Distributable net income

Starting the DNI calculation

When computing DNI under §643(a), disregard the income distribution deduction and personal exemption deduction. This adjustment does not disallow those deductions when computing taxable income.

The deduction limit for estates and complex trusts

Under §661, a nongrantor estate or complex trust deducts currently required income and other amounts properly paid, credited, or required to be distributed, subject to the exclusions below. The deduction cannot exceed DNI, and no deduction is allowed for the portion attributable to income excluded from gross income, such as tax exempt interest.

A gift or bequest of a specific sum or specific property under the governing instrument does not carry DNI when paid or credited at once or in no more than three installments. An amount payable only from income does not qualify as a specific sum.

Amounts paid, permanently set aside, or otherwise qualifying for the charitable deduction under §642(c) are also excluded from distributions that carry DNI.

Allocating income to beneficiaries

For estates and complex trusts, beneficiary inclusions have two tiers. Currently required income comes first, limited to DNI calculated without the charitable deduction. If required income exceeds that amount, beneficiaries receive proportionate allocations within this tier.

Other amounts properly paid, credited, or required to be distributed use the remaining DNI. When those amounts exceed the remaining DNI, allocation is proportionate within this second tier.

The distribution exclusions above and the separate share rule described below apply. Included amounts retain their character in beneficiaries’ hands, including the character of tax exempt income.

Two related terms

Trust accounting income is income determined under the governing instrument and applicable local law, a different measure from DNI. Trust provisions that depart fundamentally from traditional income and principal principles generally are not recognized.

Grantor trust describes a trust whose income, deductions, and credits attributable to a portion treated as owned under the subpart E rules go on that owner’s return. Dominion and control alone do not establish ownership.

Bringing outside expertise back to the family

A participant described the value of finding outside tools and bringing them into family discussions:

"we could Outsource inhouse find those tools that uh that we were not exposed to that that you know I can go out there into the world chew on them and then bring them back into the families in a well polished manner"

Common questions