EA Part 2-Passkey 20 Trusts & Estates

Question 1

A trust is created while the TP is alive or by a TP’s last will and can determine how __

Answer 1

property will be distributed during his lifetime or at death.

Question 2

An estate is a separate legal entity that is created when __

Answer 2

a taxpayer dies.

Question 3

A person who inherits the ppt from an estate is not taxed on the transfer. Instead, the estate itself __

Answer 3

is responsible for paying any tax before the ppt is distributed.

Question 4

However, if the assets are distributed to the beneficiaries before the taxes are paid, __

Answer 4

the beneficiaries may be held liable for the tax debt, up to the value of the assets distributed.

Question 5

Income in respect of a decedent (IRD) is __

Answer 5

any taxable income earned but not received by the decedent by the time of death. IRD is not taxed on the final return of the deceased TP but is reported on the tax return of the person or entity that receives the income.

Question 6

IRD retains the same tax nature after death as if the TP were still alive and is subject to __

Answer 6

income tax, by the receiver, when the income is received.

Question 7

An estate is a taxable legal entity that exists from the time of an individual’s death until __

Answer 7

all assets have been distributed to the decedent’s beneficiaries.

Question 8

Form 1041 is a fiduciary return used to report the following items for a domestic decedent’s estate, trust or bankruptcy estate:

Answer 8

• current inc. and deductions, including gains & losses from disposition of the entity’s ppt.
• a deduction for income that is either accumulated or held for future distribution or distributed currently to the beneficiaries,
• any income tax liability

Question 9

Expenses of administering the estate can be deducted either from the estate’s income on Form __

Answer 9

1041 in determining its inc. tax, or from the gross estate on Form 706 in determining the estate tax liability, but cannot be claimed for both.

Question 10

Schedule K-1 is used to report any income that is distributed to each beneficiary and is filed with Form 1041, __

Answer 10

with a copy also given to the beneficiary.

Question 11

Due date for FOrm 1041 is the 15th day of the __

Answer 11

4th month, but subject to an automatic extension of 5 months if Form 7004 is filed.

Question 12

Form 1041 must be filed for any domestic estate that has gross income for the tax year of $__ or more, or __

Answer 12

$600 or more, or

a beneficiary who is a nonresident alien (with any amount of income)

Question 13

The gross estate is based upon the FMV of the TP’s property and includes:

Answer 13

• FMV of all tangible & intangible ppt owned by he decedent at the time of death
• full value of ppt held as joint tenants with the right of survivorship (unless decedent & spouse were the only joint tenants)
• life ins. proceeds payable to the estate, or policies owned by the decedent
• the value of certain annuities or survivor benefits payable to heirs
• value of certain ppt transferred within 3 years before decedent’s death.

Question 14

Deductions from the gross estate may include:

Answer 14

• funeral expenses paid out of estate
• admin. exps.& attorney fees for the estate
• debts owed at time of death
• marital deduction (value of ppt that passes to surviving spouse)
• charitable deduction (value of ppt. that passes to qualifying charities)
• state death tax deduction

Question 15

Items not deductible from the gross estate:

Answer 15

*federal estate taxes paid
*alimony paid after the TP’s death. This would be treated as distribution to the beneficiary.
Ppt taxes are deductible only if they accrue under state law prior to decedent’s death.

Question 16

The marital deduction allows spouses to transfer an unlimited amount of ppt during their lifetimes or at death without being subject to estate or gift taxes.

Answer 16

• For a legal spouse who is U.S. citizen and

* has outright ownership of the assets

Question 17

If receiving spouse is not a citizen, assets transferred are subject to an annual exclusion of __

Answer 17

$139,000 in 2012.

Question 18

Property that is jointly owned by a decedent and another person will be included in full in the decedent’s gross estate unless __

Answer 18

it can be shown that the other person originally owned or otherwise contributed to the purchase price.

Question 19

If ppt is joint held between husband and wife as tenants by the entirety or as joint tenants with the right of survivorship, one-half of the ppt’s value __

Answer 19

is included in the gross estate, and there is a step-up basis for that one-half.

Question 20

Medical expenses paid out of the estate during the 1-year period beginning with the day after death can be deducted on __

Answer 20

the final 1040 tax return

or deducted from the gross estate on the estate tax return.

Question 21

Estate tax return is filed using __

Answer 21

Form 706 United States Estate (and Generation-Skipping Transfer) Tax Return

Question 22

After the taxable estate is computed, the value of lifetime taxable gifts is added and the estate tax is computed. The tax is then reduced by __

Answer 22

the applicable credit amount (unified credit), applies to both the gift tax and estate tax.

Question 23

DSUE: deceased spousal unused exclusion:

Answer 23

DSUE is the unused portion of the decedent’s predeceased spouse’s estate that was not used against gift or estate tax liabilities. The DSUE must be been reported on Form 706 filed on behalf of the first spouse’s estate.

Question 24

Applicable credit or unified credit amounts:

Answer 24

$5,120,000 basic exclusion amount

$1,772,800 applicable credit

Question 25

Due date for Form 706 is __ after the decedent’s date of death. An automatic __-month extension may be requested by filing ___

Answer 25

9 months
6-month extension
Form 4768

Question 26

The assessment period for tax for an estate is __ years after the due date of a timely filed return, and __ years for transfers from an estate.

Answer 26

3 year

4 years for transfers

Question 27

GST: Generation-Skipping Transfer Tax (Form 709)

Answer 27

may apply to gifts during a TP’s life or transfers occurring after his death, called bequests, made to Skip person.

Question 28

A skip person is a person who belongs to a generation that is __

Answer 28

2 or more generations below the generation of the donor. Most common: TP makes bequest to a grandchild.

Question 29

GST tax exemption is $___ and GST tax rate is set at __

Answer 29

$5,120,000
35%, the maximum estate tax rate
GST tax is imposed separately and in addition to the estate and gift tax.

Question 30

Any direct payments made toward tuition or medical expenses are exempt from __

Answer 30

gift tax or GST tax.

Question 31

A trust may be created during an individual’s life (inter-vivos trust) or __

Answer 31

at the time of death under a will (testamentary trust).

Question 32

The establishment of a trust creates a fiduciary relationship between three parties:

Answer 32

• the grantor: person who contributes ppt to trust
• the trustee (fiduciary): the person or entity charged with fiduciary duties
• the beneficiary: person designated to receive the trust income or assets

Question 33

The accounting period for a trust is generally __

Answer 33

the calendar year, with due date of April 15.

Question 34

A trust must file Form 1041 if it has:

Answer 34

• any Taxable income (after subtracting allowable exemption amount)
• $600 gross income (taxable or tax-free)
• nonresident alien beneficiary

Question 35

A simple trust – a trust that must distribute all its income currently – is allowed an exemption of __

Answer 35

$300

Question 36

Complex* trusts exemption amount:

*(anything not classified Simple)

Answer 36

$100

Question 37

A trust is a pass-through entity that is allowed a deduction for its distributions, and the beneficiaries pay __

Answer 37

any income tax on their distributive share of income (via a Sch K-1)

Question 38

DNI: Distributable Net Income of a Trust

Answer 38

is trust income that is currently available for distribution. If the beneficiary receives a distribution in excess of DNI, only the DNI is taxed.

Question 39

The income distribution deduction (IDD) is allowed to trust and estates for amounts that are __

Answer 39

paid, credited or required to be distributed to beneficiaries. It’s calculated on Sch B of Form 1041.

Question 40

A Simple Trust is one that:

Answer 40

• distributes all its income currently
• makes no distributions from principal and
• make no distributions to charity

Question 41

Grantor Trust: grantor is considered the owner of the trust for income tax purposes.

Answer 41

Grantor creates the trust and retains control.

Question 42

A Revocable Trust is a trust in which the grantor retains the right to end the trust.

Answer 42

The trust assets are subject to estate tax upon the grantor’s death. Generally created only to manage and distribute property; many use this type of trust instead of a will.

Question 43

A non-grantor trust is considered a separate legal entity from the individual or organization that created it. If it makes distributions to a beneficiary, in general those distributions __

Answer 43

carry any taxable income to the beneficiary.

Question 44

Irrevocable Trust is non-grantor and cannot be revoked after it is created. The transfer of assets is generally considered a __

Answer 44

“completed gift” subject to gift tax.

Question 45

Disability Trust: non-grantor trust created solely for benefit of disabled individual under age 65. It can claim an exemption of __

Answer 45

up to $3,800.

This is an exception to the regular exemption of $600 for trusts.

Question 46

Charitable Trusts are non-grantor and irrevocable.

Answer 46

Creator is allowed an income tax deduction for the value of all interests placed in the trust.

Question 47

Abusive Trust arrangements may use trust to hide the true ownership of assets and income or to disguise the substance of transactions.

Answer 47

Trusts cannot be used to transform a TP’s personal, living or educational expenses into deductible items or avoid tax liability.

Question 48

If an estate or trust has a loss in its final year, and only in its final year, the loss can be __

Answer 48

passed through to the beneficiaries, allowing them a deduction on their returns.