Calculating Fiduciary Accounting Income for Trusts: Interpreting Operating Documents, Applying UPIA and State Law

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1 FOR LIVE PROGRAM ONLY Calculating Fiduciary Accounting Income for Trusts: Interpreting Operating Documents, Applying UPIA and State Law Reconciling FAI to DNI and Trust Taxable Income, Avoiding Tax and Beneficiary Challenges TUESDAY, JUNE, 0, :00-:0 pm Eastern IMPORTANT INFORMATION FOR THE LIVE PROGRAM This program is approved for CPE credit hours. To earn credit you must: Participate in the program on your own computer connection (no sharing) if you need to register additional people, please call customer service at x (or 0-- x). Strafford accepts American Express, Visa, MasterCard, Discover. Listen on-line via your computer speakers. Respond to five prompts during the program plus a single verification code. You will have to write down only the final verification code on the attestation form, which will be ed to registered attendees. To earn full credit, you must remain connected for the entire program. WHO TO CONTACT DURING THE LIVE EVENT For Additional Registrations: -Call Strafford Customer Service x (or 0-- x) For Assistance During the Live Program: -On the web, use the chat box at the bottom left of the screen If you get disconnected during the program, you can simply log in using your original instructions and PIN.

2 LAW OFFICES OF SANGER & MANES, LLP SUITE B- 00 SOUTH FARRELL DRIVE PALM SPRINGS, CALIFORNIA - Internet: hsanger@sangerlaw.com Howard L. Sanger, Esq. Certified Tax Specialist (State Bar of California Board of Legal Specialization) Christopher S. Manes, Esq. Strafford Presentation Calculating Fiduciary Accounting Income For Trusts Interpreting Operating Documents, Applying UPIA and State Law June, 0 Trustees Can t Count Telephone: (0) 0- Fax: (0) 0-0 By Howard L. Sanger 0 Basic Theory Of Principal & Income Accounting. P&I Basic Concept: Slicing & Dicing.. Vertical Slices: TIC; JTROS; CP [Chart #] Remainders.. Horizontal Slices: Leaseholds; Life Estates; Term For Years (QPRT; CRT);.. Different Owners: Proprietors; Corporations; Partnerships; Trusts [Chart #] 0. Cash Basis Accounting. Terminology... Classify or Define: Refers to the characterization of an item as either Principal or Income... Allocation: refers to the assignment of a Principal or Income item between successive beneficiary interests (i.e. to a specific gift bene; to a current income interest; to a successor income interest; to a remainder interest); blended family conflict situations [Chart #]. Principal & Income Law: Default Statute; also check the language of the governing document, which often contains language that provides guidance to the fiduciary regarding Principal & Income classification issues (NIMCRUT).. California Law Duty To Account: Probate Code 0 REQUIRES trustees to account to beneficiaries: p:\howard\speeches hls\straffod june 0 speech --- pdf wo.docx# File #S Jun- : PM Updated--

3 Strafford Fiduciary Accounting Program June, 0 Page of At least annually.. At the termination of a trust.. When there is a change of trustees. Federal Income Tax Return Duty To Account Form [Chart #]. Use Of Computer Programs To Prepare Fiduciary Accounting Schedules:.. Using a dedicated fiduciary accounting program allows users to enter a transaction one time and have that single transaction populate all relevant schedules... It is much easier to produce a fiduciary accounting using a dedicated fiduciary accounting program than to produce a fiduciary accounting using a spreadsheet or Quickbooks.. Purpose Of Fiduciary Accounting:.. Court s Purpose: no theft; no malfeasance, no obvious breaches of fiduciary duties; surface level review; historically, no careful scrutiny of Principal & Income accounting issues. To summarize, the court looks to protect the interest of the beneficiaries as a group (i.e., no theft, malfeasance, obvious breach of fiduciary duty), not to protect the interests of each individual beneficiary with regard to each individual beneficiary s rights as to the allocation of principal and income; property funding of subtrusts... Allows Beneficiaries To Assess Performance Of Fiduciary. Fiduciary accounting also allows beneficiaries to assess how the fiduciary has discharged his duties (i.e., fiduciary accounting is a performance accounting ).. Accountings = Insurance For Fiduciary:.. Statutory Period to Challenge Fiduciary Accounting: years. (Probate Code 0(a)()).. Can Fiduciary Shorten the -Year Period?... Option # To Shorten -Year Period: To 0 days if trust contains Probate Code exculpatory language.... Option # To Shorten -Year Period: If fiduciary filed accounting with court and secured court order approving the accounting... Accounting must adequately disclose the existence of a claim against fiduciary for breach of trust... Send to beneficiary via Certified Mail/Return Receipt Request to have evidence the beneficiary in fact received the accounting. p:\howard\speeches hls\straffod june 0 speech --- pdf wo.docx# File #S Last Updated --0

4 Strafford Fiduciary Accounting Program June, 0 Page of. Court Accountings Form: Look at Summary Schedule filed with court... Charges: schedule... Property on Hand at beginning of account (or inventories) 0... Additional Property Received (or Supplemental Inventories) schedule. Avoid reporting later discovered assets as receipts.... Receipts schedule.... Gains on Sale or Other Disposition schedule.... Net income from trade or business schedule.. Credits:... Disbursements schedule.... Losses on Sale or Other Disposition schedule.... Net loss from trade or business schedule.... Distributions schedule.... Property on hand at close of account schedule can be helpful to segregate the assets on hand between (a) Principal assets on hand, and (b) Income assets on hand... Probate Code Additional Required Schedules. Two Buckets: Income Cash & Principal Cash [Chart #]. Reasons for P&I Accountings:.. Beneficiaries: P&I scrutiny; blended families.. Tax Return: Form, page, line Total Income versus page, Schedule B, line Accounting Income also applies to Schedule B, line.. Carry Value vs. FMV vs. Tax Basis:.. Tax Accounting: Adjusted tax basis... Fiduciary Accounting:... Carry Value... FMV p:\howard\speeches hls\straffod june 0 speech --- pdf wo.docx# File #S Last Updated --0

5 Strafford Fiduciary Accounting Program June, 0 Page of Why adjust carry value? P&I GENERAL: IRC INCOME VS. P&I FIDUCIARY INCOME. Facts #: (P&I): H died. He was survived by his second wife, W, and two children from his first marriage. It took one year to probate H's estate. During that year, H's estate had the following income and expenses: Income: Interest Income $0,000 Rent Income $0,000 Expenses: Administration Expenses $,000 Depreciation $0,000 Upon completing the probate, the Executor distributed H's assets as follows: i) $,000 specific cash gift to H's uncle ii) Apartment building specific gift to H's brother iii) The residuary in trust. The residuary trust gift provides % to H's children outright; % to a QTIP testamentary trust The testamentary trust provides for a typical QTIP arrangement: all trust income goes to W. On W's death, the remainder goes to H's children from his first marriage... Question #: During the one year probate administration period, what is the estate's Form taxable income (assume no distribution deduction; disregard exemption)?.. Question #: What is the estate's "net income" for principal and income ("P&I") purposes? P.C. 0; UPAIA 0 () and (b)(); UPAIA 0 (). P&I SPECIFIC GIFTS Question #: When the estate distributes $,000 to H's uncle, must the estate pay the uncle (i) $,000 or (ii) $,000 plus the interest earned on $,000 during the one year of probate administration? Would your answer be different if the $,000 were distributed more than one year after H's death? P.C. 00; P.C. 0(b); UPAIA 0... Question #: Instead of funding a $,000 specific gift to H's uncle, H's will provides for a pecuniary formula lead bypass trust of $,000,000. The estate funds the $,000,000 pecuniary lead bypass trust two years after H's DOD. Is interest owed on the $,000,000 allocated to the bypass trust? P.C. 00; P.C. 0(b))... Question #: What rate of interest must the estate pay? P.C. 00. p:\howard\speeches hls\straffod june 0 speech --- pdf wo.docx# File #S Last Updated --0

6 Strafford Fiduciary Accounting Program June, 0 Page of.. Question #: Assume it takes two years to distribute the apartment building specific gift to H's brother. Must the estate also distribute to the brother interest on the value of the apartment building for the final year of the two year probate delay? P.C. 00(a)... Question #: Assume the apartment building earned $0,000 of rental income after the DOD, during the probate/postdeath trust administration. When the apartment building is distributed to H's brother, must the estate also distribute to the brother the $0,000 of rental income received/earned during probate administration? P.C. 00(b); 0(a)(); UPAIA 0... Question #: Same facts as in Question #, but of the $0,000 rent income received during probate administration, $0,000 accrued prior to the DOD. Does the estate distribute (a) $0,000 rent income to the brother as the specific donee of the apartment building, or (b) $0,000 to the residue beneficiary, as $0,000 of the rent was earned prior to the DOD, and $0,000 to the brother, as $0,000 of the rent accrued subsequent to the DOD? P.C. 0(a)(). But see 00(b). UPAIA 0.. Facts #: Prior to distributing the apartment building to H s brother, during the probate period, the fiduciary 0 (a) (b) received (i) $,000 of gross apartment rent income, and (ii) $,000 of dividend income from the balance of the estate's securities; paid (i) $,000 of expenses directly related to the apartment building, and (ii) $,000 of general estate administration expenses, i.e. legal and accounting fees, fiduciary fees, etc. Assume the apartment building represented % of the total value of all probate assets. The % balance of the probate assets took the form of NYSE securities... Question #: When the fiduciary distributes the apartment building to H's brother, how much additional income does the fiduciary distribute to the brother: 0 (a) (b) $K [i.e. $K minus the sum of (i) $K of apartment expenses, plus (ii) $K (i.e. ¼ of the $K) of general estate expenses]; or $K (i.e. $K minus just the apartment's direct expenses of $K)? In other words, for P&I accounting purposes, does the fiduciary charge a portion of the estate's general administration expenses against the income of specifically gifted assets? P.C. 0(a)(); 00(b). UPAIA 0.. Facts #: Same facts as prior hypo, except the expenses attributable to the specifically gifted apartment building, exceeded the apartment gross rent income, by $,000 each year. p:\howard\speeches hls\straffod june 0 speech --- pdf wo.docx# File #S Last Updated --0

7 Strafford Fiduciary Accounting Program June, 0 Page of Question #: Did the fiduciary (a) have to pay the $,000 of expenses that exceeded the building s income, or (b) could the fiduciary have insisted that H s brother who will inherit the apartment building, pay the $,000 of expenses not covered by the rent income? P.C. 00(c).. Question #: If the fiduciary distributed the apartment building to H s brother within one year of H s death, can the fiduciary withhold or lien the apartment building for the $,000 of expenses that exceeded the building s rent income? P.C. 00(c)... Question #: If the fiduciary distributed the apartment building to H s brother more than one year after H s death, can the fiduciary withhold or lien the distributed apartment building for the $,000 of expenses that exceeded the building s rent incomeafter the first year? P.C. 00(c); UPAIA 0 ().. Facts #: The fiduciary distributes the apartment building to H s brother two years after H s DOD. The net income attributable to the apartment totals $,000 as of the distribution. On the fiduciary s two Form tax returns, the fiduciary paid $,000 income taxes, of which $,000 was attributable to the apartment building s $,000 of net rent income... Question #: Does the fiduciary distribute to H s brother the apartment building plus (a) $,000, or (b) $,000, which is the $,000 minus the $,000 of income tax? In other words, who bears the $,000 income tax (i) H s brother, or (b) the residuary beneficiaries H s kids and the QTIP trust created for H s widow? 00(b); UPAIA 0 (). P&I Area # [How is income earned (a) during probate of an estate or (b) with a funded living trust, during the administration period, allocated where it is distributable (a) to a trust, or (b) to specific outright bequests, or (c) to pecuniary gifts, or (d) the residue? 0 and. Family Allowance Issue Second Marriage Situations. Facts #: H died while married to W#. At death H owned a $,000,000 interest bearing savings account, paying % interest. H has children from his first marriage. H s estate plan provides a QTIP and a Bypass Trust for W#, with all trust income going to W#. When W# dies, the principal of the QTIP and Bypass Trust goes to H s children. During the postdeath trust administration period, prior to funding the QTIP and the Bypass Trust, the administrative trust earned $0,000 of interest, and paid W# a $0,000 family allowance... Question #: Is the $0,000 family allowance paid to the W# stepmother (a) an income expense that gets charged against the $0,000 of interest income otherwise payable to the stepmother, or (ii) a principal expense the reduces the $,000,000 of principal ultimately payable to H s children from his first marriage? In other words, does the p:\howard\speeches hls\straffod june 0 speech --- pdf wo.docx# File #S Last Updated --0

8 Strafford Fiduciary Accounting Program June, 0 Page of 0 0 family allowance reduce the income the stepmother gets, or the remainder gift that the children from the first marriage get? 0(c)(); UPAIA 0... Question #: Given the P&I treatment of family allowances, if you are advising W#, with respect to a family allowance, what do you advise her to do? Other Administration Period Expense Issues. Facts #: At the time H died, $,000 of rent was accrued but unpaid on the specific gift apartment building. The $,000 was received by H s estate 0 days after H died... Question #: Is the $,000 cash rent received (a) principal cash, or (b) income cash?.. Question #: Does the $,000 pre-death rent accrual go to (a) H s brother, the beneficiary of the specifically gifted apartment building, or (b) to the residuary trust established for H s children and H s wife? 0(a)() and 00(b); UPAIA 0 (). 0. Facts #: Following H s death, during the probate (or during the administrative trust period if H had a living trust), the fiduciary paid (a) $0 of legal fees, (b) $00 of CPA fees, (c) $00 of fiduciary fees, (d) $00 of other administration expenses, (e) $00 of interest on unpaid estate taxes. 0.. Question #: Does the fiduciary charge any portion of the above expenses against the income or principal of the apartment building specifically gift to H s brother? P.C. 00(b) 0(a)(); UPAIA 0 (). 0.. Question #: Does the fiduciary charge any portion of the above expenses against the $,000 pecuniary amount gift to the uncle? 0(b); UPAIA Question #0: Does the fiduciary charge any portion of the above expenses against the residuary gift to the testamentary trust? 0(c). Allocating Administration Period Income To Residuary Beneficiaries. Facts #: H died. After paying all administration expenses, the fiduciary is left with the residue assets. Applying the marital deduction fractional share formula clause to the residue, using date of death values, the trustee's "target" for (a) the QTIP trust is $,000,000, and (b) for the Bypass Trust is $,000,000. The QTIP benefits W#. The Bypass Trust benefits H's children from his first marriage. W# and her stepchildren do not get along. During the administration period, the trust produces net fiduciary income of $0,000. Both the QTIP and the Bypass trusts, are "simple" trusts that require the trustee to distribute all income currently. Assume QTIP Trust and the Bypass Trust had the following values: A B I&A/DOD Values At H s C Values Months Later When Adm done & Trustee p:\howard\speeches hls\straffod june 0 speech --- pdf wo.docx# File #S Last Updated --0

9 Strafford Fiduciary Accounting Program June, 0 Page of Death Plans To Distribute $0,000 Income Bypass Trust,000,000,000,000 QTIP Trust,000,000,000,000.. Question #: Fifteen months after the DOD, the trustee distributes the $0,000 of fiduciary income. Does the trustee distribute the $0,000 of fiduciary income (a) % to the Bypass Trust and 0% to the QTIP Trust; or (b) 0% to the Bypass Trust and 0% to the QTIP Trust? (a) and (c); UPAIA 0 ().. Facts #: Same facts as above, except the Trust owned Blackacre and Whiteacre. At DOD, Blackacre had an equity of $,000,000. Whiteacre had a $,000,000 equity. Per the formula clause, using DOD values, the Bypass Trust target amount equals $,000,000 and the QTIP Trust's target amount is $,000,000 (see Column B in the below table). Fifteen months after the DOD, the fiduciary, having completed the post death trust administration, funds the Bypass Trust and the QTIP Trust as shown in Column C in the below table. A B I&A/DOD Values At H s Death C Values Months Later When Adm done & Trustee Plans To Distribute $0,000 Income Bypass Trust,000,000,000,000 Equity ($M FMV minus $M TD) QTIP Trust,000,000,000,000 Equity ($M FMV minus $M TD) 0.. Question #: Does the trustee distribute the $0,000 of fiduciary income (a) % to the Bypass Trust and 0% to the QTIP Trust, using DOD values; or (b) 0% to Bypass Trust and 0% to QTIP Trust, using net date of distribution values? or (c) / to the Bypass Trust and / to the QTIP Trust, using gross date of distribution values? (a); UPAIA 0... Question #: On the distribution date months after the DOD, the fiduciary retains $0,000 of the $0,000 of fiduciary income. Twelve months later, when the gross values of the assets have changed, does the fiduciary distribute the retained $0,000 per (a) the assets FMV on the date the $0,000 was distributed, i.e. months after DOD per Column C in the above table, or (b) the assets' FMV months after the DOD when the fiduciary makes the p:\howard\speeches hls\straffod june 0 speech --- pdf wo.docx# File #S Last Updated --0

10 Strafford Fiduciary Accounting Program June, 0 Page of second distribution of the $0,000 of fiduciary income previously retained? (b); UPAIA. P&I Area # [When an income interest in a trust BEGINS or ENDS, what property is principal that goes to the remaindermen, and what is income? PC and ] First Spouse (H) Dies Apportionment Issues Between Stepmother and H s Children. Facts #: (Apportionment When Decedent Dies Or Income Interest Begins; ): H died on January. W# is the beneficiary of her deceased H s estate plan that provides her with typical mandatory income distributions Bypass/QTIP trust arrangement. W# gets all the trusts income. The remainder beneficiaries are H s children from his first marriage. H s children get the principal of the Bypass and QTIP trusts when W#, their stepmother, dies. W s estate plan leaves everything to her children from her first marriage. H and W# s children despise one another. And, there is no love between W# and H s children from his first marriage (the remainder beneficiaries). In the eyes of H s children from his first marriage, W# is their greedy stepmother that rides a broom. 0 (a) (b) (c) H is owed unpaid periodic January rent of $0,000 due on January, four days before H s DOD. The $0,000 of rent is paid on January, five days after H s DOD. H owned IBM stock, which had declared a dividend prior to H s DOD, to shareholders of record prior to H s DOD, but which is payable after H s DOD; H s IBM dividend is $0,000, and it is paid after H s DOD. H is owed a big tax refund plus $0,000 of interest from the IRS. $0,000 of the interest had accrued at H s DOD. The IRS pays the $0,000 interest after H died. 0.. Question #: Is rent an income receipt or a principal receipt? ; UPAIA 0... Question #: Should the $0,000 income receipt of rent (for the month of January) due on January, prior to H s death, but received after his death on January, (a) be treated as principal and allocated to principal of the QTIP/Bypass Trusts (effectively treating the rent income receipt as a principal receipt, which will ultimately go H s children when W# dies, or p:\howard\speeches hls\straffod june 0 speech --- pdf wo.docx# File #S Last Updated --0

11 Strafford Fiduciary Accounting Program June, 0 Page of (b) be apportioned to W#, and immediately distributed to W# as FAI, with the result that the $0,000 will go to W# as a mandatory QTIP/Bypass income distribution, or to W# s children according to the terms of her will? (a); UPAIA 0. [Chart #] Question #: For three years after H s death, the QTIP and Bypass Trust continue to receive the $0,000/month rent and to distribute the $0,000 as FAI to W#. The tenant breaches the lease, stops paying rent. Four years of litigation ensues. Two years into the litigation, W# dies. Two years after W# dies, the trustee for the trust established for H s children from H s first marriage, settles the cases for $00,000, which is half of the unpaid rent. Does the $00,000 unpaid rent settlement received by the trustee four years after W# s DOD, get distributed (a) to W# s estate, or (b) to H s children from his first marriage, who are the income beneficiaries of the trust when the $00,000 rent settlement is received? (b).. Question #: A trust rents Blackacre for $,000/month for years. Upon signing the lease, the tenant pays the trust $0,000, to cover the first and last months rent, and a $,000 security deposit. Is the $0,000 receipt income or principal? ; UPAIA 0... Question #: Is the IBM dividend (a) an income receipt, or (b) a principal receipt? 0(b); UPAIA... Question #: Is the IBM dividend received after H s death, but which had a record date prior to H s death, (a) principal which will ultimately go to H s children as remaindermen, or (b) income payable to W# the income beneficiary, which will go to her children according to the terms of her will? (b) & (c); UPAIA 0... Question #0: Is "interest" received (a) an income receipt, or (b) a principal receipt? (a); UPAIA 0... Question #: Is the $0,000 of IRS interest received after H s death (a) income payable to W#? or (b) principal to be added to the Bypass/QTIP trusts for W#, which ultimately will go to H s children? or (c) partially principal and partially income? (b); UPAIA 0. Second Spouse (W#) Dies Apportionment Issues Between Stepmother s Children and H s Children. Facts #: (Undistributed Income; Apportionment When Income Interest Ends; ): Four years after H died, W# dies on January. A $0,000 periodic payment of rent was due to the Bypass/QTIP trusts as of January, five days prior to W# s DOD, and the QTIP/Bypass trusts received the $0,000 on January, the day before W# died. But the Trustees did not distribute the $0,000 out of the trusts before W# died. [Chart #] UPAIA 0... Question #: On what date did W# s income interest end? (d); p:\howard\speeches hls\straffod june 0 speech --- pdf wo.docx# File #S Last Updated --0

12 Strafford Fiduciary Accounting Program June, 0 Page of Question #: On what date does the income interest begin for H s children? (d) & (c); UPAIA 0... Question #: Does the trustee of the QTIP/Bypass Trusts distribute the $0,000 (a) to W# s children from her prior marriage per QTIP rules that require QTIP income pass to W# or to her estate, or (b) to H s kids, the remainder beneficiaries of the QTIP/Bypass Trusts, since the $0,000 did not get distributed prior to W s death? (b); UPAIA 0... Question #: Assume the $0,000 periodic rent payment due prior to W# s death, gets paid the day after W# died. Is the $0,000 income due W#, which will go to W#'s children per her will? (a) and (b); UPAIA 0.. Facts # -- Apportionment When Decedent Dies Or Income Interest Begins; : Five days before W# died, the QTIP/Bypass trust received bills for expenses properly chargeable against fiduciary income. The bills total $0,000, and reflect charges for services provided prior to W# s death. The Trustee paid the $0,000 of bills after W# s death... Question #: Should the trustee charge the $0,000 paid after W# s death, (a) against principal and thus against H s children as the remainder beneficiaries, or (b) against the deceased W# s income interest, thus reducing what W# s children from her first marriage will inherit?... Question #: Per (a) an expense accrued prior to W# s DOD, but paid after W# DOD, does not reduce W# s income, but gets charged against principal that goes to the remaindermen children from H s first marriage. What hanky panky can a Trustee do to either (a) hurt W#, or (b) hurt the remaindermen i.e. H s kids from his first marriage? P&I Area # [After an income interest begins and before it ends, how allocate receipts between income and principal?] Entity Income Issues Facts #: Trust owns a 0% partnership interest. The partnership issues a K- to the trust. The FMV of the partnership s assets is $,000,000. The adjusted inside basis of the partnership s assets equals $0,000. Assume the Trust s 0% outside partnership interest has a $00,000 FMV (i.e. 0% of $,000,000). The Trust s K- reports a $0,000 ordinary income allocation, and an $0,000 cash distribution... Question #: For fiduciary accounting purposes, does the Trust have income of (a) $0,000 or (b) $0,000? 0(b); UPAIA... Question #: For fiduciary accounting purposes, if the partnership distributed to the trust (a) $,000 of cash, and (b) equipment worth $,000, would the trust have $,000 of fiduciary income? 0(b) and (c)(). p:\howard\speeches hls\straffod june 0 speech --- pdf wo.docx# File #S Last Updated --0

13 Strafford Fiduciary Accounting Program June, 0 Page of Question #0: If the partnership made a $,000 cash distribution, would you report the $,000 as income because the $,000 cash distribution is less than % of the $00,000 FMV of the trust s partnership interest 0(c))... Question #: Assume the $,000 cash distribution traces to the sale of raw land owned by the partnership. Is the $,000 income because it totals less than % of the $00,000 FMV of the partnership interest, and thus is not a partial liquidation? 0(d)().. Facts #: A QTIP trust is a member of an LLC that owns a large apartment building. The apartment building has skyrocketed in value, and the LLC refi's the apartment building and distributes $00,000 to the QTIP Trust... Question #: Is the $00,000 refi cash distributed to the QTIP (a) fiduciary "income" the trustee distributes to the widow, W#, or (b) "principal", to be ultimately distributed to the QTIP remainder beneficiary children? 0(b). Facts #: The trust owns shares of a mutual fund. The mutual fund distributes $ to the trustee.... Question #: If the $ mutual fund distribution were a long term capital, is the $ (a) income distributable to W#, or (b) principal that will ultimately be distributed to the remainder beneficiaries, H s children from his first marriage? 0(c)()... Question #: If the $ mutual fund distribution represents $ of shortterm gains, and $ of long-term capital gains, of the mutual fund, is the $ (a) income distributable to W#? Or (b) principal? 0(c)()... Question #: If the trustee had instructed the mutual fund to reinvest the dividends to purchase additional shares of the mutual fund, so the $ is not distributed but instead $ of new stock certificates of the mutual fund are issued to the trustee, then is the $ (a) income distributable to W#, or (b) principal, or (c) not at all reflected on the trustee s principal and income accounting? 0. Schedule C Issues --. Facts #: Following the Trustor s death, by pour-over will, the Trustee receives assets worth $,000,000 composed of (a) blue chip securities that generate $00,000 of ordinary income annually, and (b) a sole proprietorship date garden farming business that generates $00,000 of ordinary losses annually. Trustor s surviving wife needs $00,000 annually to live... Question #: Since for income tax purposes, the sole proprietorship date garden business loss wipes out the securities income, what can you do to generate $00,000 of fiduciary income for the widow surviving spouse? (a).. Question #: Can the fiduciary treat the securities as a separate business? (c); UPAIA 0 (). p:\howard\speeches hls\straffod june 0 speech --- pdf wo.docx# File #S Last Updated --0

14 Strafford Fiduciary Accounting Program June, 0 Page of Question #: Can the fiduciary continue to use the same accounting method for the date garden business as did the deceased trustor?.. Question #: If the date garden produced $0,000 of net cash receipts, must that $0,000 be treated as fiduciary income? (b)... Question #0: If the date garden produced $0,000 of net cash receipts, and the fiduciary did not need to retain $0,000 of the net cash receipts for the date garden, does the fiduciary allocate the $0,000 to principal or to income in the trust s fiduciary accounting? (b)... Question #: If the trustee sells the date garden for $,000,000, of which $,000,000 represents payment for accounts receivable, is the $,000,000 treated as principal or as income? (b). Allocation Of Receipts During Administration Of Trust: Not Normally Apportioned: Article.. 0. Facts #: A trust owns an apartment building. A tenant loses his job and can t pay the rent. To avoid litigation, the trust agrees to release the tenant from his lease if the tenant pays the trust a $00 lease cancellation fee. 0.. Question #: Does the trustee report the $00 lease cancelation fee as principal or as income? ; UPAIA 0. Allocation Of Receipts Normally Apportioned: Article... Facts #: (Insubstantial Allocations): The trust has assets worth $,000,000, which include a working interest in an oil deal that pays the trust an annual royalty. Excluding the working interest annual oil royalty, the trust has $0,000/year of income. During the year, the trust receives net receipts from the working interest... Question #: How do you allocate to P & I the working interest net receipts if they total $0,000/year? (a)(); UPAIA... Question #: How do you allocate to P&I the working interest net receipts if they total $00? 0(a). Deferred Compensation/Annuities. Facts # -- Deferred Compensation & Non-MD FAI Rules: H died. H is survived by W#, and his children from his first marriage. H has a trust that provides that following H s death, the trust divides into a QTIP and Bypass Trust. The Bypass Trust beneficiaries are H s children from his prior marriage. W# is not a beneficiary of the Bypass Trust. The Bypass Trust requires all fiduciary income to go to H s children from his first marriage. At H s death, H has a $,000,000 non-qualified deferred compensation plan (i.e. a Rabbi Trust benefit; insurance commissions; Yankee/Jeter deferred baseball contract). The plan s death beneficiary is H s Bypass Trust. For IRC income tax purposes, the $,000,000 is ordinary income. p:\howard\speeches hls\straffod june 0 speech --- pdf wo.docx# File #S Last Updated --0

15 Strafford Fiduciary Accounting Program June, 0 Page of Question #: Assume (a) the $,000,000 must be paid over years; (b) per the terms of the non-qualified deferred compensation agreement, following H s death, the $,000,000 deferred compensation is paid to the Bypass Trust; (c) the payer characterizes the first year s $00,000 payment as including (i) $0,000 interest, and (ii) $0,000 of dividends. How much of the $00,000 is fiduciary income payable to H s children from the Bypass Trust, and how much is principal ultimately payable to H s children when they attain age 0? (b); UPAIA 0... Question #: Same facts as prior question, but the payer does not characterize the first year s $00,000 payment. The payer just issues a Form for $00,000 without any indication whether any of the $00,000 is interest, dividends, etc. How much of the $00,000 is fiduciary income payable to H s children from the Bypass Trust currently, and how much is principal ultimately payable to H s children at age 0? (c); UPAIA 0... Question #: Same $,000,000 deferred compensation, but no annual required payment. The $,000,000 is all due at the end of years. But, the employer voluntarily pays $00,000 in the current year. How much of the $00,000 is fiduciary income payable to H s kids, and how much is principal ultimately payable to H s children from his first marriage at age 0? (c); UPAIA 0... Question #: Assume the $,000,000 deferred compensation payment did not have to be made, but was paid as a single $,000,000 lump sum distribution following H s death, to the trust. How much of the $,000,000 LSD payment is fiduciary income payable to W#, and how much is principal, ultimately payable to H s children from his first marriage? (c); UPAIA 0... Question #: Would you change any of your answers to the above deferred compensation questions paid to the Bypass Trust, if the payments came from a qualified plan (pension or profit sharing) or from an IRA? (a)(); UPAIA 0.. Facts #0 -- A-Rod s Deferred Compensation & MD FAI Rules: Assume the same facts as in, but the $,000,000 is in an IRA, and the $00,000 annual payments must go the QTIP Trust; not to the Bypass Trust. To facilitate discussion, let s add some color by changing the facts slightly. H is the NY Yankee s B Alex Rodriguez. W# is Madonna. Alex died. Following his death, the Yankees must pay to the QTIP Trust established in Alex s estate plan for Madonna, $,000,000 annually for years... Question #0: During the first year following A-Rod s death, the IRA account statement shows internal income of $0,000. How much of the $00,000 payment to the QTIP Trust is fiduciary income payable by the QTIP to Madonna, and how much of the $00,000 paid by the IRA to the QTIP is principal, ultimately payable to A-Rod s children from his first marriage? (f); UPAIA 0... Question #: Same facts as., except the IRA brokerage account statement shows internal income of $00,000 for the year, but the IRA payment to the QTIP is $00,000. What amount of the $00,000 IRA payment to the QTIP, is fiduciary income that the QTIP must distribute to Madonna/W#? (f); UPAIA 0. p:\howard\speeches hls\straffod june 0 speech --- pdf wo.docx# File #S Last Updated --0

16 Strafford Fiduciary Accounting Program June, 0 Page of Question #: In the prior question, the deemed QTIP FAI is $00,000, but the IRA distribution received by the QTIP was only $00,000. All the other QTIP assets are principal. How does W# get $00K of FAI, if the QTIP trustee has only $00,000 of income? (f); UPAIA 0... Question #: Same facts as., except (a) the IRA brokerage account statement does NOT show internal income ; (b) the IRA brokerage account statement shows a $,000,000 ending balance as of the end of the IRA s FYE prior to the current P&I computation year. How much of the $00,000 payment to the QTIP Trust is fiduciary income payable to Madonna/W#, and how much is principal ultimately payable to A-Rod s children from his first marriage? (g); UPAIA 0... Question #: Same facts as., except the brokerage account statement does NOT show either (a) internal income earned on the brokerage account; or (b) the brokerage account statement ending balance for the computation year. How much of the $00,000 payment to the QTIP Trust is fiduciary income payable to W#, and how much is principal ultimately payable to A-Rod s children from his first marriage? (g); UPAIA 0.. Facts # -- Insurance Paid In Installments. PICK UP -- Assume an ILIT trust owned a $,000,000 life insurance policy on H. The ILIT says pay all income to W#; remainder to H s kids from his first marriage. H died. The ILIT trustee elected to take the $,000,000 over years, $00,000 annually. How much of the annual $00,000 life insurance installment does the trustee pay to W# because it s income, and how much of the $00,000 is principal to be distributed to the children remainder men when W# dies? (c).. Question #: Assume the trustee elected to take the $,000,000 in a single lump sum. How much of the $,000,000 does the ILIT trustee distribute to W#, as income, %? (c). Facts #: A trust receives a $0 royalty payment on account of the trust s interest in the Lipitor patent... Question #: Is the $0 "income" or "principal"? (b).. Facts #: A trust receives $,000,000 from a DBPP... Question #: Is the $,000,000 "principal" or "income"? (c).. Facts #: Trust owns Blackacre for years and earns nothing; Blackacre sits vacant.... Question #: Does the unproductive property rule create "income"?. Facts #: Trust owns an apartment building. The tax return reports $0,000 of depreciation annually. p:\howard\speeches hls\straffod june 0 speech --- pdf wo.docx# File #S Last Updated --0

17 Strafford Fiduciary Accounting Program June, 0 Page of.. Question #: For fiduciary accounting purposes, does the $0,000 get charged to "principal" or to "income"?.. Facts #: (Receipt from Estate/Other Trust): The Trust receives a $,000 distribution from another trust or an estate... Question #0: Is the trust s receipt of $,000 from another trust/estate, "principal" or "income"?. Cross. 0. Facts #: (Reimbursement): The Trust receives a $,000 reimbursement from Blue 0.. Question #: Is the $,000 "principal" or "income"? (c).. Facts #: Wall Street invents a new instrument, called the Sanger. The Sanger annually yields what Wall Street calls the SangBoom... Question #: For fiduciary accounting purposes, do you allocate the SangBoom to "income" or to "principal"? (a)(). P&I Area # [After an income interest begins and before it ends, how allocate disbursements between income and principal?] Facts #: How much of the below disbursements do you charge to income and to principal : Disbursements Income Principal a $0,000 Trustee Fee computed based on % of principal, incurred during period of administration trust (i.e. before funding the subtrusts)? 0(c)() b $0,000 Trustee Fee computed based on % of principal, incurred after administration ended and when the subtrusts are funded? 0(a);(a)() c $,000 of expenses incurred to prepare and file a court accounting. 0(b) d $,000 paid to an investment advisor. 0(a) e $00 of legal fees. 0 & f $,000 of premiums on policies insuring trust assets. 0(d) g $,000 of premium on a policy of title insurance. (a)() h $,000 of trustee fees incurred to prepare trust owned property for sale. (a)() i $,000 disbursed to pay the principal on a trust debt. (a)(); to pay the interest on a trust debt. 0(c) j $,000 of expenses paid in litigation to construe the trust instrument. (a)() p:\howard\speeches hls\straffod june 0 speech --- pdf wo.docx# File #S Last Updated --0

18 Strafford Fiduciary Accounting Program June, 0 Page of 0 0 k $0,000 estate tax. (a)() l $0,000 GSTT (a)() m $,000 of interest to IRS on late paid estate taxes. (a)() n $0,000 paid relating to environmental matters. (a)(). Facts #0 -- Apartment Building: The trust owns an apartment building. The monthly mortgage totals $,000, which is partly repayment of loan principal ($,000) and partly interest ($,000). The monthly apartment rent receipt income constitutes the sole source to pay the monthly mortgage. The annual apartment depreciation totals $0, Question #: Do you charge the monthly $,000 mortgage payment to "principal" or to "income"? (a)() & 0(c)... Question #: If the trustee uses the rental income to pay the mortgage, what must the trustee do? (b).. Depreciation -- Transfers From Income To Principal For Non-Cash Depreciation :.. Question #: Is depreciation a cash disbursement (recall P&I rules deal with cash receipts and cash disbursements )?.. Question #: For P&I accounting purposes, must the trustee charge against the apartment building s income any part of the annual depreciation? (b)... Question #: Can a trustee charge the depreciation on Bldg. A against the income of Bldg B? (b)... Question #: Why would a trustee charge income cash for depreciation?.. Question #: Can the trustee charge against Bldg. A s fiduciary "income" Bldg. A s depreciation incurred during the administration of a decedent s estate? during the period of a trust s administrative trust? (b)()... Question #0: Can the trustee charge against Bldg. A s fiduciary "income" Bldg. A s depreciation if the value of the building has gone up in value? To wit, if Bldg A itself has gone down in value because it needs a new roof, or because of a normal wear and tear, requires new a/c units, a new pool, a new paint job, but Bldg A has gone up in value because of rent increases, and market values have increased because apartment buildings are good investments and the cap rates have gone from to, driving up the FMV of apartment buildings? (a). *** *** NEW *** *** *** ***.... Question #: If the property were not an apartment building, but the decedent s personal residence occupied by the surviving spouse, can the trustee charge income cash and credit principal cash for depreciation? (b)(). p:\howard\speeches hls\straffod june 0 speech --- pdf wo.docx# File #S Last Updated --0

19 Strafford Fiduciary Accounting Program June, 0 Page of Transfers From Income To Reimburse Principal For Cash Disbursements (i.e. not non-cash Depreciation) :. Facts #: Trustee wishes to hold back from income cash payable to W, the QTIP trust beneficiary, $,000 per year, as a reserve for future capital expenditures... Question #: May the trustee reduce income cash and establish a principal cash RESERVE for any of the following items that will be incurred in the future: (a) extraordinary repairs? (b)(). (b) a capital improvement to a principal asset? (b)(). (c) disbursements made to prepare property for rent (i.e. TI s; broker commission) (b)(). (d) principal disbursements on a monthly mortgage payment which are not covered from depreciation-income-to-principal charges. (b)(). (e) Environmental disbursements. (b)(). Income Taxes --. Facts #: During the year, the trustee of a trust pays an INCOME tax of $00. against.. Question #: For fiduciary accounting purposes, do you charge the $00 0 (a) (b) "income" payable to W# and thus reduce W# s income by $00, or against "principal" going to the remaindermen children from H's first marriage, and thus reduce their remainder gift by $00, 0 where the $00 INCOME tax traces to savings account interest receipts? (a).. Question #: For fiduciary accounting purposes, do you charge the $00 INCOME tax against "income" or "principal" where the $00 INCOME tax traces to a capital gain realized when the fiduciary sold IBM? (b).. Question #: For fiduciary accounting purposes, do you charge the $00 against "income" or "principal" where the $00 INCOME tax traces to both capital gain receipts and interest receipts (i.e. a payment on an installment note received when the trust sold real estate)?.. Question #: For fiduciary accounting purposes, do you charge the $00 INCOME tax against "income" or "principal" where the $00 INCOME tax traces to a K- that p:\howard\speeches hls\straffod june 0 speech --- pdf wo.docx# File #S Last Updated --0

20 Strafford Fiduciary Accounting Program June, 0 Page of 0 0 reports the trust s allocation of partnership income, where the income allocation exceeds the trust s cash distribution reported on the K-? Assume (a) the K- allocates $00 of partnership income ($0 of which is ordinary income and $00 of which is capital gain) to the trust, (b) the K- shows only $00 of cash distributed to the trust, and (c) the fiduciary did not distribute any of the $00 to any trust beneficiary. (c). Facts #: A QTIP Trust owns a partnership interest. The partnership issues a K- to the trust. The Trust s K- reports a $0 ordinary income allocation, and a $0 cash distribution. On the $0 of income trapped in the QTIP trust (i.e. $0 minus the $0 cash distributed to the surviving spouse), the Trust pays $ of income tax... Question #: For fiduciary accounting purposes, do you charge the $ of income tax against "income" or against "principal"? (c).. Question #: If it s unfair to burden principal with the income tax on phantom income (i.e. the K- of $0 exceeded the $0 distributed by the partnership), what can the trustee do to deal equitably with the income tax paid by the trustee? (a)(); USC page -. Adjustments Between Principal & Income Because of Taxes --. Facts #: A decedent dies, leaving in trust $,0,000 of assets. A trustee pays a $,000 expense which he properly charges against principal. On the trust s income tax return, the trustee makes a valid election to treat the $,000 as an income tax deduction rather than an estate tax deduction. The $,000 is the sole expense incurred by the trustee... Question #: What is the gross estate reported on the Form 0?.. Question #0: Can the trustee deduct the $,000 expense claimed for income tax purposes on the trust s Form?.. Question #: If the Applicable Exemption Amount equals $,000,000, what is the maximum marital deduction the trustee can claim on the Form 0?.. Question #: What mandatory P&I adjustment must the trustee make because of his election to claim the $,000 expense on the Form and not on the Form 0? (b)... Question #: What discretionary P&I adjustments may a trustee make because of tax elections? (a)() -- (). p:\howard\speeches hls\straffod june 0 speech --- pdf wo.docx# File #S Last Updated --0