Question

Trust Y provides that all of its income must be distributed currently to A. In addition, the trustee is empowered to make discretionary distributions of principal to J and K. For each of the following situations, determine the taxable income of the trust and the amount of trust income, if any, taxable to trust beneficiaries.

a) For the taxable year, Trust Y has tentative taxable income (“TTI”) and distributable net income (“DNI”) of $100,000 comprising $70,000 of taxable interest income and $30,000 of qualifying dividends. For the year, the trust has fiduciary accounting income (“FAI”) of $80,000. The trustee has distributed all of the FAI to A, and $20,000 of principal to J.

b) Assume the same facts as in a., except that the trust has FAI of $90,000 and that the trustee distributes $15,000 of principal to J and $5,000 of principal to K.

Answer 1

a. Taxable income of the trust is $100,000 ($70000 taxable interest income and $30000 qualifying dividends), out of which $80,000 is allocated to income and remaining $20000 is allocated to principal, which later distributed to J.

Fiduciary accounting income ditributed to A of $80000 is taxable in the hands of A.

Principal payment to J of $20000 is discreationary distribution by trustee, thus taxable in the hand of trustee.

b. In this case also FAI distributed to A $90000 is taxable in the hand of A, to avoid double taxation. and principal payment to J and K are taxable to the extent of $10000 (DNI $100000-FAI $90000) in the hand of trustees and the remaining payment of principal is not taxable.