433 Sample Test 3

TRUSTS - PROBLEMS AND QUESTIONS
True or False
1. Trusts are normally entitled to a deduction for distributions of income made to beneficiaries.
2. Estates are normally entitled to a deduction for distributions of income made to beneficiaries.
3. An estate reports the decedent's income for the period beginning the first day of the decedent's final taxable year.
4. Exempt interest is included in the computation of a trust's distributable net income.
5. Estates and trusts are not entitled to a deduction for distributions made out of nontaxable income.
7. Expenses allocated to exempt income are not deductible by a trust.
8. Expenses allocated to corpus are not deductible by a trust.
11. Estates receive an exemption of either $100 or $300.1
13. Trusts must select the same taxable period as their beneficiaries.
14. Unlike individuals, a trust's deduction for charitable contributions is not subject to percentage limitations.
16. Exempt interest loses its status as such and is taxable when distributed to a beneficiary by either an estate or trust.
17. First-tier distributions are amounts required to be distributed currently whether actually distributed or not.
18. Beneficiaries of grantor trusts are taxed much like beneficiaries of other trusts.
19. Any trust with charitable beneficiaries is a complex trust.
21. The deduction for distributions to beneficiaries cannot exceed distributable net income.
24. Simple trusts get a $100 exemption and complex trusts get a $300 exemption.

Multiple Choice
1. A trust may not deduct
a. trustee's fees
b. charitable contributions
c. funeral expenses
d. distributions to beneficiaries
e. any of the above

2. The deduction for distributions to beneficiaries is
a. available only to complex trusts
b. limited to distributable net income
c. not available to estates
d. deductible for adjusted gross income
e. none of the above

4. To be a simple trust, a trust must distribute all of its income currently and have no
a. charitable beneficiary
b. exempt income
c. remainder beneficiary
d. revisionary interest
e. none of the above

5. In the case of a grantor trust, the trust's gross income is taxable to
a. the beneficiary
b. the grantor
c. the trustee
d. the executor
e. none of the above

7. Mullins Trust has a long-term capital gain of $1,000, taxable interest income of $1,700, and exempt interest income of $1,800. The trustee's fee is $350. The capital gain is allocated to corpus. The distributable net income for the trust is:
a. $4,500
b. $3,500
c. $3,150
d. $3,000
e. none of the above

8. Mullins Trust, from the preceding question, can deduct what amount for trustee's fee?
a. $350
b. $180
c. $170
d. none
e. none of the above

9. The Mullins Trust distributed $3,150. The deduction for the distribution is:
a. $1,530
b. $1,700
c. $2,150
d. $3,150
e. none of the above

10. The Mullins Trust would get an exemption of:
a. $ 100
b. $ 300
c. $ 600
d. $2,550
e. none of the above

11. The Mullins Trust's taxable income is:
a. $ 700($1,000 + 1,700 - 170 - 1,530 - 300)
b. $ 400($1,000 + 1,700 - 170 - 1,530 - 600)
c. $1,000($1,000 + 1,700 - 170 - 1,530)
d. -0-($1,700 - 170 - 1,530)
e. none of the above

12. A complex trust is a trust which
a. can invest only in corporate securities
b. must distribute all income currently
c. allows the accumulation of current income, provides for charitable contributions or distributes principal during the tax year
d. is exempt from payment of income tax
e. none of the above

SOLUTIONS Trusts
True or False
1... .......... 15. T 21.T
2. ......9. F 16. F 22.F
3. F 10.F 17. T 23.T
4. T 11.F 18. F 24.F
5. T 12.F 19. T 25.T
6. T 13.F 20. F 26.T
7. T 14.T

Estate and Gift Tax PROBLEMS AND QUESTIONS
True or False
l. The estate tax is a tax imposed on the right to transfer property at death.
2. Community property is exempt from the estate tax.
3. In general, a limited power of appointment will be included in the holder's gross estate.
4. If an individual has the right to revoke a gift but has not done so as of the time of his death, the gifted property will be excluded from the decedent's gross estate.
5. In general, a decedent's interest in property purchased jointly with others is a percentage of the property's value based on the decedent's contribution to the original purchase price.
6. Wages accrued at death are included in a decedent's gross estate only if the wages were subject to the income tax prior to death.
7. If a decedent possessed the right to change the beneficiary of a policy on his own life, the face of the policy will be included in the decedent's gross estate.
8. The election to value property at the date of death or the alternative valuation date is made on an asset by asset basis.
9. Expenses of administering an estate are deductible on both the estate tax return and the estate income tax return.
10. The unified credit is an amount deducted from the adjusted gross estate along with the marital deduction.
11. Adjusted taxable gifts include taxable gifts made after 1976.
12. Estate tax returns are generally due 6 months after death.
13. If a large estate consists solely of community property, there will be no marital deduction.
14. In general, the IRS has three years after an estate tax return is filed to assess additional taxes.
16. A limited credit is allowed for state inheritance and estate taxes.
17. The marital deduction can not exceed 50% of the decedent's gross estate.
18. The gift tax is paid by the donee.
20. A bad bargain made in a business context is subject to the gift tax.
21. Gifts to qualified charitable organizations are exempt from the gift tax.
22. Husbands and wives may "split gifts" made to third parties only if the property was community property.
24. The gift tax rate schedule and the estate tax rate schedule are the same.
25. Having made large taxable gifts in the past will increase the tax on current gifts.
26. Splitting gifts made to third persons is required.
27. The alternative valuation date for purposes of the gift tax is six months after the gift.
28. Revocable gifts are exempt from the gift tax.
29. The annual gift tax exclusion is $10,000 per donor, per year.
30. It is not necessary to file a gift tax return for any year in which the donor made taxable gifts of less than $25,000.
31. The gift tax is computed on a cumulative basis.
33. The marital deduction is allowed for gifts of community property.
35. Because of the annual exclusion a husband and wife could make gifts totaling $60,000 to their three children and owe no tax.
36. The marital deduction is only available to the spouse and children of the decedent.
37. Gross estate includes the gift tax paid on gifts made within three years of death.
38. An extension of time to file is available for both estate tax and gift tax returns.
41. A credit is available for estate tax paid by a transferor when the same property becomes taxable estate within a 10-year period.

Multiple Choice
1. Eastman died leaving a gross estate of $800,000. Eastman had no community property nor had he made any life-time gifts. His estate was entitled to a deduction for funeral expenses of $5,000, administration expenses of $45,000, debts of the decedent of $80,000 and charitable contributions of $20,000. Assuming he left $400,000 to his widow, what is the estate's marital deduction?
a. $400,000
b. $335,000
c. $325,000
d. $250,000
e. none of the above

2. The maximum credit for state death taxes is computed by using a table and is based on the adjusted taxable estate. The adjusted taxable estate is the taxable estate.
a. increased by adjusted taxable gifts
b. reduced by adjusted taxable gifts
c. increased by taxable transfers
d. reduced by $60,000
e. none of the above

3. Which of the following is deducted to arrive at the adjusted gross estate?
a. marital deduction
b. charitable contribution deduction
c. funeral expenses
d. all of the above
e. none of the above

4. The gross estate of a decedent includes
a. interest income accrued at death
b. complete gifts made before death
c. the surviving spouse's interest in community property
d. a limited power of appointment
e. none of the above

5. Which of the following is excluded from a gross estate?
a. life insurance benefits payable to the estate
b. a personal automobile owned by a decedent
c. tax exempt bonds owned by the decedent
d. a gift made the year before death
e. none of the above

9. Which of the following accurately describes how property is valued on an estate tax return?
a. mutual fund share are valued on the average of bid and ask prices
b. stock is valued at the average of the highest and lowest selling price
c. life insurance is valued at its cash surrender value
d. all of the above
e. none of the above

10. Dougal gave stock worth $130,000 to her husband. Although she had made taxable gifts before, this was the first time she had made a large gift to her husband. The taxable gift is
a. $127,000
b. $ 63,500
c. $ 62,000
d. zero
e. none of the above

11. In 1996, Broderick made a gift of stock worth $400,000 to his son. Broderick and his wife have elected to split the gift. After deducting the $10,000 exclusion Mrs. Broderick will report a taxable gift of
a. $390,000
b. $200,000
c. $190,000
d. zero
e. none of the above

12. Mrs. Broderick, from the preceding question, has never before filed a gift tax return. Assuming the taxable year is 1996, compute Mrs. Broderick' s gift tax liability after credits.
a. $62,120
b. $53,840
c. $ 6,840
d. zero
e. none of the above

13. In February 1997, Mrs. Broderick, from the preceding question, gave $700,000 cash to her nephew. No other gifts were made by either spouse during the year. The gift tax return
a. must be filed by February 15, 1997
b. must be filed by February 15, 1998
c. must be filed by April 15, 1998
d. need not be filed
e. none of the above

14. Assuming the Brodericks again elect to split gifts, what is Mrs. Broderick's total taxable gifts?
a. $350,000
b. $340,000
c. $540,000
d. $530,000
e. none of the above

16. Which of the following would represent a taxable gift?
a. a gift of $20,000 cash to a church
b. property sold at a bargain price because the seller was not aware of its true value
c. a home transferred without consideration by a father to his daughter at the time of her marriage
d. prizes awarded by a television quiz show
e. none of the above

17. The unified credit
a. is an alternative to the $10,000 annual exclusion
b. is available for each donor
c. applies only to the estate tax
d. was repealed beginning in 1977
e. none of the above

18. The unified credit
a. replaces the $30,000 lifetime exemption
b. is equal known as the exemption equivalent (2000 worth $675,000)
c. is available in addition to the $10,000 annual exclusion
d. is not renewed each year
e. all of the above

SOLUTIONS Estate and Gift Tax
True or False
1. T 12.F 22. F 32.F
2. F 13.F 23. T 33.T
3. F 14.T 24. T 34.F
4. F 15.T 25. T 35.T
5. T 16.T 26. F 36.F
6. F 17.F 27. F 37.T
7. T 18.F 28. T 38.T
8. F 19.F 29. F 39.F
9. F 20.F 30. F 40.T
10. F 21.T 31. T 41.T
11. T

Multiple Choice
1. A .6.B 11. C 15.C
2. D .7.C 12. D 16.C
3. C .8.A 13. C 17.B
4. A .9.B 14. D 18.E
5. D 10.D

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