NISM Series X-B Chapter 15: Tools for Estate Planning Practice Questions

Question 1

Which of the following statements correctly highlights a key difference between a Family Trust and a Will?

Accepted Answer

A Will may pass through probate, which involves court oversight, while a trust generally does not.. As per Section 15.6.5, 'A Will may pass through probate which means the court overseas the administration of the Will... A trust does not pass through a probate, therefore, no court overseas the trust.'

Question 2

As a pass-through entity, how is the income of a private trust typically handled for taxation purposes?

Accepted Answer

The income of the beneficiary is taxable, and the trustee pays the tax in a representative capacity.. The text under '15.6.12 Trust as a Pass-through entity' states: 'A private trust does not have a separate legal identity, and is essentially a pass-through entity...' It further clarifies: 'In a private trust, the receipts by the trust/trustee on behalf of the beneficiary are not taxable. What is taxable is the income of the beneficiary. The liability to pay the tax is on the trustee but in a representative capacity.'

Question 3

In the context of a trust, who is responsible for managing the trust assets and holds the legal title of these assets, with their rights, duties, and obligations set forth in the trust agreement?

Accepted Answer

The Trustee. The text states, 'Trustee: The person in charge of managing the trust... The trustee has legal title of the trust assets and the power to buy, sell, borrow against or transfer the trust assets. The trust agreement sets forth the rights, duties and obligations of the trustee.'

Question 4

According to Indian law regarding trust perpetuities, which of the following statements is INCORRECT?

Accepted Answer

Accumulation of income from property is generally not allowed for a period longer than the lifetime of the transferor or 18 years from the date of transfer, whichever is earlier.. Statement C is incorrect. The text specifies: 'Further, subject to the exceptions prescribed under statute, the accumulation (either wholly or partly) of any income from property is not allowed for a period longer than the lifetime of the transferor or 18 years from the date of transfer (whichever is later).' Option C incorrectly states 'whichever is earlier'. Options A, B, and D are all directly supported by the text

Question 5

In the context of a trust, who is responsible for the management of the trust assets and holds the legal title to those assets?

Accepted Answer

The Trustee. As per '15.6.6 Parties to Trust', point 2 (Trustee) states: 'The trustee is responsible for the management of the trust assets. The trustee has legal title of the trust assets and the power to buy, sell, borrow against or transfer the trust assets.'

Question 6

According to Section 3 of the Indian Trust Act, 1882, the person who reposes or declares a confidence in another person (trustee) in some property for the benefits of a beneficiary is called the:

Accepted Answer

Author or Settlor. The text explicitly states: 'As per section 3 of the Indian Trust Act, 1882, the person who reposes or declares a confidence in another person (trustee) in some property for the benefits of beneficiary is called the “author” or “settlor” of the trust.'

Question 7

As per Indian law on Trust Perpetuities, excluding transfers for the benefit of the public, what is the maximum period for which the accumulation of income from property is allowed?

Accepted Answer

The lifetime of the transferor OR 18 years from the date of transfer, whichever is later.. The text states under 15.6.11 Trust Perpetuities: "Further, subject to the exceptions prescribed under statute, the accumulation (either wholly or partly) of any income from property is not allowed for a period longer than the lifetime of the transferor or 18 years from the date of transfer (whichever is later)."

Question 8

According to Section 161-1(A) of the Income Tax Act, under what conditions will the business income of a trust NOT be taxed at the maximum marginal rate (MMR)?

Accepted Answer

When the profits and gains are receivable under a trust declared by Will, exclusively for the benefit of any relative dependent on the settlor, and it is the only trust so declared by Will.. Section 15.6.9, under 'Assessment of Business Income of Trust,' specifies an exemption to charging business income at the maximum marginal rate if three conditions are met: (1) profits from a Will-declared trust, (2) exclusively for a dependent relative, and (3) it's the only such trust declared by Will. In this scenario, it will be taxed at the income tax slab rate instead of MMR

Question 9

According to Indian law regarding trust perpetuities, the accumulation of any income from property is generally not allowed for a period longer than which of the following?

Accepted Answer

The lifetime of the transferor or 18 years from the date of transfer, whichever is later.. As stated in Section 15.6.11, the accumulation of any income from property is not allowed for a period longer than 'the lifetime of the transferor or 18 years from the date of transfer (whichever is later)'

Question 10

In which type of private trust do the trustees have discretion over the distribution of income, and the beneficiaries' income is not defined or determinate?

Accepted Answer

Private Discretionary Trust. Section 15.6.4 states, 'Private Discretionary Trust, where trustees have discretion and beneficiaries income is not defined or determinate.'

Question 11

Which of the following is a key difference between a Family Trust and a Will as estate planning tools, according to the provided text?

Accepted Answer

A Family Trust remains private, whereas a Will may become a public record.. The text states: 'A Will can become a public record, while family trust remains private.' Other options are incorrect: A Will goes into effect at death, a trust upon creation. A Will passes through probate, a trust does not. A Will covers property in one’s name at death, a trust covers properties transferred to it

Question 12

As per Indian law regarding trust perpetuities, what is the maximum period for which the accumulation of income from property is generally allowed, subject to exceptions?

Accepted Answer

The lifetime of the transferor or 18 years from the date of transfer, whichever is later.. Section 15.6.11 states, 'Further, subject to the exceptions prescribed under statute, the accumulation (either wholly or partly) of any income from property is not allowed for a period longer than the lifetime of the transferor or 18 years from the date of transfer (whichever is later).'

Question 13

Which of the following statements correctly differentiates a Will from a Family Trust?

Accepted Answer

A Will may pass through probate, which means the court oversees its administration, whereas a trust does not pass through a probate process.. As per Section 15.6.5, a Will may pass through probate where the court oversees its administration, but a trust does not pass through probate. Option A reverses the effectiveness, Option B reverses the property coverage, and Option D reverses the functions (Will names guardian for minors, trust plans for disability/tax savings)

Question 14

In the context of private trusts, which type grants trustees discretion over the distribution of income, where the beneficiaries' income is not defined or determinate?

Accepted Answer

Private Discretionary Trust. As per Section 15.6.4, a 'Private Discretionary Trust' is where trustees have discretion and beneficiaries' income is not defined or determinate. A 'Private Specific Trust' is where the share of the beneficiaries' income is determined in the trust deed. Public trusts are for the benefit of the public at large, and public cum private trusts have both public and private components

Question 15

Which of the following statements accurately describes a 'Private Discretionary Trust' based on the provided text?

Accepted Answer

The trustees have discretion over the distribution of income, and the beneficiaries' income is not defined or determinate.. According to the text, a 'Private Discretionary Trust' is where 'trustees have discretion and beneficiaries income is not defined or determinate'. Option A describes a Private Specific Trust. Option C describes a Public Trust. Option D describes a Public cum Private Trust

Question 16

Under which circumstance can a private trust be revoked by the beneficiaries, assuming they are competent to contract?

Accepted Answer

When the beneficiaries consent, believing the existing trust structure is no longer beneficial.. Section 15.6.8 states, 'If the beneficiaries are competent to contract and they have a consent that the existing structure of the trust is not beneficial any more, then with their consent a trust can be revoked.'

Question 17

Which of the following statements accurately describes a key difference between a Will and a Family Trust regarding their effective date?

Accepted Answer

A Will goes into effect only when the testator dies, while a trust is effective as soon as it is created.. The text states: "1. A Will goes into effect only when one dies while a trust is effective as soon as it is created."

Question 18

Which of the following statements correctly highlights a key difference between a Will and a Family Trust as estate planning tools?

Accepted Answer

A Will typically passes through probate, whereas a Family Trust does not.. According to the text, 'A Will may pass through probate which means the court overseas the administration of the Will... A trust does not pass through a probate, therefore, no court overseas the trust.' Other options present the opposite of what is stated in the text

Question 19

In the context of a private trust, which of the following statements about the parties involved is correct?

Accepted Answer

The Beneficiary and the Author/Settlor can legally be the same person.. The text states under the 'Beneficiary' section: "In a private trust, the beneficiary and author may be the same person."

Question 20

According to Section 3 of the Indian Trust Act, 1882, which party to a trust accepts the confidence reposed by the author, is in charge of managing the trust, and holds legal title of the trust assets?

Accepted Answer

The Trustee. As per Section 15.6.6, the 'Trustee' is the person who accepts the confidence reposed by the author, is in charge of managing the trust, and has legal title of the trust assets. The Author or Settlor creates the trust, and the Beneficiary receives the benefits

Question 21

Which of the following statements accurately describes a key difference in effectiveness between a Will and a Family Trust?

Accepted Answer

A Will goes into effect only when one dies, while a trust is effective as soon as it is created.. According to the text under '15.6.5 Family Trust versus Will', point 1 states: 'A Will goes into effect only when one dies while a trust is effective as soon as it is created.'

Question 22

According to Section 161-1(A) of the Income Tax Act, when does the business income of a trust, which ordinarily would be taxed at the maximum marginal rate (MMR), qualify for an exemption to be taxed at the income tax slab rate instead?

Accepted Answer

When the profits and gains are receivable under a trust declared by Will, exclusively for the benefit of a dependent relative, and it is the only such trust declared by that person through the Will.. The text explicitly states the conditions for this exemption: 'However, there is an exemption provided to charge this income at income tax slab rate instead of maximum marginal rate if following conditions are met: 1. The profits and gains are receivable under a trust which is declared by any person by Will; 2. Such profits are exclusively for the benefit of any relative dependent on him for support and maintenance; and 3. Such trust is the only trust so declared by the person through the Will.'

Question 23

According to the Indian Trust Act, 1882, the person who accepts the confidence reposed by the author and is responsible for the management of the trust assets is known as the:

Accepted Answer

Trustee. Section 15.6.6 defines 'Trustee' as 'a person who accepts the confidence reposed by the author, which gives rise to an obligation annexed to the ownership of the property. The trustee is responsible for the management of the trust assets.'

Question 24

As per Section 3 of the Indian Trust Act, 1882, which party to a trust is defined as the person who accepts the confidence reposed by the author, giving rise to an obligation annexed to the ownership of the property?

Accepted Answer

The Trustee. The text states: 'As per Section 3 of the Indian Trust Act, a “trustee” is a person who accepts the confidence reposed by the author, which gives rise to an obligation annexed to the ownership of the property.' The author/settlor reposes the confidence, and the beneficiary receives the benefits

Question 25

Which of the following is NOT listed as a situation under which a private trust can become extinct or be revoked, as per the provided text?

Accepted Answer

The settlor unilaterally decides to dissolve the trust without any power reserved in the trust document.. The text states a trust becomes extinct when its purpose has been fulfilled, it has become unlawful, or impossible to carry on due to destruction of trust property, or if it has been revoked. Revocation can occur 'at the pleasure of the testator/settlor' if 'there can be power reserved to the settlor for revocation of the trust.' Unilateral dissolution without such reserved power is not listed as a valid ground for extinction or revocation

Question 26

Which of the following statements accurately describes a private trust's status as a pass-through entity under income tax provisions?

Accepted Answer

The income of a private trust 'flows through' to the beneficiaries, meaning the receipts by the trust are taxable as the beneficiary's income, with the trustee paying tax in a representative capacity.. The text states: 'A private trust does not have a separate legal identity, and is essentially a pass-through entity... In a private trust, the receipts by the trust/trustee on behalf of the beneficiary are not taxable. What is taxable is the income of the beneficiary. The liability to pay the tax is on the trustee but in a representative capacity. So under income tax provisions, the trust has been given the pass through status by the nature of tax liability.'

Question 27

In the context of private trusts, what is the primary characteristic that differentiates a Private Specific Trust from a Private Discretionary Trust?

Accepted Answer

In a Private Specific Trust, the share of the beneficiaries' income is determined in the trust deed, while in a Private Discretionary Trust, trustees have discretion over income distribution.. The text specifies: 'Private Discretionary Trust, where trustees have discretion and beneficiaries income is not defined or determinate.' and 'Private Specific Trust, where the share of the beneficiaries income is determined in the trust deed.'

Question 28

Under the Income Tax Act, when does the provision of Section 61 (income from revocable transfer of asset taxed in hands of transferor) NOT apply to a revocable trust?

Accepted Answer

When the trust is not revocable during the lifetime of the beneficiary AND the transferor derives no direct or indirect benefit from such income.. The text states under 'Taxation of Revocable Trust': 'However, provision of section 61 would not apply where the trust is not revocable during the lifetime of the beneficiary and where the transferor derives no direct or indirect benefit from such income. (Section 62)'. Option A relates to clubbing of minor income, and Option C to business income exemptions. Option D is a general statement about public trusts

Question 29

Which type of private trust is characterized by the trustees having discretion over income distribution, and where the beneficiaries' income is not defined or determinate in the trust deed?

Accepted Answer

Private Discretionary Trust. The text states under 'The private trusts are also of 2 types – 1. Private Discretionary Trust, where trustees have discretion and beneficiaries income is not defined or determinate. 2. Private Specific Trust, where the share of the beneficiaries income is determined in the trust deed.'

Question 30

According to Section 161-1(A) of the Income Tax Act, business income of a trust is generally taxed at the maximum marginal rate (MMR). However, under which specific set of conditions can this income be charged at the income tax slab rate instead of MMR?

Accepted Answer

If the profits and gains are receivable under a trust which is declared by any person by Will, AND such profits are exclusively for the benefit of any relative dependent on him for support and maintenance, AND such trust is the only trust so declared by the person through the Will.. The text states: "However, there is an exemption provided to charge this income at income tax slab rate instead of maximum marginal rate if following conditions are met: 1. The profits and gains are receivable under a trust which is declared by any person by Will; 2. Such profits are exclusively for the benefit of any relative dependent on him for support and maintenance; and 3. Such trust is the only trust so declared by the person through the Will." All three conditions must be met for the exemption

Question 31

Which of the following conditions would allow for the revocation of a private trust?

Accepted Answer

All beneficiaries, being competent to contract, provide their consent that the existing trust structure is no longer beneficial.. The text lists conditions for revocation, including: 'If the beneficiaries are competent to contract and they have a consent that the existing structure of the trust is not beneficial any more, then with their consent a trust can be revoked.' Option A describes a trust becoming 'extinct' due to impossibility, not revocation. Option B contradicts the requirement of reserved power for non-testamentary documents. Option D refers to a public trust, not a private trust

Question 32

According to the Income Tax Act, under which of the following circumstances would income arising from a revocable transfer of an asset *not* be taxed in the hands of the transferor?

Accepted Answer

The trust is not revocable during the lifetime of the beneficiary, and the transferor derives no direct or indirect benefit from such income.. The text states: 'However, provision of section 61 would not apply where the trust is not revocable during the lifetime of the beneficiary and where the transferor derives no direct or indirect benefit from such income. (Section 62)'. Options A and B describe scenarios where Section 61 *would* apply, taxing the transferor. Option D describes a condition for revoking a trust, not an exemption from the tax rule for revocable transfers

Question 33

Which of the following statements accurately highlights a key difference between a Will and a Family Trust?

Accepted Answer

A Family Trust remains private, while a Will may become a public record.. The text explicitly states: 'A Will can become a public record, while family trust remains private.' Other options contradict the information provided in section 15.6.5

Question 34

Which of the following statements correctly highlights a key difference between a Will and a Family Trust?

Accepted Answer

A Will generally passes through a probate process, making it a public record, while a Family Trust typically avoids probate and remains private.. As per the text, 'A Will may pass through probate which means the court overseas the administration of the Will and ensures the Will is valid and property gets distributed as desired by the deceased. A trust does not pass through a probate, therefore, no court overseas the trust. A Will can become a public record, while family trust remains private.' Also, 'A Will allows naming a guardian for minors, while a trust can be used to plan for disability or for saving taxes.' Options A, B, and D present incorrect or reversed comparisons

Question 35

Under what circumstances can a private trust be revoked, even if the Indian Trust Act does not explicitly provide for its dissolution?

Accepted Answer

If the trust's purpose has become impossible to carry on due to the destruction of trust property.. The text states that a trust 'becomes extinct when its purpose has been fuilfilled or it has become unalwful or it has become impossible to carry on its purpose due to the destruction of trust property or lastly if it has been revoked.' This is a condition for the trust to become extinct, which also means dissolution/revocation. Option B is too broad. Option C refers to non-testamentary documents and reserved power. Option D requires beneficiaries to be 'competent to contract'

Question 36

Under Section 161-1(A) of the Income Tax Act, a trust's business income is generally taxed at the maximum marginal rate (MMR). Which of the following is a condition that must be met for this income to be taxed at the income tax slab rate instead of MMR?

Accepted Answer

The trust is the only trust so declared by the person through the Will.. As per Section 15.6.9, for business income of a trust to be taxed at the income tax slab rate instead of MMR, three conditions must be met: 1. Profits are receivable under a trust declared by Will; 2. Profits are exclusively for the benefit of a dependent relative; and 3. The trust is the *only* trust so declared by the person through the Will. Option A and B describe public trust characteristics or contradict the requirement for dependent relatives. Option D relates to revocable trusts, not the specific conditions for business income under 161-1(A)

Question 37

Under Section 161-1(A) of the Income Tax Act, when is the business income of a trust *not* taxed at the maximum marginal rate (MMR)?

Accepted Answer

When the profits and gains are receivable under a trust declared by a Will, exclusively for the benefit of a dependent relative, and it is the only trust so declared by that person through the Will.. The text states an exemption to the MMR for business income if '1. The profits and gains are receivable under a trust which is declared by any person by Will; 2. Such profits are exclusively for the benefit of any relative dependent on him for support and maintenance; and 3. Such trust is the only trust so declared by the person through the Will.'

Question 38

In a Private Specific Trust, which characteristic is true regarding the beneficiaries' income?

Accepted Answer

The share of the beneficiaries' income is determined in the trust deed.. As per the text, a 'Private Specific Trust' is one 'where the share of the beneficiaries income is determined in the trust deed.'

Question 39

Which type of private trust is generally chargeable to income tax at the Maximum Marginal Rate (MMR), subject to certain exemptions?

Accepted Answer

Private Discretionary Trust. The section 'Taxation of Discretionary Trust' explicitly states: 'Discretionary trust is chargeable to income tax at the maximum marginal rate (MMR), with some exemptions available.' Determinate trusts, including Private Specific Trusts, are generally taxed on the representative assessee under Section 161(1) and not necessarily at MMR for all income. Public Charitable Trusts receive various exemptions under Chapter III of the Income Tax Act

Question 40

Under a determinate trust structure, who is primarily liable to pay tax in respect of any income received or entitled to be received on behalf of a beneficiary, according to Section 161(1) of The Income Tax Act?

Accepted Answer

The Trustee, as a representative assessee. The text states: "Under determinate trust structure, the tax is levied on the representative assesses in accordance with the provision of Section 161 (1) of The Income Tax Act. The section imposes the liability to pay tax on the trustees, in respect of any income that he receives or is entitled to receive on behalf or for the benefit of any beneficiary under a trust."

Ch.15: Tools for Estate Planning

What You Will Learn in This Chapter

Multiple Choice Questions (40)

Case-Based Questions (1 sets)

Ready to Test Yourself Under Exam Conditions?