is decreased by net capital gains taxable to the entity, as well as dividends allocable to corpus (for simple trusts only).

Question 32

DNI ADDITIONS/SUBTRACTIONS

Additions:

i. The personal ___
ii. Net ___ interest
iii. Net ___deduction

Subtractions:

i. Net___ taxable to the entity
ii. For ___trusts, dividends allocable to corpus

Answer 32

exemption
tax-exempt
capital loss

capital gains
simple

Question 33

A trust in which the beneficiaries are given a future right to trust income or corpus and the $15,000 gift tax exclusion is retained is termed a:

reversionary trust.
Crummey trust.
gift-leaseback.
throwback trust.

Answer 33

Crummey Trust

A Crummey trust is a “safe harbor” rule that allows the annual gift tax exclusion on gifts to a trust

Giving the right to the trust income (generally only up to $15,000 per donee, per year) meets the requirement even though the beneficiaries do not actually withdraw the funds.

Question 34

A Crummey trust is a ___rule that allows the annual gift tax exclusion on gifts to a trust

Answer 34

“safe harbor”

Question 35

Arno plans to establish a spendthrift trust naming Ford and Sims life income beneficiaries, Trip as the residuary beneficiary, and Bing as trustee. Arno plans to fund the trust with an office building. Assume that an enfor­ceable trust was formed. Which of the following will be allocated to trust principal?

Annual property tax: Yes; Monthly mortgage principal payment: Yes
Annual property tax: Yes; Monthly mortgage principal payment: No
Annual property tax: No; Monthly mortgage principal payment: Yes
Annual property tax: No; Monthly mortgage principal payment: No

Answer 35

Annual property tax: No; Monthly mortgage principal payment: Yes

The property tax is an annual payment that is typically allocated to the income of a trust. Because the monthly mortgage payment is for the only trust asset, it would be allocated to the principal of the trust.

Question 36

Mackenzie is the grantor of a trust over which Mackenzie has retained a discretionary power to receive income. Kelly, Mackenzie’s child, receives all taxable income from the trust unless Mackenzie exercises the discretionary power. To whom is the income earned by the trust taxable?

Answer 36

To Mackenzie because he has retained a discretionary power

The general rule is that whoever receives the income from the trust is taxed on the income. However, there is an exception for the grantor who retains a discretionary power. Then, the income from the trust is taxed to the grantor whether or not the grantor receives the income.

Question 37

Jay properly created an inter vivos trust naming Kroll as trustee. The trust’s sole asset is a fully rented office building. Rental receipts exceed expenditures. The trust instrument is silent about the allocation of items between principal and income. Among the items to be allocated by Kroll during the year are insur­ance proceeds received as a result of fire damage to the building and the mortgage interest payments made during the year. Which of the following items is properly allocable to principal?

Insurance proceeds on building: Yes; Current mortgage interest payments: No….WHY

Answer 37

Insurance proceeds on a building are allocable to principal, but current mortgage interest payments are not allocable to principal. Since trust property was damaged and money is received because of the damage, this money would go to principal.

The mortgage interest payments would go to income since they are not mortgage principal payments

Question 38

On the death of the grantor, which of the following testamentary trusts would fail?

A trust created to promote the public welfare
A trust created to provide for a spouse’s health care
A trust created to benefit a charity
A trust created to benefit a childless person’s grandchildren

Answer 38

A trust created to benefit a childless person’s grandchildren

A testamentary trust is created upon the death of the grantor. Oftentimes a person’s will provides for the estate to go into a testamentary trust to provide for children of the grantor. This could be set up prior to the grantor having children. In this case, a trust created to benefit a grantor’s grandchildren will be impossible to create and will fail as the grantor is specified as being childless and therefore cannot have any grandchildren.

Question 39

Absent specific directions, which of the following parties will ordinarily receive the assets of a terminated trust?

Answer 39

Remaindermen

Income beneficiaries receive the income from a trust.

The remaindermen (or principal beneficiaries) receive the assets of a terminated trust. The grantor is the person who established the trust. The trustee is responsible for the management of the trust.

Question 40

Generally, a trustee making any high-risk investment with trust property would be violating his ___

Answer 40

fiduciary responsibilit

Question 41

A will provided that an estate was to be distributed per stirpes to the deceased’s heirs. The only possi­ble heirs are two daughters, who each have three children, and two children of a predeceased son. What fraction of the estate will each child of the predeceased son receive?

Answer 41

1/6

Per stirpes designates that each branch of the family receives an equal share of the estate. If used in this example, the decedent had three children, so each of the three children receive 1/3 of the estate. Where one of the children was predeceased, then the children of the predeceased receive the 1/3 share or the 1/3 is split among the two grandchildren.

1/3 share ÷ 2 = 1/6 each grandchild

Question 42

If not expressly granted, which of the following implied powers would a trustee have?

Power to sell trust property
Power to borrow from the trust
Power to pay trust expenses

Answer 42

1 & 3

A trustee will have the power to sell trust property and the power to pay trust expenses if not expressly granted. A trustee has implied powers to carry out the extent of the trust. The trustee may sell property and pay expenses, but unless expressly granted, the trustee cannot borrow from the trust.

Question 43

To properly create an inter vivos trust funded with cash, the grantor must:

execute a written trust instrument.
transfer the cash to the trustee.
provide for payment of fees to the trustee.
designate an alternate trust beneficiary.

Answer 43

transfer cash to trustee

The written trust instrument would be the starting place for creating any trust. The written trust instrument would provide for payment of fees to the trustee and designate any and all beneficiaries.

Transferring the cash to the trustee would complete the creation of the trust.

Question 44

Bell, a cash-basis calendar-year taxpayer, died on June 1, Year 15. In Year 15, prior to her death, Bell incurred $2,000 in medical expenses. The executor of the estate paid the medical expenses, which were a claim against the estate, on July 1, Year 15. If the executor files the appropriate waiver, the medical expenses are deductible on:

Answer 44

Bell’s final income tax return.

Expenses for Bell’s medical care ($2,000) that are paid out of her estate are treated as paid by her (and deducted on Form 1040) in the year the expenses were incurred if (1) they are paid within one year after her death, (2) they aren’t deducted for federal estate tax purposes, and (3) a statement is filed with the income tax return (or amended return) showing that the expenses haven’t been allowed for estate tax purposes and that an estate tax deduction for them is waived.

Note: Since the executor filed the appropriate waiver for the medical expenses, they cannot be deducted on the estate tax return.

Question 45

Medical expenses can never be deducted on the ___Form 1041).

Medical expenses of the decedent have no connection with the executor’s personal income tax return T/F

Answer 45

estate income tax return (

True

Question 46

Dart created an irrevocable trust naming Larson as trustee. The trust provided that the trust income would be paid to Frost for 15 years, with the principal then reverting to Dart. Larson died after 10 years, Frost died after 20 years, and Dart died after 22 years. When does the trust terminate?

Answer 46

After 15 years

A trust will terminate based upon the written document. In this case, once the principal reverted back to the creator of the trust, Dart, the trust would terminate.

Question 47

What is the character of the income distributed to beneficiaries?

Ordinary income
Same character as in the hands of the estate or trust
Long-term capital gain
Short-term capital gain

Answer 47

Same character as in the hands of the estate or trust

Since a trust/estate is a pass-through entity, the character of the income distributed is the same to the beneficiary as it was to the estate or trust.

Question 48

A trust/estate is a pass-through entity T/F

Answer 48

True

Question 49

Gem Trust, a simple trust, reported the following items of income and expenses:

Interest income from corporate bonds $4,000
Taxable dividend income 2,000
Trustee fees allocable to income 1,500
What is Gem’s distributable net income (DNI)?

Answer 49

$4.5k

Distributable net income (DNI) is the taxable income of a trust or estate computed without the distribution deduction, personal exemption, and certain other adjustments.

Gem’s DNI is computed as follows:

Interest income $4,000
Dividend income 2,000
Less: trustee fees (1,500)
DNI $4,500