21. A pro-rata portion of estate/trust deductions
a. need not be allocated to tax exempt income.
b. is allocated to tax exempt income to the extent any amount of the deductions remains after allocation to taxable income.
c. must be allocated to tax exempt income but only to the extent the deductions consist of fiduciary/attorney fees.
d. none of the above is correct.
22. During its taxable year the estate received $35,000 of interest and rental income. The personal representative had few deductions left to reduce the amount of taxable income for that year. The personal representative had made no distributions during the tax year that would have carried out DNI for taxation to the residuary beneficiaries at presumably much lower tax rates. Is the personal representative out of luck?
a. yes and the PR will have a lot of explaining to do to the residuary beneficiaries.
b. no because the estate residuary beneficiaries were already entitled to the income and will be taxed on it regardless of whether it’s actually distributed.
c. yes because an order from the probate court will be required to correct the error and the IRS is not bound by state court decisions.
d. no, not if the PR promptly makes sufficiently large estate distributions to the residuary beneficiaries and within 65 days after the end of the tax year.
23. The decedent’s will reads in part “I give, devise and bequeath to Mary a sum of money equal to the value of one-third of my residuary estate as finally determined.”
a. this is a devise of a specific sum of money and Mary will receive it from the estate income tax free.
b. this is not a devise of a specific sum of money and Mary will be taxed on it to the extent of her share of DNI.
c. satisfaction of this devise will always result in capital gain to the estate.
d. satisfaction of a devise so worded violates the rule against perpetuities.
24. Tom, Dick and Harry, estate residuary beneficiaries, each received a distribution of property from the estate consisting of 100 shares of XYZ, Inc. The stock constituted original estate inventory. The decedent has paid $1,000 for each 100 share lot and each 100 share lot was worth $2,000 when he died. Dick sold his 100 share lot for $1,500 two months after receiving it. Dick
a. realizes and recognizes a long term capital loss of $500.
b. realizes and recognizes a short term capital gain of $500.
c. realizes and recognizes a long term capital gain of $500.
d. realizes neither gain nor loss.
25. The decedent’s will states in part “I give, devise and bequeath the sum of $10,000 to Mary and the personal representative shall pay this bequest in five monthly installments of $2,000 each beginning on the date of my death. Knowing Mary is in desperate need of funds the personal representative pays Mary her bequest in one lump sum of $10,000 two months after the decedent’s death. Mary’s bequest
a. will be made to her income tax free.
b. will be subject to income tax depending on the amount of DNI.
c. must be returned to the personal representative for payment in installments.
d. is subject to the claims of the decedent’s creditors because it is payable in installments.