STEP Taxation of Trusts and Estates 2 — Questions and Answers
Question 1: Under IRC Section 664, what is the primary tax benefit of a Charitable Remainder Trust (CRT)?
- The donor receives an immediate charitable deduction based on the present value of the remainder interest (Correct answer)
- All income distributed to the non-charitable beneficiary is tax-free
- The trust pays no income tax on capital gains from donated appreciated assets
- The donor avoids gift tax on transfers to the CRT
Correct answer: The donor receives an immediate charitable deduction based on the present value of the remainder interest
A CRT donor receives an immediate charitable income tax deduction equal to the present value of the remainder interest that will eventually pass to the charitable beneficiary.
Question 2: A testamentary trust created under a decedent's will becomes irrevocable upon the decedent's death. For income tax purposes, the trust's taxable year:
- Must be a calendar year
- May be any fiscal year elected by the trustee (Correct answer)
- Follows the decedent's taxable year automatically
- Is determined by the probate court
Correct answer: May be any fiscal year elected by the trustee
Unlike estates, trusts generally must use a calendar year, but a testamentary trust that is part of an estate during estate administration may adopt a fiscal year.
Question 3: Which of the following correctly describes the 'throwback rules' as historically applied to foreign trusts?
- They impose a tax and interest charge on undistributed net income accumulated in prior years when finally distributed (Correct answer)
- They allow a trust to carry back losses to prior tax years
- They require trustees to distribute all income within 65 days of year-end
- They permit beneficiaries to treat distributions as capital gains rather than ordinary income
Correct answer: They impose a tax and interest charge on undistributed net income accumulated in prior years when finally distributed
The throwback rules tax accumulated income distributions from foreign trusts as if distributed in the year earned, plus an interest charge, preventing tax deferral.
Question 4: For estate tax purposes, the gross estate of a decedent includes life insurance proceeds if:
- The policy was purchased more than three years before death
- The decedent possessed any incidents of ownership at death (Correct answer)
- The named beneficiary is the decedent's spouse
- The policy has a cash surrender value exceeding $50,000
Correct answer: The decedent possessed any incidents of ownership at death
Under IRC Section 2042, life insurance proceeds are included in the gross estate if the decedent held any incidents of ownership, such as the right to change beneficiaries or borrow against the policy.
Question 5: A trustee of a complex trust elects to treat a distribution made within 65 days after year-end as paid in the prior tax year. This election is made under:
- IRC Section 645
- IRC Section 663(b) (Correct answer)
- IRC Section 642(c)
- IRC Section 651(a)
Correct answer: IRC Section 663(b)
IRC Section 663(b) allows trustees of complex trusts to elect to treat distributions made within 65 days after the close of the tax year as made on the last day of that tax year.
Question 6: When computing the income distribution deduction (IDD) for a simple trust, which amount controls—Distributable Net Income (DNI) or the amount actually distributed?
- Always DNI regardless of actual distributions
- The lesser of DNI or the amount required to be distributed currently (Correct answer)
- The greater of DNI or actual distributions
- The amount actually distributed regardless of DNI
Correct answer: The lesser of DNI or the amount required to be distributed currently
For a simple trust, the income distribution deduction is limited to the lesser of DNI or the amount required to be distributed currently under the trust instrument.
Question 7: Under the Uniform Principal and Income Act, trustee's fees are typically allocated:
- Entirely to principal
- Entirely to income
- Half to income and half to principal (Correct answer)
- Based on the trustee's discretion as to benefit received
Correct answer: Half to income and half to principal
Under the Uniform Principal and Income Act, trustee's fees are generally allocated one-half to income and one-half to principal unless the governing instrument specifies otherwise.
STEP Taxation of Trusts and Estates 2
Under IRC Section 664, what is the primary tax benefit of a Charitable Remainder Trust (CRT)?