tax problems - questin and answer ,.,. ch 28

Ch28 DISCUSSION QUESTIONS

1. LO.1 A local bank has asked you to speak at its Building Personal Wealth Conference on the topic of “What Should Your Trust Do for You?” Develop at least four PowerPoint slides, each one listing a function that a trust might be able to accomplish for an individual who has more than a modest level of financial resources.

2. LO.1 Trusts and estates are separate tax and legal entities in which specialized management is provided for the financial and other affairs of one or more individuals. List the parties who must be identified when a trust is created, and describe the responsibilities of each. Do the same for an estate.

3. LO.1 Define the following terms.
a. Income interest.
b. Remainder interest.
c. Reversionary interest.
d. Life tenant.
e. Term certain.

4. LO.1 At a financial planning conference on the tax-effective use of trusts, a session is devoted to the use of simple trusts and complex trusts. How does the tax professional know whether a trust is simple or complex? How often is this determination made?

5. LO.1 In general terms, describe how the following entities are subject to the Federal income tax. (Answer only for the entity, not for its owners, beneficiaries, etc.)
a. C corporations (Subchapter C).
b. Partnerships (Subchapter K).
c. S corporations (Subchapter S).
d. Trusts and estates (Subchapter J).

6. LO.1 Your college’s accounting group has asked you to give a 10-minute speech titled “Trusts, Estates, and the AMT.” The audience will be students who have completed at least one course concerning Federal income taxation. Develop a brief outline for your remarks.

7. LO.1 Create a fact pattern that illustrates each of the following tax situations. Be specific.
a. A simple trust.
b. A complex trust with a $300 personal exemption.
c. A complex trust with a $100 personal exemption.

8. LO.2 Using Figure 28.2 as a guide, describe the computation of a fiduciary entity’s accounting income, taxable income, and distributable net income.

9. LO.2 The Liu Trust is short of cash. It is required to distribute $100,000 to Yang every year, and that payment is due in six weeks. In its asset corpus, Liu holds a number of investments that are valued at $100,000. One of them is a plot of land with a tax basis to the trust of $80,000. Assuming that the trust agreement allows, what are the Federal income tax consequences if Liu distributes this land to Yang?

10. LO.2 In its first tax year, the Vasquez Estate generated $50,000 of taxable interest income and $30,000 of tax-exempt interest income. It paid fiduciary fees of $8,000. The estate is subject to a 35% marginal estate tax rate and a 40% marginal income tax rate.
How should the executor assign the deductions for the payment of the fees?

11. LO.2 The Sterling Trust owns a business and generated $100,000 in depreciation deductions for the tax year. Mona is one of the income beneficiaries of the entity. Given the following information, can Mona deduct any of the Sterling depreciation on her
Form 1040? If so, how much is her deduction?
Sterling’s taxable income from the business $ 800,000
Sterling’s gross income from the business 4,000,000
Mona’s share of trust accounting income 500,000
Total trust accounting income 2,500,000
Mona’s share of distributable net income 1,200,000
Total distributable net income 1,600,000

12. LO.2 In 2013, the Helpful Trust agreed to make a $50,000 contribution to Local Soup
Kitchen, a charitable organization. Helpful’s board agreed to the gift at a November 2013 meeting, but the check was not issued until February 20, 2014 (i.e., during the next tax year).
a. Can the trust claim a charitable contribution deduction? If so, describe how Helpful should treat its gift.
b. Would the answer to part (a) change if the check was issued on May 1, 2014? If so, how?

13. LO.3 One of the key concepts in fiduciary income taxation is that of distributable net income (DNI). List the major functions of DNI on one PowerPoint slide, with no more than five bullets, to present to your classmates as part of the discussion of this chapter of the text. Just review the uses of DNI in Subchapter J, and do not discuss its computation.

14. LO.3 Use the following chart to indicate whether each of the indicated items is included in distributable net income (DNI).
Fiduciary Entity Item Included in DNI?
Taxable interest income
Tax-exempt interest income
Capital gain allocable to corpus

15. LO.3 The Flan Trust is scheduled to terminate in two years, when Amy Flan reaches age 30. Several years ago, the trust operated a business that generated a sizable NOL carryforward that the trust has not been able to use. In addition, due to a bearish stock market, the value of the entity’s investment portfolio has declined 15% from its purchase price. What issues must you consider in advising Amy and the corporate trustee?

16. LO.1, 4 The Strauss Trust must file a Form 1041 for the first time, because it has recognized about $18,000 of gross income. Corpus assets are transferred to the trust on August

30. Considering only the Federal income tax effects of the creation of Strauss:
a. What tax year should the trust select?
b. Where should the completed Form 1041 be sent?

17. LO.4 For tax planning purposes, should an estate or a trust adopt a calendar or a fiscal tax year? Why? In no more than four PowerPoint slides, describe the rules that apply to fiduciary tax years. Explain how an entity could use the choice of tax year as an effective tax planning technique.

18. LO.4 Comment on the following items relative to tax planning strategies of a fiduciary entity.
a. To reduce taxes for a typical family, should income be shifted to a trust or from a trust? Why?
b. From a tax planning standpoint, who should invest in tax-exempt bonds, the trust or its beneficiaries?
c. To reduce overall taxes, should a high-income, wealthy beneficiary be assigned to the first or second tier of trust distributions? Why?
d. To minimize taxes, how should a trust treat the distribution of an in-kind asset?