Module 6: Trusts and Entities

Question 1

Fiduciaries

Answer 1

Person in a position of special trust and confidence toward another who does one or both of the following:

• Holds property for which another person has beneficial title or interest; and/or
• Receives and controls income of another

Question 2

What taxes are estates subject to?

Answer 2

1. Income tax

2. Estate tax

Question 3

Calculation of distributable net income (DNI)

Answer 3

Estate (trust) gross income

= Adj. total income
+ Adjusted tax-exempt interest

= DNI

Question 4

Deductions

Answer 4

Allowed for ordinary and necessary expenses incurred in:

• carrying on trade/business
• production of income
• mgmt/conservation of income-producing property
• determination, collection, or refund of any tax
• contributions to a charity

Question 5

Adjusted tax-exempt interest

Answer 5

The amount of tax-exempt interest reduce by:

• related interest expense; and
• other investment expenses related to tax-exempt interest

Question 6

Income distributed to the beneficiaries

Answer 6

Reported on Schedule K-1 of Form 1041

Question 7

Income Distribution Deduction (Deduction by estate/trust)

Answer 7

The lesser of:
1. Actual distribution to beneficiary
OR
2. DNI (less adj. tax-exempt interest)

Question 8

Estate

Answer 8

Legal entity that comes into existence upon the death of an individual and continues to exist until all assets of the estate are distrbuted

Question 9

What is the exemption for an estate?

Answer 9

$600

Question 10

What is the year end for a trust?

Answer 10

12/31

Calendar year

Question 11

What deduction may a trust take to arrive at DNI?

Answer 11

Expenses
- current mgmt of principal and application of income
- incurred in connection with principal
- investing and reinvesting principal
- ordinary, in admin., mgmt, or preservation of trust property
- preparation of property for sale or rental
Extraordinary Repairs: Allowance for depreciation may be estab.

Question 12

Simple trust

Answer 12

• only makes distribution out of current income
• required to distribute all of its income currently
• cannot take a deduction for charitable contribution
  entitled to $300 exemption

Question 13

Grantor trust

Answer 13

• Grantor retains control over assets

- reported on income tax return of grantor

Question 14

Complex trusts

Answer 14

All trusts that are not simple trusts
May:
- accumulate current income
- distribute principal
- deduct charitable contributions
- exemption of $100

Question 15

When is a charitable contribution deduction on an estate’s fiduciary income tax return allowable?

Answer 15

An unlimited charitable deduction is allowable for amounts that are paid to recognize charities out of gross income under the terms of the governing instrument during tax year (decedent’s will)

Question 16

When are ordinary and necessary admin expenses paid by the fiduciary of an estate deductible?

Answer 16

On the fiduciary income tax return only if the estate tax deduction is waived for those expenses

Question 17

What is a disadvantage of a revocable trust?

Answer 17

If a trust is revocable, then a completed gift has not taken place. Therefore, the assets of the trust are still included in the estate of the grantor.