CPA Regulation (REG) : Taxation of Estates
Study concepts, example questions & explanations for CPA Regulation (REG)
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Example Questions
Example Question #1 : Taxation Of Estates
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?
Grantor
Pre-need funeral
Complex
Simple
Grantor
The definition of a grantor trust is one in which the individual who established the trust retains control over it.
Example Question #1 : Taxable Estate
For income tax purposes, the estate’s initial taxable period for a decedent who died on October 20:
May be either a calendar year, or a fiscal year beginning on the date of the decedent’s death.
Must be 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.
May be either a calendar year, or a fiscal year beginning on October 1 of the year of the decedent’s death.
May be either a calendar year, or a fiscal year beginning on the date of the decedent’s death.
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 #2 : 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?
Neither I or II
I only
Both I and II
II only
Both I and II
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 #1 : Taxation Of Estates
Of the following, which item is not normally taken into account in determining distributable net income of a simple trust?
Tax exempt interest
Taxable interest income
Personal exemption
Fiduciary fee
Personal exemption
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 #2 : Taxation Of Estates
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
Ordinary gross income
Net investment income
Distributable net income
Capital gain income
Distributable net income
DNI is the upper limit on the amount of income that a beneficiary has to include in income from a trust distribution.
Example Question #1 : Taxable Estate
Of the following, what is the standard deduction for a trust or estate fiduciary income tax return?
$1,000
Variable depending on charitable deductions
None
It depends on the fiduciary
None
There is no standard deduction allowed for fiduciary income tax returns.
Example Question #4 : Taxation Of Estates
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?
$9,500
$3,250
$8,250
$5,000
$3,250
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 #5 : Taxation Of Estates
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:
Ordinary gross income.
Distributable net income.
Net investment income.
Capital gain income.
Distributable net income.
Distributable net income is the maximum amount a trust or estate may deduct for distributions to beneficiaries.
Example Question #6 : Taxation Of Estates
Which of the following items is not normally taken into account in determining distributable net income of a simple trust?
Tax-exempt interest
Taxable interest income
Personal exemption
Fiduciary fee
Personal exemption
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 #3 : Taxation Of Estates
The standard deduction for a trust or an estate in the fiduciary income tax return is:
$800
$650
$0
$750
$0
An estate or trust is not allowed a standard deduction in preparing the fiduciary income tax return.
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