Question

The Polozzi Trust projects that it will incur the following items in the next year, which will be its first year of existence.

Interest income $25,000
Rent income 100,000
Cost recovery deductions for the rental activity $35,000
Capital gain income 40,000
Fiduciary and tax preparation fees 7,000

Betty, the grantor of the trust, is working with you on the language in the trust instrument relative to the derivation of annual accounting income for the entity. She will name Shirley as the sole income beneficiary and Benny as the remainder beneficiary.

a. If the allocation takes place, Shirley will receive how much for the year?
b. Betty suggests that the capital gains, rental revenues, and one-half of interest income should be allocable to corpus, while cost recovery expenses, one-half of interest income, and fiduciary administrative fees are allocable to income. If the allocation takes place, Shirley will receive how much for the year?

Answer 1

a. $165,000

b. -$29,500

Step-by-step explanation:

a. If the allocation takes place, Shirley's income will include both the interest and rent incomes as well as the capital gains:

= Interest income + Rent income + Capital gain income

= 25,000 + 100,000 + 40,000

= $165,000

b. If the allocation happens according to what Betty suggests, Shirley would receive:

= Interest income / 2 - Cost of recovery expenses - Fiduciary admin fees

= 25,000 / 2 - 35,000 - 7,000

= -$29,500