Question

"The Taylor Trust, a complex trust, reported the following items of income and expenses for Year 5.

Income Rental income 5,000
Long-term capital gains 2,500
Corporate bond interest 1,000
Interest from savings account 200
Municipal bond interest 2,000
ExpensesRent expense 2,000
Investment expense relating to tax-exempt income 300
Trustee fee allocated 60% to principal and 40% to income 500
What is the Taylor Trust's distributable net income (DNI) for Year 5?"

Answer 1

The Taylor Trust's distributable net income (DNI) for Year 5 is calculated by totaling its income, excluding tax-exempt income, and then subtracting allowable expenses. The DNI for Year 5 is $6,500.

Step-by-step explanation:

The distributable net income (DNI) of the Taylor Trust for Year 5 is calculated by starting with the trust's gross income and then deducting the allowable expenses. To begin with, we total all of the income items:

• Rental income: $5,000
• Long-term capital gains: $2,500
• Corporate bond interest: $1,000
• Interest from savings account: $200
• Municipal bond interest (which is generally tax-exempt and thus not included in DNI calculation): $2,000

Now, we will subtract the expenses that are applicable:

• Rent expense: $2,000
• Investment expense relating to tax-exempt income (not deductible): $300
• Trustee fee: $500, but since it is allocated 60% to principal and 40% to income, we include only the income portion which is $500 x 40% = $200

Thus, the calculation of DNI would be:

Gross Income (excluding tax-exempt income): $5,000 + $2,500 + $1,000 + $200 = $8,700

Total Deductible Expenses: $2,000 (rent expense) + $200 (part of trustee fee allocated to income) = $2,200

Distributable Net Income: $8,700 (Gross Income) - $2,200 (Total Deductible Expenses) = $6,500