Multistate Allocation of Trust Distributable Net Income: Income Sourcing and Apportionment

Description

Calculation of trust accounting income and the tax concept of DNI is one of the more complicated tasks in 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 DNI calculations so vexing 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 impact tax reporting and final computing of trust AGI.

The majority of states impose an income tax on resident trusts and state-sourced income and deduction of non-resident trusts. As with virtually all multistate taxation issues, the variety of conflicting state laws creates huge tax compliance issues for tax advisers. 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 some of the specific challenges of multistate allocation of DNI from complex trusts.