Income Taxation of Trusts and Estates - Review Questions

Question 1

GRIT

Answer 1

Grantor Retained Income Trust (GRIT)
is limited to transfers of a personal residence or certain tangible property, where the grantor retains the use of the property during the term of the trust

Question 2

GRAT

Answer 2

Grantor Retained Annuity trust (GRAT)
the grantor retains a right to payment of a fixed amount for a fixed period of years

Question 3

GRUT

Answer 3

Grantor Retained Unitrust (GRUT)
the grantor retains a right to payment of a fixed percentage of the value of the trust property (determined annually) for a fixed period of years

Question 4

QPRT

Answer 4

Qualified Personal Residence Trust (QPRT)
is usually a personal residence GRIT

Question 5

Jack and Brenda are a married couple living in a community property state. They decide to transfer their community property to a GRAT. Jack passes away during the term of the GRAT. Where is his value of the community interest allocated?

Choose the best answer.

1) Included in Jack’s estate
2) Included in Brenda’s estate
3) Left in the GRAT

Answer 5

1) Included in Jack’s estate

If husband and wife transfer community property to a grantor-retained annuity trust (GRAT) or grantor-retained unitrust (GRUT), each may reserve the right to the payment for the trust term as to his or her respective community interest. If either dies during the term, the value of his or her community interest in the trust would be included in his or her taxable estate, either in whole or in part.

Question 6

Which of the following forms is used to request an automatic 3-month extension for trusts?

Choose the best answer.

1) Form 1041
2) Form 8736
3) Form 2758
4) Form K-1

Answer 6

2) Form 8736

Trusts use Form 8736, “Application for Automatic Extension Time to File U.S. Return for a Partnership, REMIC, or for Certain Trusts,” to request an automatic 3-month extension of time to file.

Question 7

Items of income and expense that are allocated to ______ are not used in calculating accounting income.

Answer 7

Principal

Items of income and expense that are allocated to principal are not used in calculating trust accounting income.

Question 8

Select the best trust income item that is described by the statement in the question.

Allocates taxable income between beneficiaries and the trust.

1) Trust Accounting Income
2) Trust Taxable Income
3) Distributable Net Income (DNI)

Answer 8

3) Distributable Net Income (DNI)

Question 9

Select the best trust income item that is described by the statement in the question.

The items of income and expense that are used to determine the amount the income beneficiaries are entitled to receive from the trust each year.

1) Trust Accounting Income
2) Trust Taxable Income
3) Distributable Net Income (DNI)

Answer 9

1) Trust Accounting Income

Trust and estate taxable income is the total taxable income of the trust or estate for the tax year. Distributable Net Income (DNI) is used to allocate taxable income of a trust or estate between the trust or estate and the beneficiaries and is an estimate of the actual benefit available to the income beneficiaries and is the maximum amount that can be taxed to beneficiaries.

Question 10

Select the best trust income item that is described by the statement in the question.

This is the maximum amount that can be taxed to the beneficiaries.

1) Trust Accounting Income
2) Trust Taxable Income
3) Distributable Net Income (DNI)

Answer 10

3) Distributable Net Income (DNI)

Question 11

Select the best trust income item that is described by the statement in the question.

This is determined by subtracting deductions for distributions, as well as other deductions such as charitable contributions and investment advisors fees.

1) Trust Accounting Income
2) Trust Taxable Income
3) Distributable Net Income (DNI)

Answer 11

2) Trust Taxable Income

Question 12

Which of the following items is (are) correct?

I) Complex trusts require annual distributions to the beneficiaries.
II) All trusts are complex in the year terminated.
III) A trust may be complex one year and simple the following year.

1) I only
2) I and II only
3) II and III only
4) I and III only

Answer 12

3) II and III only

In order to distribute principal, the trust will be classified as complex. Based on the annual activity, it is possible to be classified complex in a given year and simple in the following year.