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Someone posted this awhile back, but it was never discussed
“On January 1, Year 3, Dix transferred certain assets into a trust. The assets consisted of Lux Corp. bonds with a face amount of $500,000 and an interest rate of 12%. The trust instrument named Dix as trustee, Dix’s child as life beneficiary, and Dix’s grandchild as remainderman. Interest on the bonds is payable semiannually on May 1 and November 1. Dix had purchased the bonds at their face amount. As of January 1, Year 3, the bonds had a fair market value of $600,000. The accounting period selected for the trust is a calendar year. The trust instrument is silent as to whether Dix may revoke the trust. Assuming that the trust is valid, how should the amount of interest received in Year 3 be allocated between principal and income if the trust instrument is otherwise silent?”
Answer: C Principal: $10,000; Income $50,000
Can anyone explain the answer? My initial thoughts were that only the interest would be income. First, what hints or key words indicate that an allocation is necessary? Second, what rule or pronouncement states that an allocation has to be made? I’m using Roger and Ninja MCQ and have only seen capital gains included when calculating taxable income for trusts or estates.
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