CES Documentation & Legal Requirements 3

Question 1

Which IRS form must a trustee file annually for a domestic trust that has taxable income or gross income of $600 or more?

Accepted Answer

Form 1041

Answer

Form 1041 (U.S. Income Tax Return for Estates and Trusts) is the annual income tax return required for domestic trusts and decedents' estates.

Question 2

A decedent's estate includes a farm valued at $8 million. Which provision may allow the executor to value the farm based on its agricultural use rather than highest and best use?

Accepted Answer

IRC Section 2032A Special Use Valuation

Answer

IRC Section 2032A permits qualifying real property used in farming or a closely-held business to be valued at its current use rather than fair market value, reducing estate tax.

Question 3

What document must a trustee provide to trust beneficiaries that details income, deductions, and distributions allocable to each beneficiary for federal income tax purposes?

Accepted Answer

Schedule K-1 (Form 1041)

Answer

Schedule K-1 (Form 1041) reports each beneficiary's share of the trust's income, deductions, and credits so beneficiaries can report them on their individual returns.

Question 4

Under the Uniform Prudent Investor Act, what is the primary duty of a trustee when setting investment policy?

Accepted Answer

Diversify investments and balance interests of all beneficiaries

Answer

UPIA requires trustees to diversify trust investments and to balance the competing interests of current income beneficiaries and remainder beneficiaries within an overall investment strategy.

Question 5

A grantor retains the right to revoke a trust. Under the grantor trust rules, who is taxed on the trust's income?

Accepted Answer

The grantor

Answer

Because the grantor holds the power to revoke the trust, IRC grantor trust rules treat the grantor as the owner of the trust assets, making the grantor responsible for income tax.

(CES) Certified Estate and Trust Specialist Practice Test

(CES) Certified Estate and Trust Specialist Practice Test

CES Documentation & Legal Requirements 3