[Anonymous]

Hi Everyone,

Quick question on DNI for estates and trusts. Becker defines it as the limitation on the amount the trust or estate can deduct with respect to distributions to beneficiaries. The calculation adds tax exempt interest (net of interest expense and all other investment expenses related to the tax exempt interest). It later says the Income Distribution Deduction is the lesser of actual distributions to beneficiaries or DNI (less adjusted tax exempt interest).

Just to make sure I’m understanding this correctly…DNI is the total amount that can be distributed, but the DNI Deduction for the estate/trust is limited to DNI less tax exempt interest since the interest is not taxable to the beneficiary or the estate/trust? The tax exempt interest is not included in as income on Form 1041, correct?

Please let me know if this is the correct rationale. Thanks!

[Anonymous]

The question boils down to…what's the purpose of including tax exempt interest in the calculation of DNI if it's later deducted from the calculation of Income Distribution Deduction?

[Theo]

My understanding is that the DNI is the amount that can actually be distributed to beneficiaries (including tax-exempt interest). As stated in the Becker text the income retains the same character with the beneficiaries as it had with the estate. The Income Distribution Deduction, on the other hand is the figure deducted on the estate's Tax return (Form 1041). This deduction is in order to avoid the double taxation of income. Since tax-exempt interest is not included in income, then it is not included in the deduction. This is why it has to be subtracted from the DNI to arrive at the limit for the Income Distribution Deduction.

HTH

AUD 01/17/2013 (92)
REG 02/28/2013 (85)
FAR 04/26/2013 (85)
BEC 05/30/2013 (88)

[Author]

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