[Anonymous]

Hello,

I am starting to review on estates and trusts and I have no clue what my textbook is talking about when referring to allocations between principal vs. income.

Could anyone provide a brief explanation on what they are?

The only part I understand is figuring out Distributable Net Income, and if this the amount that the estate/trust can deduct when they make distributions to the beneficiary. If the actual distribution is more than the DNI, then the remaining amount is considered nontaxable (principal) distribution.

But then the Becker textbook talks about all these other stuff like: “Corporation distributions -> call for shares = principal, while cash dividend = income, liquidation = principal, etc.”

So, I am confused on what is the general rule/treatment for estates and trusts.

Thanks again for your help everyone.

[thehip41]

In a simple trust, ALL of the income that isn't assigned to corpus must be distributed.

Most of these things are stated as fact and not really known. For example, a trust can have some stocks, and state that “all interest earned on the stocks must be put back into the principle (corpus)”

It comes down to this:

if its income, it has to be distributed.

If it's reserved for corpus, then it doesn't get distributed.

So you'll have expenses for regular income and expenses for corpus. Allocate to each one to determine how much income goes to corpus and how much gets distributed.

FAR - 83
AUD - 73 92
BEC - 83
REG - 88

Licensed CPA in the state of Michigan

[thehip41]

In a simple trust, ALL of the income that isn't assigned to corpus must be distributed.

Most of these things are stated as fact and not really known. For example, a trust can have some stocks, and state that “all interest earned on the stocks must be put back into the principle (corpus)”

It comes down to this:

if its income, it has to be distributed.

If it's reserved for corpus, then it doesn't get distributed.

So you'll have expenses for regular income and expenses for corpus. Allocate to each one to determine how much income goes to corpus and how much gets distributed.

FAR - 83
AUD - 73 92
BEC - 83
REG - 88

Licensed CPA in the state of Michigan

[Anonymous]

Thanks.

In terms of expenses, would all of it go towards DNI (Distributable Net Income) regardless of allocation?

In one of the SIMS from Becker, it states “trustee fee in the amount of 2,000 allocated 70% to principal and 30% to income”.

But in the answer solution they allocated all of it to DNI.

[Anonymous]

Thanks.

In terms of expenses, would all of it go towards DNI (Distributable Net Income) regardless of allocation?

In one of the SIMS from Becker, it states “trustee fee in the amount of 2,000 allocated 70% to principal and 30% to income”.

But in the answer solution they allocated all of it to DNI.

[thehip41]

I believe that if they state it's for the corpus, it should be split up.

FAR - 83
AUD - 73 92
BEC - 83
REG - 88

Licensed CPA in the state of Michigan

[thehip41]

I believe that if they state it's for the corpus, it should be split up.

FAR - 83
AUD - 73 92
BEC - 83
REG - 88

Licensed CPA in the state of Michigan

[Author]

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