Discussion:Simple Trust, DNI vs Accounting Income
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Discussion Forum Index --> Tax Questions --> Simple Trust, DNI vs Accounting Income
Gmacdon167 (talk|edits) said: | 2 April 2007 |
| Can someone please help? I have so much conflicting information...
On a simple trust 1041 does DNI always equal the amount to be distributed or should I be using "accounting income?" I do just 1 of these each year and have consulted attorneys, the 1041 instructions, and CPAs and keep getting conflicting information. As always, thanks for any guidance... | |
| 2 April 2007 | |
| you have it backward, DNI is the maximum amount that CAN be deducted if distributed (the income distributed deduction) | |
Gmacdon167 (talk|edits) said: | 2 April 2007 |
| so are you saying that DNI is also the maximum amount that CAN be distributed?
I know that DNI is the maximum allowed to be deducted, but my question is how much to distribute? Accounting income or DNI? Thanks Kevin! | |
| 2 April 2007 | |
| A simple trust requires all income to be distributed. It cannot be left in the trust. Accounting income is income according to the accounting method used (according to the terms of the trust or the UTAA or state law), often it will be the same as DNI, but sometimes not (especially if depreciation is involved or the trustee has discretion to allocate capital gains to income or corpus).
If more than income is distributed, then it is no longer a simple trust for that year - it has also distributed some corpus, and is therefore a complex trust. | |
Gmacdon167 (talk|edits) said: | 2 April 2007 |
| I do not have a copy of the trust instrument, just guidance from the attorney that set it up. She advised that it is a simple trust and only income is to be distributed. However, my accounting income is more than my DNI because of Cap Gain distributions from mutual funds and foreign taxes being passed through to the K-1. | |
| 2 April 2007 | |
| You can't know accounting income unless you read the trust. You are guessing. Tell the attorney that you need a copy of the trust in order to do the tax return. | |
| 2 April 2007 | |
| Accounting income is governed by your state's version of the Uniform Principal and Income Act. While it may be modified by trust language, that tends to get complicated and generally doesn't happen. Pretty much standard is short term mutual fund dividends are income and long term corpus. Accounting income is always cash basis so technically you have to watch out for distributions received after the end of the year that are reported on the 1099. I see that ignored a lot. | |
Gmacdon167 (talk|edits) said: | 2 April 2007 |
| Her e-mail correspondence indicates that it is a credit shelter trust, with interest and dividend income passed through to the beneficiary and that cap gains/losses be allocated to corpus. | |
| 2 April 2007 | |
| Foreign taxes are considered an expense paid on behalf of the income beneficiary and included in amount distributed. | |
Gmacdon167 (talk|edits) said: | 2 April 2007 |
| I understand that trust accounting income is not the same as tax income. I'm really not having any difficulty with any of that. My question pertains to schedule B line 10 as to amount currently required to be distributed. I just don't know whether or not to override that line item with accounting income or not. Thanks Kevin & Dennis for your input. I do appreciate it. | |
| 3 April 2007 | |
| DNI will oftentimes be substantially lower than accounting income simply because certain expenses are only partially allocated to income; whereas, those same expenses are 100% deductible for DNI purposes. | |
| 21 May 2007 | |
| Thank you for the above refresher, very helpful.
1. In determining the beneficiary's distribution, the measure is accounting income, right? If she took more than the amount of 2006 accounting income, and she's only supposed to take a distribution of income, not corpus, then she owes $$ back to the trust, right? 2. DNI is the tax concept (as explained above), and I understand it to NOT impact the amount of distributions that the beneficiary is entitled to. 3. If trust allows distribution of corpus in unusual situations, and she only takes accounting income each year, then do I disclose the trust as simple (because she only takes current income in that year) or complex (because in certain situations she COULD take corpus)? Thanks anyone and everyone... | |
| 22 May 2007 | |
| Technically surviving spouse should not have the ability to "take" from a credit shelter trust. Kind of defeats the purpose. My preference is to designate these trusts as simple in years where no corpus is distributed. If this is the first year you want to be careful as to ownership of income during estate administration. | |
| 2007-05-22 | |
| JAD, you need to look at the trust document to see whether a trustee has the power to distribute corpus. It is not that uncommon to have an "ascertainable standard power" to withdraw the greater of $5,000 or 5% of the aggregate value of the trust estate. As mentioned above, you need to figure it as a complex trust if corpus is distributed. | |
