Lesson 4 Tax 507

Writing Assignments

1. Sarah Settlor created an irrevocable trust that provided that all income is required to be distributed in equal shares to her two children Steven and Stephanie. The trust earned $200,000 in dividend income and 100,000 in tax-exempt interest for the year. It had $9,000 in expenses allocated to income by the trust instrument and state law. Calculate (1) the DNI for trust, (2) the distribution deduction, and (3) the amount and character of income that the beneficiaries received for the tax year.

2. Gertrude Grantor created an irrevocable trust for the benefit of her two children, Gerald and Geraldine, and Momandapplepie, a qualified charity. Assume that it is not a grantor trust and no income has been accumulated prior to this year. The trust provides that $25,000 must be distributed to Geraldine annually. The remainder of the income can be accumulated or paid out to Geraldine, Gerald, and Momandapplepie in such amounts as the Trustee, in its sole discretion deems appropriate. Corpus may be distributed under the discretionary provisions also. The trust had the following items of income and expense for the tax year:

Taxable Interest……………………………..$60,000

Tax-exempt interest…………………………$50,000

Long-term Capital Gain…………………….$25,000 Rent…………………………………………….…$40,000

Rental Expense………………………………..$15,000

Fiduciary Fees (allocated to corpus)…. $ 8,000

The Trustee made the following distributions at the close of the tax year:

Geraldine…………………..……$50,000

Gerald……………………….…….$30,000

Momandapplepie………………$20,000

Compute (1) the distribution deduction, (2) the charitable deduction, (3) the taxable income of the trust (it is not necessary to determine its tax liability), and (4) the character of the items distributed to the beneficiaries.