CTFA Trust Taxation and Accounting 3

Question 1

In trust accounting, what does the term 'accounting income' refer to?

Accepted Answer

Income determined by the trust document and applicable state principal and income law

Answer

Taxable income calculated under IRS rules for Form 1041

Answer

Total portfolio return including realized capital gains

Answer

Net asset value of trust assets at year-end

Question 2

Which type of trust is required to file Form 5227 with the IRS?

Accepted Answer

Charitable remainder trusts (CRTs) and charitable lead trusts (CLTs)

Answer

Simple trusts with income under $600

Answer

Grantor trusts with no separate filing requirement

Answer

Revocable living trusts during the grantor's lifetime

Question 3

For federal tax purposes, when does a revocable living trust become a separate taxable entity?

Accepted Answer

At the grantor's death

Answer

At the time the trust is created and funded

Answer

When the trust holds more than $600 in gross income

Answer

When the trustee is a professional corporate trustee

Question 4

What is a trustee's obligation regarding trust accounting records under the Uniform Trust Code?

Accepted Answer

Keep accurate records and provide beneficiaries with a trust accounting upon reasonable request

Answer

Provide annual accountings only to remainder beneficiaries, not income beneficiaries

Answer

File all trust records with the state probate court each year

Answer

Retain records for a minimum of 2 years after the trust terminates

Question 5

How is depreciation on trust-held real property allocated between trust income and principal under the Uniform Principal and Income Act?

Accepted Answer

The trustee must transfer a reasonable amount from income to a principal reserve for depreciation

Answer

Depreciation is an income deduction and reduces distributions to income beneficiaries directly

Answer

All depreciation is allocated to the remainder beneficiaries' interest in principal

Answer

Depreciation is ignored in trust accounting because real estate is not depleted

Question 6

What is the income tax treatment of a trust's capital gains when they are not distributed to beneficiaries?

Accepted Answer

Capital gains are taxed to the trust at trust income tax rates

Answer

Capital gains are always passed through to beneficiaries regardless of distribution

Answer

Capital gains are excluded from the trust's taxable income if held over one year

Answer

Capital gains reduce the trust's distributable net income (DNI) and are shared with beneficiaries