CES Taxation of Estates & Trusts 2 — Questions and Answers
Question 1: Which IRS form must an estate file to report income earned after the decedent's death?
- Form 1040
- Form 1041 (Correct answer)
- Form 706
- Form 709
Correct answer: Form 1041
Form 1041 (U.S. Income Tax Return for Estates and Trusts) reports income earned by an estate or trust after the decedent's death.
Question 2: What is the maximum estate tax rate under current federal law?
- 35%
- 40% (Correct answer)
- 45%
- 55%
Correct answer: 40%
The federal estate tax rate is a flat 40% on the taxable estate value exceeding the applicable exclusion amount.
Question 3: A trust distributes $20,000 of DNI to its sole beneficiary. How much income must the beneficiary report?
- $0 — trusts pay all tax
- $10,000
- $20,000 (Correct answer)
- $20,000 less the trust's 20% deduction
Correct answer: $20,000
Under the conduit principle, distributions carry out DNI to beneficiaries dollar-for-dollar, so the beneficiary reports the full $20,000.
Question 4: Which trust is treated as a 'grantor trust' for income tax purposes when the grantor retains the power to revoke?
- Irrevocable life insurance trust
- Qualified personal residence trust
- Revocable living trust (Correct answer)
- Charitable remainder unitrust
Correct answer: Revocable living trust
A revocable living trust is a grantor trust because the grantor retains control, so all trust income is reported on the grantor's personal return.
Question 5: For estate tax purposes, what does the 'gross estate' include?
- Only probate assets
- Only assets titled in the decedent's name
- All assets in which the decedent had an includible interest at death (Correct answer)
- Only assets passing under the will
Correct answer: All assets in which the decedent had an includible interest at death
The gross estate under IRC §2031 includes probate and non-probate assets in which the decedent held an includible interest, such as life insurance and retirement accounts.
Question 6: An estate elects the alternate valuation date. What is the maximum allowable period after the date of death?
- 3 months
- 6 months (Correct answer)
- 9 months
- 12 months
Correct answer: 6 months
IRC §2032 permits estates to elect an alternate valuation date of six months after the date of death if it reduces both the gross estate and estate tax.
Question 7: Which deduction reduces a decedent's gross estate for debts owed at the time of death?
- Charitable deduction
- Marital deduction
- Claims against the estate deduction (Correct answer)
- State death tax deduction
Correct answer: Claims against the estate deduction
IRC §2053 allows deductions for funeral expenses, administration expenses, and claims against the estate, including debts the decedent owed at death.
