Question

The Valerie Trust is a complex trust. In Year 3, The Valerie Trust had various items of income and expense as indicated below. For each item below, please indicate how much, if any, should be included in the calculation of distributable net income for Year 3.

Item                                                                                        Amount in DNI

1. Corporate Bond interest received, $700.
2. Municipal Bond interest received, $400.
3. A stock that was purchased 2 years ago for $2,100 was sold for $6,100.
4. Rental
   1. Income of $4,500.
   2. Rental Expense of $1,100
5. Trustee fee, $2,000 allocated 70% to principal and 30% to income.

Answer 1

Distributable Net Income

Corporate Bond Interest (100% included) = 700

Municipal Bond Interest (100% included) = 400

Capital Gain (6100-2100=4000) (0% included) = 0

Rental Net Income (4,500-1,100 = 3,400) (100% included) = 3,400

Trustee Fee (2000) (30% included) = 600

Distributable Net Income (700+400+0+3400+600) = 5,100

Explanation

What Is Distributable Net Income?
The term distributable net income (DNI) refers to income allocated from a trust to its beneficiaries. Distributable net income is the maximum amount received by a unitholder or a beneficiary that is taxable. This figure is capped to ensure there is no instance of double taxation. Any amount above the DNI is, therefore, tax-free.
Distributable net income is income allocated to the beneficiaries of a trust.
This figure is the maximum taxable amount received by a unitholder or beneficiary—anything above that figure is tax-free.
DNI gives beneficiaries a reliable income source while minimizing the amount of income taxes paid by the trust.
DNI is calculated using the trust's taxable income, subtracting the capital gain or adding the capitsl loss, then adding the exemption