Cannon Trust School II Exam ACTUAL
EXAM 2026/2027 | Cannon Trust School
Level II | Verified Q&A | Pass
Guaranteed - A+ Graded
Section 1 – Fiduciary Income Taxation (Questions 1–20)
Q1: A simple trust has distributable net income (DNI) of $50,000. The trustee distributes $40,000 to the
sole beneficiary as required by the trust instrument. How much of the distribution is taxable to the
beneficiary?
A. $0
B. $40,000 [CORRECT]
C. $50,000
D. $10,000
Correct Answer: B
Rationale: Beneficiaries of a simple trust are taxed on the lesser of DNI ($50,000) or the amount
distributed to them ($40,000). The trust deducts the same amount under IRC §651.
Q2: A trustee receives a $5,000 cash dividend from publicly traded stock held in the trust. Under the
Uniform Principal and Income Act (UPIA), how should this receipt be allocated?
A. Entirely to principal
B. Entirely to income [CORRECT]
C. 50% to principal, 50% to income
D. To principal, but an adjustment may be made for depreciation
Correct Answer: B
Rationale: Under UPIA §401, ordinary cash dividends are allocated entirely to trust income because they
represent a return on the investment during the accounting period, not a return of capital.
Q3: Which of the following types of trusts is taxed as a grantor trust under IRC §§671–679?
,A. A trust with an independent trustee who has sole distribution authority
B. A trust where the grantor retains the power to revoke the trust [CORRECT]
C. A charitable remainder trust (CRT)
D. A qualified spousal trust (QTIP) after the first spouse's death
Correct Answer: B
Rationale: IRC §676 treats a trust as a grantor trust if the grantor retains the power to revoke the trust,
meaning the grantor is taxed on all trust income as if it were received directly.
Q4: A complex trust has DNI of $30,000. The trustee makes discretionary distributions of $25,000 to
Beneficiary A and $20,000 to Beneficiary B. What is the total amount the trust can deduct for
distributions?
A. $45,000
B. $30,000 [CORRECT]
C. $25,000
D. $50,000
Correct Answer: B
Rationale: Under IRC §661, a complex trust's distribution deduction is limited to DNI ($30,000),
regardless of the total amount distributed, because DNI serves as the ceiling for both the trust's
deduction and beneficiaries' taxable income.
Q5: For tax year 2026, a non-grantor trust reaches the top 37% federal income tax bracket at what
amount of taxable income?
A. $609,350
B. $14,451 [CORRECT]
C. $231,250
D. $47,026
Correct Answer: B
Rationale: Trusts and estates are subject to highly compressed tax brackets under IRC §1(e); for 2026,
the 37% rate applies to trust taxable income exceeding $14,451, compared to $609,350 for married
individuals filing jointly.
Q6: Under the tier system for beneficiary taxation, a mandatory income distribution to a beneficiary is
classified as:
, A. Tier 2 distribution
B. Tier 1 distribution [CORRECT]
C. Tier 3 distribution
D. Excluded from DNI entirely
Correct Answer: B
Rationale: Under IRC §652 and §662, Tier 1 distributions consist of mandatory income distributions
required by the trust instrument, which are taxed to beneficiaries first before any Tier 2 (discretionary or
other corpus) distributions.
Q7: A trust earns $10,000 in tax-exempt municipal bond interest and $20,000 in taxable interest. The
trust instrument requires all income to be distributed currently. What is the trust's DNI?
A. $20,000
B. $30,000
C. $30,000, but the tax-exempt portion is excluded from taxable DNI [CORRECT]
D. $10,000
Correct Answer: C
Rationale: DNI includes tax-exempt income for allocation purposes under IRC §643(a), but the tax-
exempt portion carries out its character to the beneficiary and is excluded from the trust's taxable DNI
computation, resulting in no tax on that portion.
Q8: A grantor retains the right to receive trust income for 10 years. Under IRC §673, this trust is treated
as a grantor trust because:
A. The grantor retained a reversionary interest exceeding 5% of trust value
B. The grantor retained an interest for a period exceeding 5 years
C. The grantor retained an interest for more than 5% of the trust term [CORRECT]
D. The grantor made a completed gift
Correct Answer: C
Rationale: IRC §673(a) treats a trust as a grantor trust if the grantor retains a reversionary interest
exceeding 5% of the value of the trust at the time of transfer, measured actuarially under IRS valuation
tables.
Q9: A simple trust has DNI of $40,000 and makes a required distribution of $40,000. The trust also pays
$2,000 in trustee fees from income. What is the trust's taxable income?
EXAM 2026/2027 | Cannon Trust School
Level II | Verified Q&A | Pass
Guaranteed - A+ Graded
Section 1 – Fiduciary Income Taxation (Questions 1–20)
Q1: A simple trust has distributable net income (DNI) of $50,000. The trustee distributes $40,000 to the
sole beneficiary as required by the trust instrument. How much of the distribution is taxable to the
beneficiary?
A. $0
B. $40,000 [CORRECT]
C. $50,000
D. $10,000
Correct Answer: B
Rationale: Beneficiaries of a simple trust are taxed on the lesser of DNI ($50,000) or the amount
distributed to them ($40,000). The trust deducts the same amount under IRC §651.
Q2: A trustee receives a $5,000 cash dividend from publicly traded stock held in the trust. Under the
Uniform Principal and Income Act (UPIA), how should this receipt be allocated?
A. Entirely to principal
B. Entirely to income [CORRECT]
C. 50% to principal, 50% to income
D. To principal, but an adjustment may be made for depreciation
Correct Answer: B
Rationale: Under UPIA §401, ordinary cash dividends are allocated entirely to trust income because they
represent a return on the investment during the accounting period, not a return of capital.
Q3: Which of the following types of trusts is taxed as a grantor trust under IRC §§671–679?
,A. A trust with an independent trustee who has sole distribution authority
B. A trust where the grantor retains the power to revoke the trust [CORRECT]
C. A charitable remainder trust (CRT)
D. A qualified spousal trust (QTIP) after the first spouse's death
Correct Answer: B
Rationale: IRC §676 treats a trust as a grantor trust if the grantor retains the power to revoke the trust,
meaning the grantor is taxed on all trust income as if it were received directly.
Q4: A complex trust has DNI of $30,000. The trustee makes discretionary distributions of $25,000 to
Beneficiary A and $20,000 to Beneficiary B. What is the total amount the trust can deduct for
distributions?
A. $45,000
B. $30,000 [CORRECT]
C. $25,000
D. $50,000
Correct Answer: B
Rationale: Under IRC §661, a complex trust's distribution deduction is limited to DNI ($30,000),
regardless of the total amount distributed, because DNI serves as the ceiling for both the trust's
deduction and beneficiaries' taxable income.
Q5: For tax year 2026, a non-grantor trust reaches the top 37% federal income tax bracket at what
amount of taxable income?
A. $609,350
B. $14,451 [CORRECT]
C. $231,250
D. $47,026
Correct Answer: B
Rationale: Trusts and estates are subject to highly compressed tax brackets under IRC §1(e); for 2026,
the 37% rate applies to trust taxable income exceeding $14,451, compared to $609,350 for married
individuals filing jointly.
Q6: Under the tier system for beneficiary taxation, a mandatory income distribution to a beneficiary is
classified as:
, A. Tier 2 distribution
B. Tier 1 distribution [CORRECT]
C. Tier 3 distribution
D. Excluded from DNI entirely
Correct Answer: B
Rationale: Under IRC §652 and §662, Tier 1 distributions consist of mandatory income distributions
required by the trust instrument, which are taxed to beneficiaries first before any Tier 2 (discretionary or
other corpus) distributions.
Q7: A trust earns $10,000 in tax-exempt municipal bond interest and $20,000 in taxable interest. The
trust instrument requires all income to be distributed currently. What is the trust's DNI?
A. $20,000
B. $30,000
C. $30,000, but the tax-exempt portion is excluded from taxable DNI [CORRECT]
D. $10,000
Correct Answer: C
Rationale: DNI includes tax-exempt income for allocation purposes under IRC §643(a), but the tax-
exempt portion carries out its character to the beneficiary and is excluded from the trust's taxable DNI
computation, resulting in no tax on that portion.
Q8: A grantor retains the right to receive trust income for 10 years. Under IRC §673, this trust is treated
as a grantor trust because:
A. The grantor retained a reversionary interest exceeding 5% of trust value
B. The grantor retained an interest for a period exceeding 5 years
C. The grantor retained an interest for more than 5% of the trust term [CORRECT]
D. The grantor made a completed gift
Correct Answer: C
Rationale: IRC §673(a) treats a trust as a grantor trust if the grantor retains a reversionary interest
exceeding 5% of the value of the trust at the time of transfer, measured actuarially under IRS valuation
tables.
Q9: A simple trust has DNI of $40,000 and makes a required distribution of $40,000. The trust also pays
$2,000 in trustee fees from income. What is the trust's taxable income?
