CTFA Trust Taxation and Accounting 2

Question 1

Under the principal and income rules, how are stock dividends typically allocated between income and principal in a trust?

Accepted Answer

Cash dividends are income; stock dividends are principal

Answer

Under the Uniform Principal and Income Act, cash dividends are allocated to income while stock dividends and stock splits are allocated to principal.

Question 2

What is the purpose of a unitrust conversion in a traditional income trust?

Accepted Answer

To pay beneficiaries a fixed percentage of trust assets annually instead of actual accounting income

Answer

A unitrust conversion replaces the trust's accounting income with a set percentage of the trust's value (e.g., 3–5%), aligning distributions with total return investing.

Question 3

Which IRS form do trust beneficiaries receive to report their share of trust income?

Accepted Answer

Schedule K-1 (Form 1041)

Answer

Schedule K-1 (Form 1041) reports each beneficiary's allocable share of trust income, deductions, and credits that must be included in their personal tax return.

Question 4

A charitable remainder trust (CRT) provides which primary tax benefit to the donor at the time of contribution?

Accepted Answer

A partial charitable income tax deduction based on the present value of the remainder interest

Answer

The donor receives an income tax deduction equal to the actuarial present value of the remainder interest that will pass to the charity at the trust's termination.

Question 5

Under IRC Section 642(c), charitable deductions for trusts differ from individual charitable deductions in which way?

Accepted Answer

Trust charitable deductions are limited to amounts actually paid from gross income pursuant to the trust instrument

Answer

Under IRC Section 642(c), a trust may deduct amounts paid for charitable purposes only if the trust document specifically authorizes charitable distributions from gross income.

CTFA - Certified Trust and Fiduciary Advisor Practice Test

CTFA - Certified Trust and Fiduciary Advisor Practice Test

CTFA Trust Taxation and Accounting 2