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20 20-1
Chapter Check figures (2014) 21. Attribute Trust could incur its own tax liability for the year Trust generally distributes all of DNI Trust can deduct its charitable contributions in the year of, or the year after, payment Trust could claim a foreign tax credit Maximum tax rate on net longterm capital gains = 15% AMT preferences and adjustments flow through to beneficiaries ratably Trust can adopt the FIFO method for its inventory assets; the grantor had been using lower of cost or market Trust can use a tax year other than the calendar year Amount of personal exemption Simple Trust Yes, if capital gains are allocable to corpus (the general rule). Yes, simple trust is required to distribute all accounting income (by definition). No, simple trusts cannot make contributions to charitable organizations (by definition). No, credit is allocated to beneficiaries on a pro-rata basis (based on DNI). Yes Yes
updated: October 22, 2013
Complex Trust Yes
Depends on the terms in the trust agreement. Yes
Yes
Yes Yes
Yes, the trust can choose its own tax accounting method
Yes, the trust can choose its own tax accounting method
Generally no. $300 (by definition, since it is required to distribute all of its accounting income.
Generally no. $100 or $300 if the trust is required to distribute all of its accounting income. $500,000 30,000 (0) (0) (15,000) (100) $514,900 $190,378 6,000 $196,378
22.
Operating income Dividend income Tax-exempt interest Net passive loss (no passive income) Deductible portion of fiduciary fees Personal exemption (trust distributes no income) Trust taxable income Tax on $484,900 ordinary income [(($484,900 $11,950) x 39.6%) + $3,090] Tax on dividend income ($30,000 20%) Total tax
24. a. Interest income, rent income, and capital gains are allocable to income which is distributed to Betty; fiduciary and tax preparation fees and cost recovery deductions are allocable to corpus. Shirley receives $165,000. Capital gains, rent income, and one-half of interest income are allocable to corpus; cost recovery expenses, one-half of interest income, and fiduciary and tax preparation fees administrative fees are allocable to income. Shirley receives nothing, since accounting income is less than zero. (This is just one of many allocations that could be written into the trust document where Shirley gets $0.)
b.
20-2
25.
Trust agreement provisions Fees and capital gains allocable to corpus
Trust accounting income Interest income Tax-exempt interest Tax-exempt interest (AMT) Accounting income Interest income Tax-exempt interest Tax-exempt interest (AMT) trustee fee Accounting income Interest income Tax-exempt interest Tax-exempt interest (AMT) Capital gain trustee fee Accounting income 300,000 30,000 20,000 $350,000 300,000 30,000 20,000 (5,000) $345,000 300,000 30,000 20,000 40,000 (5,000) $385,000
Capital gains allocable to corpus, one-half of fees allocable to income
Capital gains allocable to income, silent concerning allocation of fees
Fees and exempt income allocable to corpus, silent concerning allocation of capital gain/loss 26. Attribute Separate income tax entity Controlling document Can have both income and remainder beneficiaries Computes entity accounting income, before determining entity taxable income Termination date is determinable from controlling document Legal owner of assets under fiduciary's control Document identifies both income and remainder beneficiaries Separate share rules apply Generally must use calendar tax year 27. Estate Yes. Will. Yes. Yes.
Most state laws allocate fees one-half to corpus, one-half to income. Interest income $300,000
Trust Yes. Trust instrument. Yes. Yes.
No, estate terminates when the required activities are completed. Beneficiaries although immediately, the executor has a fiduciary duty during the administration period. Yes. Yes. No.
Yes. Trustee.
Yes. Yes. Yes.
Roberto's IRD = $60,000 [$40,000 (sales commissions) + $20,000 (1/3 installment gain $60,000)].
20-3
30.
a. b. c. d.
$50,000 (1/2 of $100,000 accounting (ordinary) income). Ricardo's DNI $95,000. Trust taxable income $29,700. Gross income reported by each beneficiary $47,5000 (1/2 of $95,000 DNI). Taxable income $100,000 30,000 (5,000) (300) 124,700 (95,000) $29,700 124,700 300 (30,000) 95,000 100,000
Ordinary income Long-term capital gain Fiduciary fees Personal exemption Taxable income b-4 distributions deduction Less: Distribution deduction Trust taxable income (part c)
Taxable income b-4 Distributions Deduction Add: Personal exemption Less: Capital gain allocable to corpus Distributable net income (part b) Distribution deduction (lesser of DNI or accounting income 31. a. $65,000 (1/2 of $130,000 accounting income).
Ordinary income Long-term capital gain Accounting income b. c. d. $125,000. ($300). $62,500 (1/2 of $125,000 DNI).
Accounting income $100,000 30,000 130,000
Ordinary income Long-term capital gain Fiduciary fees Personal exemption Taxable income b-4 distributions deduction Less: Distribution deduction Trust taxable income (part c)
Taxable income $100,000 305,000 (5,000) (300) 124,700 (125,000) ($300) 124,700 300 125,000 130,000
Taxable income b-4 Distributions Deduction Add: Personal exemption Distributable net income (part b) Distribution deduction (lesser of DNI or accounting income 32.
Lagos Trust is a complex trust. Lagos Trust's DNI of $120,000 is allocated to each beneficiary ($40,000) under the separate share rule of Sec. 663(c), a. $40,000. Willie is taxed on his share of the trust's DNI of $40,000. The second-tier distribution of $10,000 is not taxable. $25,000. The separate share rule applies. Sylvia's is taxed on her share of the DNI that is distributed to her (not the $15,000 that is accumulated by the trust). $0. All of the trust's DNI allocated to Doris has been accumulated by the trust. $55,000. The trust's DNI of $120,000 DNI $40,000 amount taxed to Willie $25,000 amount taxed to Sylvia. In other words, the trust is taxed on the distributable net income that is accumulated by the trust (Sylvia's $15,000 + Doris's $40,000).
b.
c. d.
20-4
33.
a.
DNI = $150,000. The trust makes first-tier distributions of $60,000 and $90,000 of secondtier distributions. The second-tier distributions are allocated to the beneficiaries as follows: Renee Cash received DNI allocated First Tier $30,000 $30,000 Second Tier $120,000 $100,000 Totals $150,000 $130,000 taxable interest income Note: Renee receives a $20,000 "tax-free" distribution from the trust.
b. Clare First Tier Second Tier Totals c. Cash received $30,000 $0 $30,000 DNI allocated $30,000 $0 $30,000 taxable interest income
First-tier distributions are the required distributions of $60,000. Second tier distributions total $90,000 ($150,000 DNI $60,000 first-tier distributions). Reported on (X) Dora's Form 1040 Jose's Estate: Form 1041 X X X X X Jose's Estate: Form 706 X X X X X X
Not reported on any return. Recapture potential disappears.
36.
Item
a. Last paycheck b. State income tax withheld on last paycheck c. Capital gain portion of installment payment received d. Ordinary income portion of installment payment received e. Dividend income, record date was two days prior to Jos's death f. Unrealized appreciation, securities g. Depreciation recapture accrued as of date of death h. Medical expenses of last illness i. Apartment building, rents accrued but not collected as of death j. Apartment building, property tax accrued and assessed but not paid as of death
X X X X X

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