- Which of the following is correct regarding the 2025 income tax treatment?
Answer: The bonus is income in respect of a decedent; the estate includes $90,000 in DNI, deducts the $50,000 distribution, the beneficiary includes $50,000, and the beneficiary may be eligible for a § 691(c) deduction.
IRC § 691 treats income that a decedent had a right to receive but that was not includible before death as income in respect of a decedent; because the decedent was cash-basis, the unpaid bonus was not reported on the decedent's final return. When the estate received the $90,000 bonus, it became gross income and entered DNI. Under IRC §§ 661 and 662, the $50,000 distribution is deductible by the estate and includible by the beneficiary; the remaining $40,000 is taxable to the estate. Section 691(c) may allow the recipient of IRD an income tax deduction for the estate tax attributable to the item. Choice A misstates the IRD rule and the taxability of the distribution. Choice C wrongly denies a distribution deduction for IRD. Choice D ignores the DNI cap because only the distributed $50,000 is carried out in 2025. The answer is Choice B.
- How much of the $25,000 distribution is includible in the beneficiary's 2025 gross income?
Answer: $20,000
IRC §§ 643(a) and 662(b). The estate's distributable net income (DNI) is $50,000: $40,000 of taxable interest plus $10,000 of tax-exempt interest. The $50,000 capital gain is excluded from DNI because it is allocated to corpus and was neither paid nor required to be distributed. Since the $25,000 distribution is less than DNI, the beneficiary's distribution carries out DNI proportionately. Taxable interest is 40/50 of DNI, so 40/50 × $25,000 = $20,000 is includible; the remaining $5,000 is tax-exempt. Choice B ($22,500) incorrectly includes the corpus capital gain in DNI before allocating the distribution. Choice C ($40,000) taxes the beneficiary on all the estate's taxable interest rather than the amount carried out by the distribution. Choice D ($50,000) treats the entire DNI as the beneficiary's gross income, even though only $25,000 was distributed.
- Which statement correctly describes the treatment of these payments for 2025?
Answer: The estate may deduct the $30,000 distribution to the child, and the friend does not include the $6,000 installment in gross income.
IRC §§ 661(a) and 663(a)(1). Section 661 generally allows an estate a distribution deduction for amounts paid to beneficiaries, limited to DNI. Section 663(a)(1) excepts a bequest of a specific sum of money or specific property paid in not more than three installments; the beneficiary does not include it. The $18,000 bequest to the friend is such a specific-sum bequest, so the first $6,000 installment is neither deductible by the estate nor includible by the friend. DNI is $50,000, and the child's $30,000 distribution is an otherwise deductible distribution under § 661. Choice A reverses the treatment of the two payments. Choice B incorrectly deducts the specific bequest installment. Choice D deducts DNI rather than the amount actually distributed and ignores the § 663(a)(1) exclusion.
- What is the trust's regular federal income tax for 2025, before any net investment income tax?
Answer: $16,529.50
IRC §§ 641, 642(b), 661, and 1(h). DNI is $54,000 ($60,000 taxable interest minus the $6,000 trustee fee), so the $20,000 distribution is fully deductible under § 661. The $100 exemption for a complex trust is allowed under § 642(b). The capital gain is excluded from DNI but is included in the trust's taxable income. Taxable income is $60,000 + $30,000 − $6,000 − $20,000 − $100 = $63,900. The ordinary taxable income after the distribution and exemption is $33,900. Using the 2025 trust brackets (10% to $3,150; 24% to $11,450; 35% to $15,650; 37% above), the ordinary tax is $315 + $1,992 + $1,470 + $6,752.50 = $10,529.50. Because ordinary taxable income exceeds the $15,900 top of the 15% capital-gain bracket for estates and trusts, the entire $30,000 capital gain is taxed at 20%: $6,000. Total regular tax is $16,529.50. Choice A omits the tax on the corpus capital gain. Choice B applies a 15% rate to the capital gain. Choice D taxes the entire $63,900 at ordinary trust rates, denying the 20% capital-gain rate.
- If the trustee makes a timely election under IRC § 663(b), which of the following is correct?
Answer: The trust claims a $20,000 distribution deduction on its 2025 Form 1041, and the beneficiary reports the $20,000 on the beneficiary's 2025 return.
IRC § 663(b) permits a fiduciary to treat distributions made within the first 65 days of the next taxable year as paid on the last day of the preceding taxable year. The election is made with the Form 1041 for the preceding year. Here, the January 2026 payment can be treated as a 2025 distribution, so the trust takes the § 661 deduction on the 2025 return and the beneficiary includes it in 2025. Choice A splits the treatment between years, which the election does not do. Choice B is wrong; the 65-day rule is not limited to required distributions. Choice C misstates the filing vehicle; the election is made on Form 1041, not Form 1045. The answer is Choice D.
- A complex trust's governing instrument directs the trustee to pay $12,000 of the trust's annual gross income to a qualifying charity. In 2025, the trust receives $18,000 of taxable interest and makes the $12,000 payment to the charity. Which of the following is correct for the trust's 2025 income tax return?
Answer: The trust may deduct the full $12,000, because the payment is made from gross income pursuant to the governing instrument and no percentage limit applies to estate and trust charitable contributions.
IRC § 642(c) controls; Choice A is correct. An estate or trust is allowed a deduction for amounts of gross income paid pursuant to the governing instrument to an organization described in IRC § 170(c), and the percentage-of-AGI limitations that apply to individual donors do not apply. Choice B applies the individual 60% cash-contribution limit to a trust. Choice C is wrong because the deduction is allowed in the year paid, not only in the final year. Choice D is wrong because a charitable payment is not a distribution to a beneficiary and is not limited by distributable net income.
- Which of the following is correct regarding the grantor trust rules for 2025?
Answer: When a grantor is treated as the owner of a trust, the grantor reports the trust's income, deductions, and credits on the grantor's income tax return, and the trust is not allowed a distribution deduction for those items.
IRC § 671 controls. Choice C is correct. When a grantor is treated as the owner of all or a portion of a trust, the income, deductions, and credits attributable to that portion are taken into account directly by the grantor, and the distribution deduction rules of IRC §§ 651 and 661 do not apply to those items. Choice A is wrong because under IRC § 676(a), a retained power to revoke makes the trust a grantor trust regardless of an independent trustee's distribution discretion. Choice B is wrong: under IRC § 676, the grantor is not treated as the owner if revocation requires the consent of an adverse party. Choice D is wrong because a reversionary interest exceeding 5% is only one of several grantor-trust tests, not the exclusive test.
- In 2025, a simple trust is required to distribute its current trust accounting income to its sole beneficiary. The trust receives $30,000 of taxable interest, $10,000 of tax-exempt state bond interest, and a $20,000 long-term capital gain that the trust instrument allocates to principal. The trustee distributes the $40,000 of current trust income and retains the capital gain. The trust has no expenses. What amount of the distribution is includible in the beneficiary's gross income?
Answer: $30,000
IRC § 643(a) and IRC § 652(b) control; Choice A is correct. Distributable net income limits the amount taxable to a beneficiary, and the character of items in DNI carries out to the beneficiary. Here the trust's $40,000 of current income consists of $30,000 of taxable interest and $10,000 of tax-exempt state bond interest. The capital gain allocated to principal is not included in DNI because it is neither distributed nor required to be distributed, so it remains with the trust. Because the tax-exempt interest retains its tax-exempt character, the beneficiary includes only the $30,000 of taxable interest. Choice B would also tax the tax-exempt interest. Choice C would treat the principal capital gain as distributable income. Choice D would include all trust receipts without regard to DNI or the character of the tax-exempt interest.
- An individual who used the cash method of accounting died in 2025 before receiving a $90,000 bonus that she had earned. The estate later received the bonus and paid federal estate tax attributable to it. Which of the following is correct?
Answer: The estate must include the bonus in gross income when it is received, and it may deduct the federal estate tax attributable to the bonus.
IRC §§ 691(a) and 691(c) control; Choice D is correct. Income in respect of a decedent that was not properly includible on the decedent's final return is included by the estate or other recipient when received. IRC § 691(c) then allows the recipient a deduction for the federal estate tax attributable to that income, mitigating the double tax. Choice A is wrong because income in respect of a decedent is not reported on the decedent's final return merely because a right to it existed at death. Choice B is wrong because income in respect of a decedent does not receive a stepped-up basis under IRC § 1014(c). Choice C is wrong because inclusion in the gross estate for estate tax purposes does not exempt the item from income tax.
- How is the $15,000 capital gain treated on the trust's 2025 Form 1041?
Answer: It is excluded from distributable net income and is taxable to the trust because the gain was allocated to corpus and was not paid, credited, or required to be distributed to a beneficiary.
IRC § 643(a)(3) excludes capital gains from distributable net income when they are allocated to corpus and are not paid, credited, or required to be distributed to a beneficiary. Because the gain was added to principal and no corpus distribution was made, it does not enter DNI and is taxable to the trust on Form 1041. Choice A ignores the corpus-allocation rule and treats the distribution of ordinary accounting income as carrying out the gain. Choice B incorrectly postpones recognition of the gain until termination. Choice D is internally inconsistent: a gain included in DNI would flow out to the beneficiary and would not remain taxable to the trust. The answer is Choice C.
- Which of the following is correct?
Answer: The expenses may be claimed on the estate's Form 1041 only if the executor files a statement with that return waiving the right to claim them on the estate tax return.
IRC § 642(g) and Treas. Reg. § 1.642(g)-1 prohibit deducting the same administration expense for both estate tax and income tax purposes. To deduct executor's and legal fees on Form 1041, the executor must waive the right to claim them on Form 706; the waiver is filed with the income tax return for the year the income tax deduction is claimed. Choice A asserts the prohibited double deduction. Choice B is too absolute; the expenses may be claimed on the income tax return if the waiver is filed. Choice C adds a limitation tied to the estate tax exclusion that is not in the statute. The answer is Choice D.
- What amounts from the trust's 2025 income are includible in Alice's and Bob's gross income?
Answer: Alice includes $30,000 and Bob includes $18,000.
Under IRC § 662, DNI is allocated first to income required to be distributed currently (first tier), then to other amounts actually distributed (second tier). DNI is $48,000; Alice's required distribution of $30,000 is first-tier and is fully included by Alice. Only $18,000 of DNI remains to be allocated to Bob's discretionary distribution, even though he received $60,000 in cash; the excess is a corpus distribution. Choice B fails to reduce DNI by Alice's first-tier amount. Choice C has no basis in the tier rules. Choice D ignores the DNI ceiling for beneficiary inclusions and the trust's distribution deduction. The answer is Choice A.
- Which of the following is correct for 2025?
Answer: The trust deducts $30,000, Ava includes $30,000, and Liam includes $0.
IRC § 663(c) treats substantially separate and independent shares as separate trusts for purposes of §§ 661 and 662. Ava's share has only $30,000 of DNI, so the $40,000 cash distribution carries out only $30,000 to her; the $10,000 excess is a corpus distribution. The trust is entitled to a $30,000 distribution deduction, and Liam, who received no distribution from his share, includes $0. Choice A ignores the separate-share DNI cap. Choice B treats the shares as one trust and also attributes income to Liam that was not distributed. Choice D allows Ava to include $40,000 and gives Liam DNI that belongs to his retained share. The answer is Choice C.
- In 2025, an estate has adjusted gross income of $100,000, all of which is undistributed net investment income, and it makes no distributions to beneficiaries. What amount of net investment income tax is imposed on the estate?
Answer: $3,205.30
IRC § 1411(a)(2) controls; Choice B is correct. For estates and trusts, the 3.8% net investment income tax applies to the lesser of undistributed net investment income and the excess of adjusted gross income over the amount at which the highest ordinary income tax bracket begins for estates and trusts, which is $15,650 for 2025. The excess is $100,000 − $15,650 = $84,350, and 3.8% of $84,350 is $3,205.30. Choice A applies the tax to the entire $100,000 and ignores the threshold. Choice C uses the $250,000 MFJ threshold rather than the estate and trust threshold. Choice D applies the tax to the $15,650 threshold itself rather than to the excess above it.
