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Lulu Landry is a new client for your firm. She relocated to Los Angeles, CA on January 1, 2017 in search of a

career in movies and television. She had a very successful modeling career in New York before she moved to California to pursue a career on the silver screen. In 2019 two things happened. 

In 2012 Lulu's very wealthy Uncle Herschel Landry had passed away. His will set up a trust with the sole beneficiary being Lulu. The bequest stated that all $10 million transferred into the trust is to be distributed to Lulu when she reaches age 35. The trust document also stated that the trustee (at his discretion) could distribute any amount to Lulu at any time if needed for health, education or support. The trustee has not made any distributions up to this time.  Uncle Herschel was a resident of New York when he died and he appointed his brother (and also a New York resident) as the trustee charged with the responsibility of administering the trust. The trust included stocks and taxable bonds. The interest, dividends and capital gains were all accumulated in the trust and deposited in the principal of the trust, as they were not distributed. No California tax returns were filed by the trust.

In 2019, Lulu turns age 35 and has been contacted by the trustee regarding the pending distribution. Over the years the trust has accumulated $3,500,000 (dividends $500,000, taxable interest on bonds $2,500,000 and capital gain of $500,000.) As indicated above, the trustee has made no distributions to Lulu and the trustee has not made any special elections regarding the tax/accounting treatment of capital gains. The accumulated dividends, interest and capital gains all relate to prior years. In the current year (2019) the trust reports $80,000 of dividends, taxable interest $400,000 and $30,000 of capital gains. 

Also in 2019, Lulu got a big contract to appear in a TV sitcom for a major network. This contract is set to pay her $3,000,000 in 2019. Lulu does not think she needs any money from Uncle Herschel's trust.

Other Information:

                                   2014               2015               2016               2017               2018

Lulu's taxable income

for five previous years.

Lulu does not claim any

credits in prior years and

does not have any AMT

adjustments.                $500,000       $300,000        $200,000        $150,000        $100,000

Lulu's taxable income in 2019 is estimated to be $2,500,000. She does not have any credits or AMT adjustments that have to be taken into account for the year. 


1.     Does Lulu have to take the distribution in a lump sum during the year 2016?

2.     If she leaves the income in the trust, what are the tax results?

3.     Determine which alternative is better for Lulu. (The alternatives are leaving monies in the trust or taking a lump sum distribution).

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