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Taxable income to Smith, Jones, Smith and Earl Litt

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1. What three functions does distributable net income serve in fiduciary taxation?

2. What problem does the separate share rule alleviate?

3. Beneficiaries of estates and complex trusts are subject to the tier system of taxation.
Explain what is meant by a first- and second- tier beneficiary.

4. The trust instrument requires the trustee to distribute $40,000 annually to Carl Smith, the grantor's son. Any residual income may be distributed or accumulated for Bob Jones, Sam Smith, Earl Litt, and Carl Smith in the trustee's discretion. In the current year, the trust has distributable net income of $100,080 in domestic dividends. The trustee distributes $40,000 of income to Carl Smith. Next, he distributes $30,000 to Bob Jones, $20,000 each to Sam Smith and Earl Litt, and an additional $15,000 to Carl Smith. The trust does not have any undistributed net income from previous years.

Required:

How much of the distributions are taxable income to Carl Smith, Bob Jones,
Sam Smith, and Earl Litt?

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Solution Summary

Taxable income to Smith, Jones, Smith and Earl Litt are examined.

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ANSWERS

Question 1
1. Establishes the maximum income distribution deduction the trust may receive
2. Establishes the maximum amount of annual trust income that is taxable to the beneficiaries
3. The character of the ...

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