Why it matters
When a trust or estate has an income beneficiary and a remainder beneficiary, each receipt and each disbursement belongs to one or the other: income, which the income beneficiary receives, or principal, which is kept for the remainder. The amount allocated to income, often called trust accounting income or fiduciary accounting income, decides what the income beneficiary is paid. When there are income beneficiaries, the accounting includes a schedule allocating receipts and disbursements between principal and income (Prob. Code §1063(c)).
The rules: California’s Uniform Fiduciary Income and Principal Act
California’s act is Probate Code §§16320–16383. The trust instrument’s own terms come first; the act supplies the rules where the instrument is silent. Some of the main ones:
- Interest: generally income (§16345).
- Dividends and other money distributed by an entity: income (§16340(c)), except a capital distribution, which is principal (§16340(d)(3)), and a capital gain dividend from a mutual fund or REIT, which is principal (§16340(d)(4)).
- Proceeds of selling a principal asset: principal, so gains and losses on sales stay with principal (§16343(b)).
- Receipts the act does not otherwise address: principal (§16325(c)(1)).
Disbursements
- From income: one-half of the fiduciary’s regular compensation and of investment advisory and custodial fees, and of accounting and court expenses affecting both interests (§16360(a)); ordinary expenses such as interest, ordinary repairs and recurring taxes (§16360(c)); and insurance premiums on principal assets (§16360(d)).
- From principal: the other half of those fees and expenses, fees for acceptance, distribution or termination, expenses of selling property, payments on the principal of a debt, estate taxes, environmental costs, and extraordinary repairs and capital improvements (§16361(a)).
Trust accounting income vs. DNI and taxable income
Trust accounting income is a fiduciary-law measure: what the income beneficiary is entitled to. Distributable net income (DNI) and taxable income are tax measures, used on the trust’s income tax returns, and they can differ from it; for example, capital gains are usually principal for accounting purposes but still taxable. The trust’s CPA works from both.
Let Balanced allocate it
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