Distributable Net Income

Trusts are one way in which assets can be sheltered from estate taxes and in which the probate process (associated with wills) can also be avoided. In recent years, Americans have begun to use trusts and trust funds in increasing numbers, and many Americans now have Living Trusts which make it possible to pass on assets and proceeds from assets to heirs without paying estate taxes or having the estate go through a lengthy and sometimes costly probate. The use of trusts does not eliminate taxes altogether, however, and it is important to understand how the taxable income of a trust (the distributable net income) affects the trust and beneficiaries. This research examines the use of trusts and some of the issues surrounding distributable net income.

Trusts are legal documents created by an individual (the grantor) to manage assets in a particular way for the benefit of others (the beneficiaries). The administrator of a trust is the trustee. Trusts can be revocable, meaning that they can be modified or canceled at some point in the future, or they can be irrevocable, meaning that they are permanent. They can be valid for a fixed period of time, or for an unspecified period of time. Depending on the way they are structured, trusts can save or shelter tax dollars to the benefit of both the grantor and the beneficiaries. There are four types of trusts which are used in conjunction with estate planning: revocable living trusts, testamentar

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ven the power to withhold distributions from the trust. Beneficiaries typically have unrestricted power to dispose of trust assets, which is the general power of appointment. In this situation, the entire value of the property is subject to estate tax when the beneficiary dies. However, the grantor can give the beneficiary the power to dispose of assets according to specific dictates without adverse tax consequences; this is the special power of appointment. This is done when it is determined that the beneficiary should decide at a later date who the ultimate heirs should be. Distributable Net Income Just as individuals and corporations have income which is received over the course of a year, so trusts can also have income which is separate from the principal (or corpus) of the trust. Depending on the type of income received, it may be designated as distributable, meaning that the trustee is bound to distribute some or all of the income to the beneficiaries (subject to the provisions of the trust and the special provisions outlined above). Any income distributed to the beneficiaries is taxable to the beneficiaries; any distributable income which is retained by the trust is taxable to the trust. Because of this, determini

Category: Economics - D