Test Bank For Corporate Partnership Estate and Gift Taxation
2021 1st Edition Pratt 9781617407901 | All Chapters with
Answers and Rationals
What are the two types of trust distributions? - ANSWER: There are mandatory distributions that
include payments of trust income, and there are discretionary distributions that are decided upon by
the trustee
What amount can you gift in one year without having to file a gift tax return and triggering a gift tax? -
ANSWER: 16,000 per donee per year (not per gift)
When do you have to pay taxes on gifts? - ANSWER: When you exceed your 12,000,000 lifetime limit
How do you treat gifts of more than 16,000 to a person? - ANSWER: They eat away at your lifetime
limit of 12,000,000. Only when you exceed the 12,000,000 are gifts taxes owed.
What is the tax rate for gift and estates? - ANSWER: There is a 40% tax on amounts exceeding the
12,000,000 lifetime limit
When must an estate pay taxes? - ANSWER: An estate must pay taxes before the assets are
distributed.
Who is liable for estate taxes owed? - ANSWER: The executor is liable to pay the estate taxes prior to
their distribution
True or false: a trust is a taxpayer - ANSWER: True
True or false: you must register with the Secretary of State to open a trust - ANSWER: False
When do you have to file an estate tax return? - ANSWER: if the estate owes money or a surviving
spouse wants portability at death
What does Portability mean? - ANSWER: when one spouse dies, they can transfer any unused portion
of their $12,000,000 estate/gift lifetime limit to the surviving spouse
When is the estate tax due? - ANSWER: It is due exactly nine months from the day of death, down to
the day
A woman passes away on January 18th, and her husband wants to file an estate tax return to get
portability. When must he file by? - ANSWER: October 18th (9 months later)
True or false: a trust subject to double taxation - ANSWER: False, a trust pays tax on the portion of
income items that are not distributed and the beneficiary pays tax on income items that are
distributed, never both.
What is the role of a trustee? - ANSWER: A trustee may buy or sell assets, use trust funds to pay taxes
owed by the trust, and files a trust tax return. Depending on the terms outlined by the trust, they may
have different limitations or abilities. They may charge a fee.
True or false: if all income items within a trust are paid out, the trust does not pay tax - ANSWER: True
, True or false: allocation of expense not defined by the terms of the trust vary state by state -
ANSWER: True
In general, how might a state allocate the following trust expenses not set out in the terms of the
trust: trustee fees, ordinary expenses to maintain an asset, asset additions/improvements, asset
manager salaries, payments of principal and payments of interest? - ANSWER: charge to income: 1/2
trustee fees, ordinary expenses to maintain assets, asset manager salaries, payments of interest
charge to principal (AKA corpus): 1/2 trustee fees, asset additions/improvements, payments of
principal
What are the dollar amounts of the short term exemptions for the following: estate, simple trust, and
complex trust? - ANSWER: (in order) 600, 300, 100
How are net operating losses of an asset held in trust treated? - ANSWER: They are stuck within the
trust, to be used to offset any future operating gains, until the termination of the trust in which
remaining losses may be transferred to the beneficiary
True or false: the distribution tier system applies to simple trusts - ANSWER: False; a simple trust only
has one tier of distributions which fall in the mandatory category
True or false: trust related expenses can be charged against principal/corpus or income - ANSWER:
True
What does the trust distribution tier system entail? - ANSWER: Mandatory distributions take up the
taxable amount determined by the DNI calculation first, then any remaining taxable portion is passed
on to the discretionary distributions (if any). Any income items not distributed will go on the tax
return of the trust itself.
What are the three mandatory rules that must be followed to have a simple trust? - ANSWER: the
trust may not donate to charity, the trust must pay out income every year, and principal may not be
invaded
What does it mean to invade principal? - ANSWER: In determining the type of trust, if at any point the
trustee may pay out portion of principal (corpus) it is considered to have invaded principal; thus, the
trust may not be classified as simple
True or false: the terms principal and corpus are used interchangeably when referring to trust tax -
ANSWER: True
What is the 65 day rule regarding trusts? - ANSWER: A trust has 65 days to report income and issue
1099s to the beneficiary/beneficiaries. A beneficiary may not demand payment until 65 days has
passed
What is the formula for calculating simple trust taxable income? - ANSWER: capital gains - 300
In regard to a simple trust, why are capital gains not distributed? - ANSWER: capital gains are
generated from buying and selling assets held in trust. These assets generate income which must be
paid out to the beneficiaries. Any gains on the sale of these assets are considered additions to
principal. Within a simple trust, a distribution of a capital gain is considered to be an invasion to
principal. Only the income items excluding capital gains may be distributed within a simple trust
What is the formula for determining net accounting income (NAI)? - ANSWER: all income items
excluding capital gains (dividends, interest, rent) less any expenses charged to income
What is the formula for determining distributable net income (DNI)? - ANSWER: net accounting
income less any charges to principal/corpus
2021 1st Edition Pratt 9781617407901 | All Chapters with
Answers and Rationals
What are the two types of trust distributions? - ANSWER: There are mandatory distributions that
include payments of trust income, and there are discretionary distributions that are decided upon by
the trustee
What amount can you gift in one year without having to file a gift tax return and triggering a gift tax? -
ANSWER: 16,000 per donee per year (not per gift)
When do you have to pay taxes on gifts? - ANSWER: When you exceed your 12,000,000 lifetime limit
How do you treat gifts of more than 16,000 to a person? - ANSWER: They eat away at your lifetime
limit of 12,000,000. Only when you exceed the 12,000,000 are gifts taxes owed.
What is the tax rate for gift and estates? - ANSWER: There is a 40% tax on amounts exceeding the
12,000,000 lifetime limit
When must an estate pay taxes? - ANSWER: An estate must pay taxes before the assets are
distributed.
Who is liable for estate taxes owed? - ANSWER: The executor is liable to pay the estate taxes prior to
their distribution
True or false: a trust is a taxpayer - ANSWER: True
True or false: you must register with the Secretary of State to open a trust - ANSWER: False
When do you have to file an estate tax return? - ANSWER: if the estate owes money or a surviving
spouse wants portability at death
What does Portability mean? - ANSWER: when one spouse dies, they can transfer any unused portion
of their $12,000,000 estate/gift lifetime limit to the surviving spouse
When is the estate tax due? - ANSWER: It is due exactly nine months from the day of death, down to
the day
A woman passes away on January 18th, and her husband wants to file an estate tax return to get
portability. When must he file by? - ANSWER: October 18th (9 months later)
True or false: a trust subject to double taxation - ANSWER: False, a trust pays tax on the portion of
income items that are not distributed and the beneficiary pays tax on income items that are
distributed, never both.
What is the role of a trustee? - ANSWER: A trustee may buy or sell assets, use trust funds to pay taxes
owed by the trust, and files a trust tax return. Depending on the terms outlined by the trust, they may
have different limitations or abilities. They may charge a fee.
True or false: if all income items within a trust are paid out, the trust does not pay tax - ANSWER: True
, True or false: allocation of expense not defined by the terms of the trust vary state by state -
ANSWER: True
In general, how might a state allocate the following trust expenses not set out in the terms of the
trust: trustee fees, ordinary expenses to maintain an asset, asset additions/improvements, asset
manager salaries, payments of principal and payments of interest? - ANSWER: charge to income: 1/2
trustee fees, ordinary expenses to maintain assets, asset manager salaries, payments of interest
charge to principal (AKA corpus): 1/2 trustee fees, asset additions/improvements, payments of
principal
What are the dollar amounts of the short term exemptions for the following: estate, simple trust, and
complex trust? - ANSWER: (in order) 600, 300, 100
How are net operating losses of an asset held in trust treated? - ANSWER: They are stuck within the
trust, to be used to offset any future operating gains, until the termination of the trust in which
remaining losses may be transferred to the beneficiary
True or false: the distribution tier system applies to simple trusts - ANSWER: False; a simple trust only
has one tier of distributions which fall in the mandatory category
True or false: trust related expenses can be charged against principal/corpus or income - ANSWER:
True
What does the trust distribution tier system entail? - ANSWER: Mandatory distributions take up the
taxable amount determined by the DNI calculation first, then any remaining taxable portion is passed
on to the discretionary distributions (if any). Any income items not distributed will go on the tax
return of the trust itself.
What are the three mandatory rules that must be followed to have a simple trust? - ANSWER: the
trust may not donate to charity, the trust must pay out income every year, and principal may not be
invaded
What does it mean to invade principal? - ANSWER: In determining the type of trust, if at any point the
trustee may pay out portion of principal (corpus) it is considered to have invaded principal; thus, the
trust may not be classified as simple
True or false: the terms principal and corpus are used interchangeably when referring to trust tax -
ANSWER: True
What is the 65 day rule regarding trusts? - ANSWER: A trust has 65 days to report income and issue
1099s to the beneficiary/beneficiaries. A beneficiary may not demand payment until 65 days has
passed
What is the formula for calculating simple trust taxable income? - ANSWER: capital gains - 300
In regard to a simple trust, why are capital gains not distributed? - ANSWER: capital gains are
generated from buying and selling assets held in trust. These assets generate income which must be
paid out to the beneficiaries. Any gains on the sale of these assets are considered additions to
principal. Within a simple trust, a distribution of a capital gain is considered to be an invasion to
principal. Only the income items excluding capital gains may be distributed within a simple trust
What is the formula for determining net accounting income (NAI)? - ANSWER: all income items
excluding capital gains (dividends, interest, rent) less any expenses charged to income
What is the formula for determining distributable net income (DNI)? - ANSWER: net accounting
income less any charges to principal/corpus
