Search This Blog
Chapter 28 Income Taxation Of Trusts And Estates
Discussion Questions
1. LO.1 A local bank has asked you to speak at its Building Personal Wealth Conference on the topic of “What Should Your Trust Do for You?” Develop at least four PowerPoint slides, each one listing a function that a trust might be able to accomplish for an individual who has more than a modest level of financial resources.
2. LO.1 In general terms, describe how the following entities are subject to the Federal income tax. (Answer only for the entity, not for its owners, beneficiaries, etc.)
a. C corporations (Subchapter C).
b. Partnerships (Subchapter K).
c. S corporations (Subchapter S).
d. Trusts and estates (Subchapter J).
3. LO.1 Your college’s accounting group has asked you to give a 10-minute speech titled “Trusts, Estates, and the AMT.” The audience will be students who have completed at least one course concerning Federal income taxation. Develop a brief outline for your remarks.
4. LO.1 Create a fact pattern that illustrates each of the following tax situations.
Be specific.
a. A simple trust.
b. A complex trust with a $300 personal exemption.
c. A complex trust with a $100 personal exemption.
5. LO.2 Using Exhibit 28.4 as a guide, describe the computation of a fiduciary entity’s accounting income, taxable income, and distributable net income.
6. LO.2 The Liu Trust is short of cash. It is required to distribute $100,000 to Yang every year, and that payment is due in six weeks. In its asset corpus, Liu holds a number of investments that are valued at $100,000. One of them is a plot of land with a tax basis to the trust of $80,000. Assuming that the trust agreement allows, what are the Federal income tax consequences if Liu distributes this land to Yang?
7. LO.2 In its first tax year, the Vasquez Estate generated $50,000 of taxable interest income and $30,000 of tax-exempt interest income. It paid fiduciary fees of $8,000. The estate is subject to a 35% marginal estate tax rate and a 40% marginal income tax rate. How should the executor assign the deductions for the payment of the fees?
8. LO.2 The Sterling Trust owns a business and generated $100,000 in depreciation deductions for the tax year. Mona is one of the income beneficiaries of the entity. Given the following information, can Mona deduct any of the Sterling depreciation on her Form 1040? If so, how much is her deduction?
Sterling’s taxable income from the business $ 800,000
Sterling’s gross income from the business 4,000,000
Mona’s share of trust accounting income 500,000
Total trust accounting income 2,500,000
Mona’s share of distributable net income 1,200,000
Total distributable net income 1,600,000
9. LO.2 In year 1, the Helpful Trust agreed to make a $50,000 contribution to Local Soup
Kitchen, a charitable organization. Helpful’s board agreed to the gift at a November year 1 meeting, but the check was not issued until February 20, year 2 (i.e., during the next tax year).
a. Can the trust claim a charitable contribution deduction? If so, describe how
Helpful should treat its gift.
b. Would the answer to part (a) change if the check was issued on May 1, year 2? If so, how?
10. LO.3 One of the key concepts in fiduciary income taxation is that of distributable net income (DNI). List the major functions of DNI on one PowerPoint slide, with no more than five bullets, to present to your classmates as part of the discussion of this chapter of the text. Just review the uses of DNI in Subchapter J, and do not discuss its computation.
11. LO.4 Comment on the following items relative to tax planning strategies of a fiduciary entity.
a. To reduce taxes for a typical family, should income be shifted to a trust or from a trust? Why?
b. From a tax planning standpoint, who should invest in tax-exempt bonds, the trust or its beneficiaries?
c. To reduce overall taxes, should a high-income, wealthy beneficiary be assigned to the first or second tier of trust distributions? Why?
d. To minimize taxes, how should a trust treat the distribution of an in-kind asset? Why?