I recently became trustee of a trust that provides income only to the current beneficiary and income and/or principal to the residuary beneficiaries. In looking for an investment strategy that would work for all beneficiaries, the question of what counts as income arose.
After consulting several attorneys and tax accountants the answers I got regarding income distribution are:
- Capital gains and losses are counted as principal, only dividends and interest are income.
- Taxes on the income side come out of income
- Administrative expenses are split between income and principal
- Only the net income is available for distribution
Be sure to check with your own accountant for state specific information and advice.