CPA Regulation (REG) : Distributable Net Income
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Example Questions
Example Question #1 : Distributable Net Income
Lake Trust, a simple trust, reported the following items of income and expense during the year:
- Dividend income: $2,500
- Taxable interest income: 2,000
- Capital gains (allocable to corpus): 5,000
- Accounting fees (allocable to income): (500)
- Trustee fees (allocable to income): (750)
What is Lake's distributable net income?
$9,500
$3,250
$5,000
$8,250
$3,250
The DNI will include both the dividend and interest income, totaling $4,500. Expenses allocable to income total ($1,250). Netted, these bring DNI to $3,250. Capital gains allocable to corpus are not treated as income, as these remain within the estate and are not distributed to beneficiaries.
Example Question #2 : Distributable Net Income
A distribution from estate income, that was currently required, was made to the estate’s sole beneficiary during its calendar year. The maximum amount of the distribution to be included in the beneficiary’s gross income is limited to the estate’s:
Distributable net income.
Ordinary gross income.
Capital gain income.
Net investment income.
Distributable net income.
Distributable net income is the maximum amount a trust or estate may deduct for distributions to beneficiaries.
Example Question #3 : Distributable Net Income
Which of the following items is not normally taken into account in determining distributable net income of a simple trust?
Fiduciary fee
Personal exemption
Tax-exempt interest
Taxable interest income
Personal exemption
Since trusts are treated as a different class of taxpayer than living individuals, personal exemptions are not allowed for trusts. The other items – interest expenses, management fees, and interest income – are all standard components of a trust’s DNI.
Example Question #1 : Distributable Net Income
The standard deduction for a trust or an estate in the fiduciary income tax return is:
$800
$0
$750
$650
$0
An estate or trust is not allowed a standard deduction in preparing the fiduciary income tax return.
Example Question #1 : Distributable Net Income
Peter created a trust and transferred property to it. He also retained certain interests. For income tax purposes, Peter was treated as the owner of the trust. Peter created what type of trust?
Grantor
Complex
Pre need funeral
Simple
Grantor
When the creator of a trust is treated as the owner of it, it is referred to as a grantor trust.
Example Question #1 : Distributable Net Income
Which of the following would be deductible for purposes of calculating DNI?
Trustee fees allocable to income
Personal expenses
Itemized deductions
Trustee fees not allocable to income
Trustee fees allocable to income
Only income-related expenses such as trustee fees allocable to income would be allowed to be deducted for DNI purposes.
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