Trusts and Estates: Income and Deductions

Question 1

Income beneficiaries

Answer 1

receive the income from a trust

Question 2

The remaindermen (or principal beneficiaries)

Answer 2

receive the assets of a terminated trust

Question 3

The grantor

Answer 3

is the person who established the trust

Question 4

The trustee

Answer 4

is responsible for the management of the trust

Question 5

A fiduciary must file a tax return for an estate

Answer 5

if there is gross income of $600 or more

Question 6

A fiduciary must file a tax return for a trust

Answer 6

if there is any taxable income, or gross income of $600 or more

Question 7

Indirect expenses of a trust such as trustee fees are considered to apply to all income and

Answer 7

The ratio of taxable income to total income (not including income allocated to corpus) is used to determine the deduction

Question 8

Only three entities are permitted to freely select a fiscal year

Answer 8

C corporations, estates, and tax-exempt entities

Question 9

Trust income calculation

Answer 9

(Capital Gain plus taxable interest) minus Trustee Fee + Distribution + Exemption)

Question 10

An unlimited charitable contribution deduction is allowed for an estate if

Answer 10

1) the contribution is provided for in the will of the decedent
2) the charity is a qualified charity,
3) and if the contribution is paid in the year of deduction or the year following the deduction

Question 11

There is no standard deduction for a trust or an estate (IRC Section 63(c)(6)(D)). Instead

Answer 11

the personal exemption for an estate is $600, for a simple trust is $300, and for a complex trust is $100,

Question 12

The general rule is that whoever receives the income from the trust is taxed on the income. However

Answer 12

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 13

Ordinary and necessary administration expenses

Answer 13

are deductible on either the fiduciary income tax return (Form 1041) or the federal estate tax return (Form 706) but not both

Question 14

In order to deduct the expense on Form 1041

Answer 14

the estate must file a waiver of the death tax deduction on Form 706 and Form 1041

While the expenses cannot be deducted twice, they can be allocated between the Form 1041 and Form 706

Question 15

Income in respect of a decedent (IRD) for a cash-basis taxpayer

Answer 15

consists of taxable income that the deceased earned or otherwise was entitled to but failed to receive before their death

To avoid double taxation, the income does not receive a stepped-up basis in the decedent’s estate or is treated as capital gains. The IRD can be included on the tax return of the decedent estate, the beneficiary, or any person the estate passes the income to that had the right to receive it.