CPA Regulation (REG) : Taxable Income from Trusts & Estates

Study concepts, example questions & explanations for CPA Regulation (REG)

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Example Questions

Example Question #1 : Taxable Income From Trusts & Estates

The Manor Trust, a complex trust, had distributable net income (DNI) in Year 7 of $12,000. Of the $12,000 of DNI, $5,000 was distributed to trust beneficiaries. Of the $5,000 distributed, which taxpayer(s), if any, are responsible for the tax liability on the $5,000 distribution?

Possible Answers:

The trust beneficiaries

The Manor Trust and the trust beneficiaries

Neither Manor Trust nor the trust beneficiaries

The Manor Trust

Correct answer:

The trust beneficiaries

Explanation:

Income distributed to trust beneficiaries is included on a Schedule K-1. Only the amount received by beneficiaries is taxed; undistributed DNI is not taxed at either the trust or beneficiary level.

Example Question #2 : Taxable Income From Trusts & Estates

The charitable contribution deduction on an estate’s fiduciary income tax return is allowable:

Possible Answers:

Only if the decedent’s will specifically provides for the contribution.

To the extent of the same adjusted gross income limitation as that on an individual income tax return.

Subject to the 2% threshold on miscellaneous itemized deductions.

If the decedent died intestate.

Correct answer:

Only if the decedent’s will specifically provides for the contribution.

Explanation:

Deductions for charitable contributions by an estate are allowed only if the contributions are provided for in a will. Otherwise such contributions cannot be deducted from the estate’s taxable income.

Example Question #3 : Taxable Income From Trusts & Estates

A distribution to an estate’s sole beneficiary for the current calendar year equaled $15,000, the amount currently required to be distributed by the will. The estate’s current year records were as follows:

  • Estate income: $40,000 Taxable interest
  • Estate disbursements: $34,000 Expenses attributable to taxable interest

What amount of the distribution was taxable to the beneficiary?

Possible Answers:

$6,000

$40,000

$0

$15,000

Correct answer:

$6,000

Explanation:

Only that portion of a distribution that comes from earned, taxable income in the year would be taxable to the beneficiary. Since the net taxable income for the estate is $6,000, the remainder of the distribution comes from the corpus and is a transfer of property, which in this case is not taxable.

Example Question #4 : Taxable Income From Trusts & Estates

The ABC Trust reported DNI of $120,000 for the year. The trustee is to distribute $60,000 to A and $90,000 to B each year. If the trustee distributes these amounts, what amount is includable in B’s gross income?

Possible Answers:

$90,000

$72,000

$0

$60,000

Correct answer:

$72,000

Explanation:

The income distribution deduction is the lesser of DNI or the actual amount distributed to the beneficiary. A is required to receive $60,000 and B is required to receive $90,000 per year for a total of $150,000. The applicable pro rata portion of the income distribution deduction is as follows: $90,000/$150,000 * $120,000 = $72,000.

Example Question #5 : Taxable Income From Trusts & Estates

G Trust is a simple trust. It reported the following items of income and expenses for the current year: Interest income of $4,000, dividend income of $2,000 and trustee fees allocable to income of $1,500. What is the trust’s DNI for the year?

Possible Answers:

$500

$4,500

$2,500

$6,000

Correct answer:

$4,500

Explanation:

DNI is computed as the trust’s income less any expenses allocated to income, The $6,000 of income items minus the $1,500 of income related expenses equals DNI of $4,500. This means that the first $4,500 of distributions from the trust are taxable income to the recipients with any additional distributions being considered nontaxable distributions of trust corpus.

Example Question #6 : Taxable Income From Trusts & Estates

Which of the following income items would not be included in the Distributable Net Income of a simple trust?

Possible Answers:

Trustee Fees Allocable to Income

Capital Gains Allocable to Corpus

Dividend Income

Accounting Fees Allocable to Income

Correct answer:

Capital Gains Allocable to Corpus

Explanation:

Capital gains are not included if they are allocable to the corpus.

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