Chapter
Q 2:15 When is income sourced within a state for income tax purposes?
Q 2:16 Can more than one state have the right to tax the same trust?
Q 2:17 What determines which state has jurisdiction for estate tax purposes?
Q 2:18 What determines the residence of an individual for state tax purposes?
Chapter 3 Overview of Fiduciary Accounting
Q 3:1 What is the purpose of a fiduciary accounting?
Q 3:2 What are the basic principles to be followed in preparing a fiduciary accounting?
Q 3:3 What is necessary to insure that an accounting is understandable by persons who are not familiar with practices and terminology peculiar to the administration of estates and trusts?
Q 3:4 What are the basic schedules included in a fiduciary accounting?
Q 3:5 What should the cover page of a fiduciary accounting contain?
Q 3:6 Does the same format apply to both estates and trusts?
Q 3:7 What is “sufficient information to put the interested parties on notice as to all significant transactions affecting administration during the accounting period”?
Q 3:8 What is “carrying value”?
Q 3:9 Does carrying value change when there is a change in fiduciary?
Q 3:10 At what other times is the carrying value adjusted?
Q 3:11 Why must fair market value be presented?
Q 3:12 Must a fiduciary obtain appraisal reports annually for assets for which fair market value is not otherwise obtainable?
Q 3:13 Can subsequent accountings omit the presentation of a detailed listing of opening inventory?
Q 3:14 How should assets discovered after the initial inventory be reported?
Q 3:15 What are “significant transactions that do not affect the amount for which the fiduciary is accountable” as outlined in the sixth standard of the Uniform Fiduciary Accounting Principles?
Q 3:16 How frequently should fiduciary accountings be prepared?
Q 3:17 When must an accounting allocate receipts and disbursements between principal and income?
Q 3:18 How should the schedules of receipts and disbursements be presented?
Q 3:19 How should an accounting record the purchase of an asset?
Q 3:20 Where are distributions to beneficiaries recorded?
Q 3:21 Should a fiduciary accounting include a compilation report?
Q 3:22 Is there GAAP (or OCBOA) for fiduciary accountings?
Q 3:23 How does fiduciary accounting income differ from taxable income?
Q 3:24 What is distributable net income (DNI)?
Q 3:25 Are trust distributions considered community or separate property in states that adopt the community property system?
Chapter 4 Definitions and Fiduciary Duties—UPIA Sections 102 and 103
Q 4:1 What is an “accounting period” for purposes of the UPIA?
Q 4:2 Who is a “beneficiary”?
Q 4:3 Who is a “fiduciary”?
Q 4:5 Who is an “income beneficiary”?
Q 4:6 What is an “income interest”?
Q 4:7 What is a “mandatory income interest”?
Q 4:8 What is “net income”?
Q 4:9 What is a “person”?
Q 4:10 What is “principal”?
Q 4:11 Who is a “remainder beneficiary”?
Q 4:12 What are the “terms of a trust”?
Q 4:13 Who is a “trustee”?
Q 4:14 What is the “prudent investor rule”?
Q 4:15 What is “total return”?
Q 4:16 What definitions in the 1962 Act were omitted from the revised UPIA?
Q 4:17 What is a “trust”?
Q 4:18 Which controls if there is a conflict between state law and the terms of a will or trust?
Q 4:19 May a trustee exercise a discretionary power given to him in the trust instrument that conflicts with state law?
Q 4:20 What should the trustee do if there are no provisions in the trust, will, or the Act providing how a receipt or disbursement should be applied?
Q 4:21 What is the duty of impartiality?
Q 4:22 What should the trustee do if the trust agreement provides that state law determinations of principal and income do not apply, but the agreement fails to provide an alternate rule?
Q 4:23 Is it advisable to grant the fiduciary discretion to determine trust income in the governing instrument?
Chapter 5 Trustee’s Power to Adjust and Judicial Control—UPIA Sections 104 and 105
Q 5:1 When may a trustee exercise the power to adjust?
Q 5:2 What must the trustee take into consideration in exercising the power to adjust?
Q 5:3 Are there restrictions on the exercise of the power to adjust?
Q 5:4 How does the Prudent Investor Act impact the application of the power to adjust?
Q 5:5 If a state has not adopted the Prudent Investor Act, how will the power to adjust provision apply?
Q 5:6 Does Section 104 apply to all trusts?
Q 5:7 How does Section 103 impact the power to adjust?
Q 5:8 May the trustee of a marital trust exercise the power to adjust?
Q 5:9 May the trustee of a net income charitable remainder trust (CRT) or a net income charitable remainder unitrust (NIMCRUT) exercise the power to adjust?
Q 5:10 Can the power to adjust be applied without computing traditional fiduciary accounting income?
Q 5:11 Can a trustee release the power to adjust?
Q 5:12 Can the terms of the trust limit the trustee’s exercise of a power to adjust?
Q 5:13 What is the tax impact of exercising the power to adjust?
Q 5:14 What is the relationship between fiduciary accounting income under state law and distributable net income (DNI)?
Q 5:15 Does exercising the power to adjust automatically allocate capital gains to income and thus DNI?
Q 5:16 What protections does the UPIA give to a trustee exercising a power to adjust?
Q 5:17 What remedies are provided for under UPIA Section 105 if the court determines an abuse of discretion has occurred?
Q 5:18 Does the UPIA provide a unitrust option?
Q 5:19 What is the difference between converting to a unitrust and achieving the same result by exercising the power to adjust?
Q 5:20 What is the tax impact of a unitrust conversion?
Q 5:21 What is a unitrust ordering rule and how does it affect capital gains?
Q 5:22 Will the IRS respect a trust provision that allocates capital gains and ordinary income to a unitrust payment in the same proportion as those classes bear to the total capital gains and ordinary income of the trust for the year?
Q 5:23 If the IRS challenges the allocation of capital gains to a unitrust payment in a marital trust, will that jeopardize the marital deduction?
Chapter 6 Determining Net Income and Beneficiary Distributions—UPIA Sections 201 and 202
Q 6:1 What is a specific gift or devise?
Q 6:2 What is a general devise or gift?
Q 6:3 What is a residual devise or gift?
Q 6:4 How is income earned during the administration of an estate or terminating income interest allocated to a specific devisee?
Q 6:5 How is income earned during the administration of an estate or terminating income interest allocated to a general devise?
Q 6:6 How is the remaining income allocated?
Q 6:7 How is the beneficiary’s fractional interest in the undistributed principal assets determined?
Q 6:8 Is realized appreciation of assets allocated the same way as income earned during administration?
Q 6:9 Is the distributable net income of the estate or trust allocated in the same way as the fiduciary accounting income?
Q 6:10 Can the unfavorable results illustrated in Q 6:9 be avoided?
Q 6:11 Are there other tax considerations to making disproportionate distributions?
Q 6:12 Does the fiduciary have any discretion in charging expenses of administration of a decedent’s estate or terminating income interest to income or principal?
Q 6:13 Are there any limits on the use of the fiduciary’s discretion allocating administrative expenses?
Q 6:14 What expenses may be charged against the income of property passing as part of a marital deduction without reducing the amount of the allowed deduction?
Q 6:15 Are there similar rules regarding the expenses chargeable against property passing to charities?
Q 6:16 What expenses relating to the settlement of a decedent’s estate or the winding up of an income interest are specifically chargeable to principal?
Q 6:17 If management expenses are paid from the income of property passing to the surviving spouse, thereby not reducing the marital deduction, can the expenses still be claimed as an estate tax deduction without reducing the marital deduction?
Chapter 7 Apportionment at the Beginning and End of an Income Interest—UPIA Sections 301–303
Q 7:1 When does an income interest begin?
Q 7:2 When does an income interest begin when no date is specified in the will or trust instrument?
Q 7:3 When does an asset become subject to a trust?
Q 7:4 How should income be accounted for when the assets to be transferred to a trust have not yet been identified?
Q 7:5 What is a successive income interest?
Q 7:6 When does a successive income interest begin?
Q 7:7 When does an income interest end?
Q 7:8 Who is entitled to income that is accrued but unpaid before a decedent dies or an income interest begins?
Q 7:9 What is the due date of a payment?
Q 7:10 What is a periodic payment?
Q 7:11 Who is entitled to an income receipt when the due date is not periodic or there is no due date?
Q 7:12 Who is entitled to an income receipt that is due on the date a decedent dies?
Q 7:13 What is the due date for interest income?
Q 7:14 What is the due date for dividend income?
Q 7:15 What is the due date for a required minimum distribution from an individual retirement account or qualified plan?
Q 7:16 Is the due date different for a decedent who was taking monthly distributions than for one who was taking an annual distribution from his IRA or qualified plan?
Q 7:17 How is interest on a zero coupon bond apportioned when the proceeds are received?
Q 7:18 Who is entitled to undistributed income when an income interest ends?
Q 7:19 What is undistributed income?
Q 7:20 What is a mandatory income interest?
Q 7:21 What is net income?
Q 7:22 Who is entitled to undistributed income on trust principal that is voluntarily left in the trust after an income interest ends?
Q 7:23 Who is entitled to a fixed annuity or unitrust payment due after an income interest ends?
Q 7:24 Who is entitled to the undistributed income of a trust received on the date an income interest ends?
Chapter 8 Receipts from Entities, Trusts and Estates—UPIA Sections 401 and 402
Q 8:2 What entities are excluded under Section 401?
Q 8:3 Which receipts from entities are classified as income?
Q 8:4 Which receipts are classified as principal?
Q 8:5 How are short-term capital gain distributions from regulated investment companies and real estate investment trusts allocated?
Q 8:6 How are dividend reinvestment plans classified?
Q 8:7 What is a “distribution in partial liquidation”?
Q 8:8 Can the trustee rely on the entity’s designation of whether a distribution is income or principal?
Q 8:9 Do taxes on the distribution affect whether it is income or principal?
Q 8:10 May a fiduciary rely on the character of income as reported on the entity’s Schedule K-1 (i.e., dividends, interest, and capital gains) to determine whether a distribution is income or principal?
Q 8:11 Can the trustee avoid the application of Section 401 and the 20-percent rule by transferring its assets to an entity?
Q 8:12 How should the trustee allocate tax on its share of taxable income of a partnership between income and principal?
Q 8:13 How should the fiduciary allocate tax on its share of the taxable income of a Subchapter S corporation between income and principal?
Q 8:14 How are distributions from other trusts or estates classified?
Q 8:15 What is a purchased interest in a trust?
Q 8:16 How are receipts from a purchased interest in a trust that is an investment entity classified?
Q 8:17 Does decanting impact the determination of principal and income of the distributing and resulting trusts?
Chapter 9 Business and Other Activities Conducted by the Trustee—UPIA Section 403
Q 9:1 What flexibility does Section 403 give the trustee?
Q 9:2 How are proceeds from the sale of the business assets accounted for?
Q 9:3 Is Section 403 mandatory or elective?
Q 9:4 Why would a trustee elect to apply the provisions of Section 403?
Q 9:5 Must the trustee keep a separate set of books and records under Section 403?
Q 9:6 To what types of activities does Section 403 apply?
Q 9:7 Which activities are specifically excluded from the application of this section?
Q 9:8 How are the provisions of Section 403 applied?
Q 9:9 Can a trustee account for mineral interests under UPIA Section 403?
Q 9:10 How should a trustee account for a loss incurred in a business activity under UPIA Section 403?
Chapter 10 Rents, Interest, Insurance and Other Receipts Not Normally Apportioned—UPIA Sections 404–408
Q 10:1 How are assets received from a transferor recorded by the trust?
Q 10:2 How are the proceeds from the sale, exchange, liquidation, or change in form of a principal asset recorded?
Q 10:3 How are payments received for property taken by eminent domain or lost profits allocated?
Q 10:4 How are amounts received from third parties to reimburse the trusts for disbursements relating to environmental matters recorded?
Q 10:5 How is income allocated when there is no beneficiary to whom the trustee may or must distribute income?
Q 10:6 Is UPIA Section 404 the only provision under which receipts are allocated to principal?
Q 10:7 Under what circumstances may the trustee adjust between income and principal?
Q 10:8 How are receipts from rental property allocated?
Q 10:9 If rental expenses exceed the rental income, is the deficit charged to income or principal?
Q 10:10 How are amounts received as interest allocated?
Q 10:11 Are bond premiums and discounts amortized in determining income and principal?
Q 10:12 Does UPIA Section 406 apply to all obligations to pay money?
Q 10:13 How are proceeds from life insurance allocated?
Q 10:14 How are proceeds from property and casualty insurance policies allocated?
Q 10:15 How are proceeds from errors and omission or fiduciary liability insurance policies allocated?
Q 10:16 How are dividends paid on insurance policies allocated?
Q 10:17 When may a trustee avoid making insubstantial allocations?
Q 10:18 Is the trustee ever required to make insubstantial allocations?
Chapter 11 Deferred Compensation, Annuities and Similar Payments—UPIA Section 409
Q 11:1 What payments are covered by this section?
Q 11:2 What payments are not covered by Section 409?
Q 11:3 How does Section 409 differ from Section 12 of the 1962 Act?
Q 11:4 How is “payment” defined for purposes of Section 409?
Q 11:5 What is a “separate fund”?
Q 11:6 How are such payments allocated?
Q 11:7 What type of payments does UPIA Section 409(b) cover?
Q 11:8 Does it matter how much of an IRA payment can be traced to dividends or interest earned by a retirement plan?
Q 11:9 How does Section 409 apply to distributions from an IRA?
Q 11:10 How does Section 409 address the marital deduction requirements of Code Section 2056?
Q 11:11 Can the trustee use the “power to adjust” to determine the income from a separate fund under UPIA Section 409 to satisfy the marital deduction requirements?
Q 11:12 Can the trustee rely on a state unitrust provision to determine income from a separate fund to satisfy the marital deduction requirement?
Q 11:13 How does UPIA Section 409(d) affect trusts in states that have not adopted the 10 percent rule?
Q 11:14 What are the adverse consequences for a QTIP that fails to qualify under Revenue Ruling 2006-26?
Q 11:15 How are payments allocated when they are not “required to be made” or when they represent the entire amount to which the trustee is entitled?
Q 11:16 How does Section 409 apply to annuity payments from a commercial annuity?
Chapter 12 Liquidating Assets—UPIA Section 410
Q 12:1 What types of assets are considered “Liquidating Assets”?
Q 12:2 What types of assets are not considered “Liquidating Assets”?
Q 12:3 How are payments from liquidating assets allocated between principal and income?
Q 12:4 Does the ten percent to income allocation continue after the trust recovers the original carrying value of the principal asset?
Q 12:5 How does this treatment differ from treatment under the 1962 Uniform Principal and Income Act?
Q 12:6 How are lottery payments apportioned between principal and income?
Chapter 13 Minerals, Water, and Other Natural Resources and Timber—UPIA Sections 411 and 412
Q 13:1 What are the minerals and other natural resources covered by Section 411?
Q 13:2 Is Section 411 mandatory?
Q 13:3 How are receipts from minerals and other natural resources allocated between income and principal under UPIA Section 411?
Q 13:4 Which states have modified UPIA Section 411 and how have they done so?
Q 13:5 How are amounts received on account of an interest in water allocated?
Q 13:6 When is an interest in water “renewable”?
Q 13:7 What grandfather rules apply to mineral interests, water, and other natural resources owned on or before the effective date of the Act?
Q 13:8 How does Section 411 apply to property located in a state other than the state where the trust is administered?
Q 13:9 Does the grandfather rule apply to nonproducing mineral interests owned by a trust on the date the state adopted the 1997 version of the UPIA?
Q 13:10 Does the grandfather rule apply to mineral interests, water, and other natural resources acquired by a bypass or marital trust created under a grantor trust after the death of the grantor?
Q 13:11 What is the “open mine” doctrine and how does UPIA Section 411 address it?
Q 13:12 Does UPIA Section 411 apply to insubstantial allocations?
Q 13:13 What state law governs the allocation between income and principal of receipts from mineral interests in a state other than where the trust is administered?
Q 13:14 How are intangible drilling costs (IDC) and dry hole costs allocated between income and principal?
Q 13:15 May a trustee allocate trustee fees, accounting fees, and other administrative costs attributable to mineral receipts in a manner other than 50-50 as specified in Act Section 501 where mineral interests constitute a substantial portion of the trust income?
Q 13:16 What types of timber and related products does Section 412 apply to?
Q 13:17 Is Section 412 mandatory?
Q 13:18 How are receipts from the sale of timber and related products or the lease of timberland allocated between income and principal?
Q 13:19 Which states have adopted modified versions of UPIA Section 412 and how have they differed from the original?
Q 13:20 How is the timber’s “rate of growth” determined?
Q 13:21 Does UPIA Section 412 preclude any personal use of the timber?
Q 13:22 What is a “reasonable amount for depletion” of timber?
Q 13:23 Does UPIA Section 412 have a grandfather rule that applies to timber owned by the trust before the effective date of the Act?
Q 13:24 What allocation methods are available to a trustee other than those described in UPIA Section 412?
Chapter 14 Underproductive Property—UPIA Section 413
Q 14:1 Does UPIA Section 413 apply to all trusts?
Q 14:2 Under what circumstances is Section 413 applied?
Q 14:3 What is “beneficial enjoyment” for purposes of Section 413?
Q 14:4 Is the income beneficiary of a nonmarital trust that owns underproductive property entitled to a portion of the proceeds from the sale of underproductive property as under previous Acts?
Q 14:5 Does Section 413 apply to all marital trusts?
Q 14:6 Is the Internal Revenue Service likely to respect a spouse’s discretionary powers under UPIA Section 413 as giving the beneficial enjoyment necessary to obtain a marital deduction?
Q 14:7 Does Section 413 apply to trustees who do not have the power to adjust?
Chapter 15 Derivatives, Options and Asset-Backed Securities—UPIA Sections 414 and 415
Q 15:1 What is a derivative security?
Q 15:2 What is an option?
Q 15:3 How do derivatives and options differ from each other?
Q 15:4 If the trust participates in derivatives or options indirectly through an entity, how are amounts received from the entity allocated?
Q 15:5 May the trustee account for options as a separate trade or business under UPIA Section 403?
Q 15:6 What types of options does Section 414 cover?
Q 15:7 Does Section 414 apply to employee stock options?
Q 15:8 How are proceeds from derivatives and options allocated under Section 414?
Q 15:9 May the trustee account for transactions in derivatives as a separate trade or business under UPIA Section 403?
Q 15:10 Is “marking to market” a transaction in a derivative financial instrument covered by Section 414?
Q 15:11 How does a trustee account for property other than cash received from a derivatives transaction?
Q 15:12 What is an asset-backed security?
Q 15:13 What are some common types of asset-backed securities?
Q 15:14 How are receipts from asset-backed securities allocated between income and principal?
Q 15:15 How are receipts allocated that represent a payment for the trust’s entire interest in the asset-backed security?
Q 15:16 Does an interest in a corporation or partnership constitute an asset-backed security?
Q 15:17 Is an investment trust or a mutual fund an assetbacked security?
Q 15:18 How are receipts from an instrument that do not come within the scope of Section 415 or any other section of the Act allocated?
Chapter 16 Allocation of Disbursements During the Administration of a Trust—UPIA Sections 501 and 502
Q 16:1 Do Sections 501 and 502 apply to an estate?
Q 16:2 What is “regular” compensation of a trustee and how is it allocated?
Q 16:3 What is not considered “regular” compensation of a trustee?
Q 16:4 Are the allocation provisions of Sections 501 and 502 mandatory?
Q 16:5 How are investment advisory fees allocated?
Q 16:6 How are accounting fees allocated?
Q 16:7 How are attorney fees allocated?
Q 16:8 How are property taxes allocated?
Q 16:9 How is the payment of interest allocated?
Q 16:10 How are disbursements for repairs and maintenance of trust property allocated?
Q 16:11 How are payments for insurance premiums allocated?
Q 16:12 How are payments of the principal on an indebtedness of the trust allocated?
Q 16:13 How are expenses allocated where there is no specific provision in the UPIA?
Chapter 17 Transfers from Income to Principal—UPIA Sections 503 and 504
Q 17:1 What is “depreciation” for purposes of Section 503?
Q 17:2 May depreciation be charged on an asset that is appreciating in value?
Q 17:3 What assets are subject to a depreciation allowance?
Q 17:4 How is depreciation recorded on the trust’s accountings?
Q 17:5 How much may be charged for depreciation?
Q 17:6 Must the amount charged for depreciation be equal to the depreciation allowed for federal income tax purposes?
Q 17:7 When may depreciation not be charged?
Q 17:8 Must amounts transferred for depreciation be held in a separate fund?
Q 17:9 When might a fiduciary consider a transfer for depreciation?
Q 17:10 What factors must the trustee consider when deciding whether to provide for depreciation?
Q 17:11 May a fiduciary transfer income to principal to pay for unusually large expenses that are normally chargeable to income?
Q 17:12 May the fiduciary make a transfer from income to principal in anticipation of an unusually large expense that will be chargeable to income?
Q 17:13 Under what circumstances is the fiduciary prohibited from making such a transfer?
Q 17:14 May transfers be made from income to reimburse principal for capital improvements?
Q 17:15 May a fiduciary make a transfer from income to principal to pay the principal on a trust indebtedness?
Q 17:16 May a trustee transfer income to principal to pay for environmental expenses?
Q 17:17 Are there any other circumstances allowing the fiduciary to transfer income to principal?
Q 17:18 How should the trustee classify dry hole costs, leasehold improvements and other costs of mineral operations?
Chapter 18 Income Taxes and Adjustments Between Principal and Income for Payment of Taxes—UPIA Sections 505 and 506
Q 18:1 Which taxes are covered by Sections 505 and 506?
Q 18:2 Are Sections 505 and 506 mandatory?
Q 18:3 How are taxes of an estate or trust allocated between income and principal under Section 505?
Q 18:4 How is the allocation of taxes affected by distributions to a beneficiary that are tax deductible?
Q 18:5 How are taxes on an estate or trust’s share of a passthrough entity’s taxable income allocated between income and principal?
Q 18:6 How are taxes on an estate or trust’s share of a passthrough entity’s taxable income allocated when the entity makes no distributions?
Q 18:7 How are taxes on an estate or trust’s share of a passthrough entity’s taxable income allocated when the entity distributes less than enough to pay the tax?
Q 18:8 How are taxes on an estate or trust’s share of a passthrough entity’s taxable income allocated when the entity distributes more than enough to pay the tax but less than all of its taxable income?
Q 18:9 How are taxes on an estate or trust’s share of a passthrough entity’s taxable income allocated when the entity distributes an amount greater than or equal to all of its taxable income?
Q 18:10 How does the formula apply when some or all of a pass-through entity’s taxable income consists of capital gains?
Q 18:11 How are taxes on an electing small business trust’s (ESBT) share of taxable income from an S corporation allocated between income and principal?
Q 18:12 If the trustee or executor believes that a mandatory allocation under Section 505 inappropriately shifts the economic interests between the income and principal beneficiaries, what are the trustee’s options?
Q 18:13 When does the trustee have discretionary authority under UPIA Section 506(a) to adjust between income and principal?
Q 18:14 What are some tax elections that warrant a discretionary adjustment of taxes between income and principal under Section 506(a)(1)?
Q 18:15 What are some transactions or distributions that may warrant a discretionary adjustment of taxes between income and principal under Section 506(a)(2)?
Q 18:16 May the trustee of a QSST reimburse the income beneficiary of the QSST for taxes paid on undistributed income of the S corporation?
Q 18:17 When does UPIA Section 506(b) require the executor or trustee to adjust between income and principal for taxes?
Q 18:18 Can a fiduciary adjust between beneficiaries of the same class under UPIA Section 506, or must equitable adjustments be made only between income and principal beneficiaries?
Q 18:19 Would the power to adjust under Section 506 apply to adjustments made to compensate the beneficiaries for disproportionate basis allocations under the new modified carryover basis rules of Code Section 1022(d)(3) for decedents dying in 2010?
Q 18:20 Would the power to adjust under Section 506 apply to adjustments to compensate the income beneficiary for income taxes paid on the sale of low basis assets where the executor elected carryover basis under Code Section 1022, saving estate taxes for the principal beneficiary at the expense of the income beneficiary?
Appendix A State Appendix
Appendix B Uniform Principal and Income Act
Table of Uniform Principal and Income Act Sections
Fiduciary Accounting Answer Book, 2014
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