CPA Regulation (REG) : Taxation of Estates

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

varsity tutors app store varsity tutors android store

Example Questions

← Previous 1

Example Question #1 : Taxable Estate

Taylor created a trust, transferred property to this trust, and retained certain interests. For income tax purposes, Taylor was treated as the owner of the trust. Taylor has created which of the following types of trusts?

Possible Answers:

Grantor

Pre-need funeral

Simple

Complex

Correct answer:

Grantor

Explanation:

The definition of a grantor trust is one in which the individual who established the trust retains control over it.

Example Question #2 : Taxable Estate

For income tax purposes, the estate’s initial taxable period for a decedent who died on October 20:

Possible Answers:

May be either a calendar year, or a fiscal year beginning on October 1 of the year of the decedent’s death.

Must be a fiscal year beginning on the date of the decedent’s death.

May be either a calendar year, or a fiscal year beginning on the date of the decedent’s death.

Must be a calendar year beginning on January 1 of the year of the decedent’s death.

Correct answer:

May be either a calendar year, or a fiscal year beginning on the date of the decedent’s death.

Explanation:

Upon the decedent’s death, the estate may elect either a fiscal year beginning at the death date or a calendar year. The resulting tax returns are due either the fifteenth day of the fourth month following the end of the fiscal year, or April 15, respectively.

Example Question #3 : Taxable Estate

Under the provisions of a decedent’s will, the following cash disbursements were made by the estate’s executor:

I.  A charitable bequest to the American Red Cross
II. Payment of the decedent’s funeral expenses

What deduction(s) is (are) allowable in determining the decedent’s taxable estate?

Possible Answers:

II only

Both I and II

I only

Neither I or II

Correct answer:

Both I and II

Explanation:

The gross estate is taxed only after several deductions (discretionary and nondiscretionary) are taken. Nondiscretionary deductions include satisfying all outstanding debts, estate administrative expenses, medical expenses, funeral expenses, and certain taxes. Discretionary deductions include charitable bequests and marital deductions, both of which are unlimited.

Example Question #4 : Taxable Estate

Of the following, which item is not normally taken into account in determining distributable net income of a simple trust?

Possible Answers:

Personal exemption

Fiduciary fee

Tax exempt interest

Taxable interest income

Correct answer:

Personal exemption

Explanation:

The calculation of a distributable net income includes all of a trust’s gross income except capital gains attributable to corpus and is reduced by all of a trust’s deductions except the exemption.

Example Question #5 : Taxable Estate

A distribution from estate income that was currently required was made to the estate’s sole beneficiary during its calendar year. The maximum amount of the distribution to be included in the beneficiary’s gross income is limited to the estate’s 

Possible Answers:

Ordinary gross income

Distributable net income

Net investment income

Capital gain income

Correct answer:

Distributable net income

Explanation:

DNI is the upper limit on the amount of income that a beneficiary has to include in income from a trust distribution.

Example Question #6 : Taxable Estate

Of the following, what is the standard deduction for a trust or estate fiduciary income tax return?

Possible Answers:

Variable depending on charitable deductions

None

$1,000

It depends on the fiduciary

Correct answer:

None

Explanation:

There is no standard deduction allowed for fiduciary income tax returns.

Example Question #1 : Distributable Net Income

Lake Trust, a simple trust, reported the following items of income and expense during the year:

  • Dividend income: $2,500
  • Taxable interest income: 2,000
  • Capital gains (allocable to corpus): 5,000
  • Accounting fees (allocable to income): (500)
  • Trustee fees (allocable to income): (750)

What is Lake's distributable net income?

Possible Answers:

$3,250

$9,500

$5,000

$8,250

Correct answer:

$3,250

Explanation:

The DNI will include both the dividend and interest income, totaling $4,500. Expenses allocable to income total ($1,250). Netted, these bring DNI to $3,250. Capital gains allocable to corpus are not treated as income, as these remain within the estate and are not distributed to beneficiaries.

Example Question #2 : Distributable Net Income

A distribution from estate income, that was currently required, was made to the estate’s sole beneficiary during its calendar year. The maximum amount of the distribution to be included in the beneficiary’s gross income is limited to the estate’s:

Possible Answers:

Net investment income.

Capital gain income.

Distributable net income.

Ordinary gross income.

Correct answer:

Distributable net income.

Explanation:

Distributable net income is the maximum amount a trust or estate may deduct for distributions to beneficiaries.  

Example Question #3 : Distributable Net Income

Which of the following items is not normally taken into account in determining distributable net income of a simple trust?

Possible Answers:

Fiduciary fee

Taxable interest income

Personal exemption

Tax-exempt interest

Correct answer:

Personal exemption

Explanation:

Since trusts are treated as a different class of taxpayer than living individuals, personal exemptions are not allowed for trusts. The other items – interest expenses, management fees, and interest income – are all standard components of a trust’s DNI. 

Example Question #4 : Distributable Net Income

The standard deduction for a trust or an estate in the fiduciary income tax return is:

Possible Answers:

$650

$800

$0

$750

Correct answer:

$0

Explanation:

An estate or trust is not allowed a standard deduction in preparing the fiduciary income tax return.

← Previous 1
Learning Tools by Varsity Tutors