For exam and test prep, contact excellentessaywriters@gmail.com 14) The Tucker Trust was established six years ago. The trust is required to distribute all of the trust income at least annually to Betty for life. Capital gains are credited to principal. The current year results of the trust are as follows:
Dividends Rental income from land Tax-exempt interest Rental expenses Trustee fees Tax return preparation fee Capital gain on stock sale (stock purchased five years ago) Distribution of net accounting income Payment of estimated taxes
Amounts Allocable To Income Principal $15,000 2,500 7,500 500 $600 250 24,250 6,000 1,300
Compute (a) distributable net income (DNI), (b) the distribution deduction, (c) trust taxable income, and (d) Betty's reportable income and its classification. Charge all of the deductible expenses against rent income. Answer: (a) DNI = $23,650 ($15,000 + $2,500 + $7,500 - $500 - $250 - $600) (b) Distribution deduction = $16,330 [$23,650 - $7,320 (net tax-exempt income)]. Note the nondeductible trustee's fee is $180 [($7,500/$25,000) × $600]. (c) Trust taxable income = $5,700 ($6,000 - $300) (d) Betty's dividends = $15,000; Betty's rental income = $1,330 ($2,500 - $500 - $250 - $420 deductible trustee's fees); Betty's tax-exempt interest = $7,320 ($7,500 - $180) Page Ref.: C:14-17 through C:14-19 Objective: 5 15) Sukdev Basi funded an irrevocable simple trust in May Y1. The trust benefits Sukdev's son for life and grandson upon the son's death. One of the assets he transferred to the trust was Jetco stock, which had an FMV on the transfer date of $40,000. Sukdev's basis in the stock was $44,000, and he paid no gift tax on the transfer. The stock's value has dropped to $33,000, and the trustee thinks that now, October Y4, might be the time to sell the stock and take the loss deduction. For Y4, the trust will have $20,000 of income exclusive of any gain or loss. Sukdev's taxable income is approximately $15,000. What tax and nontax issues should the trustee consider concerning the possible sale of the stock? Answer: Sukdev transferred depreciated property to the trust, something he should not have done. If the trustee sells the Jetco stock at a loss, the trust's basis for determining loss will be $40,000, the stock's value on the date of the gift. (If the trustee sells the property at a gain, the basis will be Sukdev's basis of $44,000.) Thus, if the trust sells the stock for its current value of $33,000, it can recognize only $7,000 of loss (less than the economic loss). Because the trust must distribute all of its income, there will be no noncapital gain income against which to offset the capital loss. The only time the trust will get a tax benefit from the capital loss will be when it has capital gains. Any unused loss will pass through to the beneficiaries when the trust terminates in the distant future. Deferring the stock sale is not necessarily the best strategy, however, because there may be little expectation that the value of the stock will "recover," and, in fact, it could decline further. Page Ref.: C:14-16 Objective: 5 19 ..