CHAPTER 15—INCOME TAXATION OF ESTATES AND
TRUSTS Key
1. There is no statutory period after which a decedent’s estate must be terminated.
2. Both estates and trusts may pay any income tax due for a year with a timely filed return.
3. Decedent D, a calendar year taxpayer, died on October 18 of the current year. The estate of D also must use a
calendar year for income tax purposes.
4. As a general rule, tax provisions that apply to the income taxation of individuals also apply to the income
taxation of fiduciaries.
5. The standard deduction available to a fiduciary is the same amount available to a married taxpayer
filing separately.
6. Since fiduciaries are generally only managing assets and not carrying on a business, their expenses are not
deductible.
7. The Estate of X incurred administration expenses of $42,000. These expenses can be taken as an estate tax
deduction to reduce X’s taxable estate and can also be deducted for income tax purposes on the estate income
tax return.
8. On February 9, 19X2 trustee T makes a $10,000 payment to a qualified charity out of the gross income of the
Alpha trust, a calendar year taxpayer. T may elect to deduct the payment on Alpha’s 19X1 or 19X2 income tax
return.
9. If a trust incurs a net operating loss or a capital loss, the trust beneficiaries may deduct the losses under the
“conduit” theory for their taxable year within which the trust year ends.
10. An executor may elect to include “income in respect of a decedent” either in the gross estate on the Federal
estate tax return or in gross income on the fiduciary Federal income tax return.
11. Upon his death, individual T, a cash basis taxpayer, had an outstanding account receivable of $20,000 for
services he had performed prior to death. Because of some uncertainty as to its collectability, this receivable
was valued at $15,000 for estate tax purposes. The tax basis of this asset to T’s estate is zero.
12. A fiduciary can elect whether or not to recognize a gain for tax purposes on the distribution of appreciated
property made in fulfillment of a pecuniary bequest to a beneficiary.
13. If a fiduciary does not elect to recognize gain or loss on the distribution to a beneficiary of appreciated or
depreciated property (determined as if the property had been sold at fair market value), the fiduciary’s tax basis
in the property carries over to the beneficiary.
14. Taxable income not available for distribution to income beneficiaries may still be included in distributable
net income.
15. The categorization of a trust as “simple” or “complex” may vary from year to year.
16. Because a simple trust by definition is a trust that must distribute all income currently to
beneficiaries, a simple trust will never have an income tax liability.
17. Under the terms of the governing trust instrument, the trustee of ABC trust is required to distribute all trust
income annually to trust beneficiaries. In the current taxable year, the trust had taxable income of $100,000.
However, because of an illness late in the year, the trustee failed to make any actual cash distributions to
beneficiaries. The beneficiaries will report and pay tax on the $100,000 of current year trust income even
though no actual distribution was made.
18. Estate E has a fiscal year ending September 30 of the current year. On October 15 of the current year, the
executor distributed $10,000 out of current year income to beneficiary Q, a calendar year taxpayer. Q will report
the taxable portion of this distribution on his current year’s tax return.
19. In the current taxable year, trust beneficiary B received a distribution exceeding DNI. B will generally not
pay tax on the distribution.
20. Income accumulated in a trust for a child less than 19 is taxed at the parents’ rates and not the trust’s rates.
21. The trustee of the XYZ Trust has been selling off assets and purchasing others with the aim of establishing a
major trucking business. Besides possibly breaching his fiduciary duty to prudently manage the trust assets, the
trustee’s action may cause the IRS to
22. Fiduciary accounting income is
23. F transfers $100,000 in trust to trustee T. Under the terms of the trust instrument, S (F’s son) is to receive the
income of the trust for his lifetime. Upon S’s death, the corpus will be distributed to GC, S’s daughter. The
beneficiaries of this trust are
24. For the current year, Trust J has the following receipts and expenses:
Tax-exempt interest income
$12,000
Dividends from domestic, taxable corporations
15,000
Long-term capital gain (allocable to corpus under state law)
5,000
Trustee fee (equally allocable to income
and corpus under the trust instrument)
(4 000)
Based on the above facts, what is the trust’s income for fiduciary accounting purposes?
25. To determine whether capital gains are allocable to corpus, the trustee should
26. If the terms of a trust allocate one-third of the trustee’s fee to corpus, which of the following is true?
27. Which of the following triggers the filing of Form 1041, the fiduciary income tax return?
28. The amount of personal exemption available to a complex trust is
29. The amount of personal exemption available to a simple trust is
30. In the current taxable year, Trust J has the following receipts and expenses:
Tax-exempt interest income
$5,000
Taxable interest income
12,000
Rent income
8,000
Long-term capital gain allocable to corpus
25,000
Trustee fee
2,000
Rent expenses
1,100
Based on these facts, the trust may deduct
31. In the current taxable year, Trust R has the following receipts and expenses:
Tax-exempt interest income
$15,000
Taxable interest income
7,000
Rent income
23,000
Long-term capital gain allocable to corpus
15,000
Trustee fee
9,200
Rent expense
12,000
During the current taxable year, the trustee made payments to charity totaling $3,000. The trust may claim a charitable contribution deduction of
32. The governing instrument for Trust S provides that the trustee will establish a reserve for depreciation of
trust rental property of $10,000 per year. In the current year, Trust S’s rental property generates a tax
depreciation deduction of $18,000. During the current year, the trustee distributes 30 percent of S’s DNI to
beneficiaries. Based on these facts, Trust S may take a depreciation deduction of
33. Which of the following may a fiduciary not deduct?
34. D, a country doctor, died suddenly. The doctor practiced as a sole proprietor using cash basis accounting.
The decedent’s final return reported cash basis income and expenses on Schedule C (Form 1040). D’s former
patients have continued to send checks in payment for services D performed. The landlord, phone company, and
other creditors of his practice have sent their bills. The administrator of D’s estate should
35. Distributions of trust income to trust beneficiaries most resembles
36. The executor of D’s estate, in accordance with the specific instructions of the testator, must distribute 50
percent of the income produced by the estate to A. The estate recognized $60,000 income, and the executor
distributed $25,000 and a diamond ring worth $5,000. The ring belonged to the estate and had not been
bequeathed to anyone. As a result of this distribution, A should report taxable income of
37. During the current year, the Estate of W had taxable income of $11,000. During the year, the executor of the
estate distributed an automobile that had been owned by decedent W to W‘s daughter, D. The automobile was a
specific bequest to D. The automobile had a basis to the estate of $10,000, and a fair market value at date of
distribution of $14,000. Based on these facts, D has received an income distribution from the Estate of W of
38. Under the terms of Q’s will, beneficiary X was to receive a cash (pecuniary) bequest of $25,000. X agreed to
accept certain shares of corporate stock, FMV $25,000, out of the Estate of Q in satisfaction of this bequest. The
basis of the shares to the Q Estate was $21,000, the value of the shares at the date of Q’s death. Based on these
facts,
39. A trust whose assets are stocks and bonds generates $13,000 of distributable net income (DNI) during its
current taxable year; $2,500 of this amount is tax-exempt interest on municipal bonds, while the remaining
amount is made up of dividends. According to the trust instrument, the trustee may make discretionary
distributions of trust income; during the current year $1,000 is distributed to beneficiary B. The taxable portion
of this amount is
40. A trust whose assets are stocks and bonds generates $13,000 of distributable net income (DNI) during its
current taxable year; $2,500 of this amount is tax-exempt interest on municipal bonds, while the remaining
amount is made up of dividends. According to the trust instrument, the trustee may make discretionary
distributions of trust income; during the current year $1,000 is distributed to beneficiary B. The distribution
made by the trust entitles the trust to a deduction of
41. In the current taxable year, Trust MN had DNI of $50,000, $10,000 of which was nontaxable. During the
year, Trustee T made a $15,000 cash distribution to beneficiary M and a $30,000 cash distribution to
beneficiary N. (The trust instrument does not require that all trust income be distributed to beneficiaries.) Based
on these facts,
42. Which of the following statements is not a characteristic of DNI (distributable net income)?
43. In the calculation of the distributable net income of a fiduciary, which of the following statements is true?
44. A fiduciary is instructed by a trust instrument to distribute currently all trust income equally between two
beneficiaries. Furthermore, the corpus of the trust is to be preserved intact for the remainderman. The
instrument states that no charitable contributions are allowed from either income or principal. During the year,
the trust’s DNI was $23,000: $22,000 from rents and $1,000 from interest on a tax-exempt debenture. Based on
these facts, the trust is a(n)
45. A fiduciary is instructed by a trust instrument to distribute currently all trust income equally between two
beneficiaries. Furthermore, the corpus of the trust is to be preserved intact for the remainderman. The
instrument states that no charitable contributions are allowed from either income or principal. During the year,
the trust’s DNI was $23,000: $22,000 from rents and $1,000 from interest on a tax-exempt debenture. Compute
the reportable income for one of the beneficiaries (B), and the trust’s deduction for distributions made to the
beneficiaries.
46. Which of the following statements is not a characteristic of a complex trust?
47. In the current taxable year, Trust XYZ had fully taxable DNI of $100,000. Under the terms of the trust
instrument, the trustee was required to make a $60,000 income distribution to beneficiary X. In addition, the
trustee made discretionary cash distributions in the current taxable year of $20,000 each to beneficiaries X, Y,
and Z. Based on these facts,
48. A complex trust has $70,000 in DNI for the current year. One-tenth of the income is from tax-exempt
bonds. Distributions to beneficiaries total $7,000 for the current year. The trust must report taxable DNI of
49. When allocating DNI among beneficiaries who have received distributions during the taxable year
exceeding DNI, the tier one distributions represent
50. During the current year, Trust S had the following receipts and expenses:
$45,000
15,000
(2,000)
During the year, $43,500 was distributed to X, the sole income beneficiary. The trust instrument does not require that all trust income be distributed
to X annually. Based on these facts, the § 661(a) distribution deduction available to the trust is
51. Father created a testamentary simple trust for his two sons, A and B. Father’s will clearly indicates that A
and B should have an equal interest in both income and corpus but also allows the trustee considerable
discretion to deal with any financial emergencies. A needs a kidney transplant and cannot afford the operation
without larger distributions from the trust. B does not object and tells the trustee to “do what Dad would have
wanted.” If the trust’s DNI was $50,000 for the current year (100% taxable) and A receives a cash distribution
of $60,000, A’s taxable income from the trust is