Trusts Holding Partnership Assets: DNI and FAI Calculations, Fiduciary and Reporting

Description

FAI and tax reporting for trusts holding partnership assets present calculation challenges for fiduciaries and their tax advisers. The new Section 199A deduction for qualified business income from some pass-through entities introduces new complexities in allocating trust income from partnerships between principal and interest.

In determining distributable net income (DNI) treatment of income from partnerships, trust advisers focus on the taxable income reported on the partnership's K-1 and related footnote disclosures. For fiduciary entities, the deduction is divided between the trust or estate and its beneficiaries, and compliance professionals must understand any terms in the trust document that impact allocation of the deduction. Additionally, trusts holding S corporation stock generally must determine whether to make a QSST or ESBT election to qualify for the deduction.

For FAI purposes, trust income from partnerships is calculated using amounts distributed. However, allocating those distribution amounts between principal and income can be especially tricky given an absence of concrete guidance from either the RUPIA or most state statutes. Liquidating distributions, for example, generally must be allocated to income absent an exception in the trust operating instrument.

Listen as our experienced panel provides a thorough and practical guide to the new challenges of FAI and DNI calculations for trust income from partnerships in light of the recent tax reform.