* Learn how to apply tax treaty provisions and the corresponding distributable net income
(DNI) allocations that determine the net distribution amounts to the entity's U.S.
Code section 661(b) provides that the character of the amount distributed to the beneficiary "shall be treated as consisting of the same proportion of each class of income entering into the computation of distributable net income
." In this example, the distribution of $10,000 is equal to 10 percent of $100,000, the total amount of DNI.
The value of the deduction is limited to the distributable net income
. Similar to a simple trust, distributions do not have to actually be made available to the beneficiary during the tax year in order for the trust to claim the distribution deduction.
The distribution deduction may not exceed distributable net income
If a trust distributes amounts that are in excess of its distributable net income
in a given year, the excess distributions are tax free to the beneficiaries.
In the case of a spousal share, however, it is sometimes difficult to ascertain whether property passes through the probate estate, and for years commentators have speculated on whether the spouse's elective share is subject to the provisions of Subchapter J. In most instances, it was presumed that a spouse's elective share was subject to Subchapter J, so that the distribution would include a share of the estate's distributable net income
for the year.
When complex trusts and estates distribute less than 100% of distributable net income
, North Carolina General Statutes Section 105-160.2 requires the fiduciary to distribute any North Carolina adjustments using the same allocations used for distributing income.
Estates also calculate distributable net income
(DNI) for the purpose of allocating income and the related tax burden between the beneficiaries and the estate.
The final regulations provide guidance and examples of how to apply capital gains in the computation of distributable net income
The trust pays tax on capital gains that are considered principal under the Uniform Principal and Income Act (UPIA), because gains are not included in accounting income or in Distributable Net Income
on trust income tax returns.
Unlike the majority of other items of income and expense, which are shifted from the fiduciary to the beneficiary based on a proportion and measured as a distribution to the beneficiary as a percentage of the distributable net income
, depreciation is allocated based on the ratio of the distribution compared with the trust's or estate's trust accounting income (TAI) (Regs.
Except as provided in section 1.643(a)-6 and paragraph (b) of this section, gains from the sale or exchange of capital assets are ordinarily excluded from distributable net income
and are not ordinarily considered as paid, credited, or required to be distributed to any beneficiary.