Distributable Net Income (DNI): What Trust Beneficiaries Need to Know

Simple Trusts

A simple trust is required to distribute all income earned to beneficiaries each year. This distribution method allows the income to maintain its character as it passes from the trust to the individual beneficiaries. The trust receives a deduction equal to the amount distributed, provided the distribution does not exceed the trust’s DNI. The calculation of DNI for a simple trust typically excludes capital gains since they often get attributed to the trust’s corpus rather than trust income distribution. Thus, understanding DNI allocation is vital for managing tax liabilities effectively.

Complex Trusts

Complex trusts differ from simple trusts in that they may retain some income instead of distributing all earnings. They can also distribute amounts from the corpus or make charitable contributions. This added flexibility results in different implications for trust income distribution and tax liabilities.

When calculating DNI for a complex trust, the interaction of retained income and capital gains can lead to more complex calculations requiring careful consideration of allowable deductions and allocations. Complex trusts allow for strategies that can optimize tax outcomes for both the trust and its beneficiaries, underscoring the importance of understanding the specific structure and rules governing these trusts.