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Allocation of Trust Distributable Net Income Between Trust and Multistate Beneficiaries

Overcoming Income Sourcing and Apportionment Challenges, DNI Calculations, Trust Income Reporting

Note: CPE credit is not offered on this program

Recording of a 90-minute CLE webinar with Q&A

This program is included with the Strafford CLE Pass. Click for more information.
This program is included with the Strafford All-Access Pass. Click for more information.

Conducted on Tuesday, December 17, 2019

Recorded event now available

or call 1-800-926-7926

This CLE course will provide trust and estates counsel a thorough and practical guide into the challenges of allocating distributable net income (DNI) for complex trusts with income or beneficiaries in multiple states. The panel will discuss key tax rule challenges and considerations in trust document drafting, tax reporting of trust income from assets such as partnership interests, capital gains, and tax-exempt interest, and detail state variations in the tax treatment of various income components.

Description

The tax concept of DNI is one of the more complicated tasks in trust planning and both fiduciary and tax accounting. DNI determines the maximum income distribution deduction that a trust or estate may claim and the amount that beneficiaries must report as taxable income. These calculations become even more complicated when a trust has income or beneficiaries in multiple states, with fiduciaries needing to grasp the various state rules and approaches to computing DNI.

Two factors that make determining DNI complex are the presence of tax-exempt income or a trust situation that allows DNI to include capital gains. Also, scenarios where actual distributions are either higher than or less than actual DNI impacts tax reporting for trusts and beneficiaries.

The majority of states impose an income tax on resident trusts and state-sourced income and deduction of nonresident trusts. As with virtually all multistate taxation issues, the variety of conflicting state laws creates huge tax compliance issues. Depending on the allocation of income, a trust may have DNI sourced to one state that exceeds its federal amount.

Listen as our experienced panel provides a practical guide to specific challenges of multistate allocation of DNI from complex trusts.

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Outline

  1. Trust accounting income vs. DNI
    1. Determining DNI under various income scenarios
    2. Allocation of DNI among beneficiaries
    3. "Tier I" vs. "Tier II" distribution requirements
  2. State taxation of resident trusts

  3. Allocating income between non-grantor trust and beneficiaries in multistate situations

  4. Sourcing issues and methods to overcome them

  5. State apportionment issues for trusts holding active business income

  6. Notable state deviations from the federal tax treatment of grantor trusts

Benefits

The panel will review these and other relevant topics:

  • Determining whether a trust is resident or nonresident for state income tax purposes
  • Allocating income and deductions for FAI purposes
  • When trust income allocated to an individual state exceeds federal DNI
  • Notable state variations and deviations from the federal tax treatment of grantor trusts
  • Key practice methods to avoid allocation and distribution pitfalls

Faculty

Egan, Alison
Alison F. Egan
Of Counsel
Caplin & Drysdale

Ms. Egan assists high-net-worth individuals and their families by designing and implementing tailored strategies to...  |  Read More

Mehany, Dianne
Dianne C. Mehany
Member
Caplin & Drysdale

Ms. Mehany's practice focuses on international tax planning and controversies, including inbound and outbound tax...  |  Read More

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