Jan 1, 2007 12:00 PM, By Jeremy T. Ware, associate, Arnall Golden Gregory LLP, Atlanta

By: By Jeremy T. Ware, associate, Arnall Golden Gregory LLP, Atlanta

Distributable net income (DNI) has long been a complicated concept for fiduciaries, who — in making distributions — must consider the income tax consequences to both the trust or estate and its beneficiaries. When fiduciaries also must contend with the interplay of capital gains and DNI, the situation can become murky, indeed. The rise of total return theory in trust investing has led many jurisdictions to adopt unitrust conversion statutes as well as the Uniform Principal and Income Act.¹ That means more unitrusts and unitrust conversions across the country — and more fiduciaries grappling with complex capital gains and DNI issues.

The Internal Revenue Service has issued regulations to address most situations involving capital gains and DNI.² The regulations apply to tax years ending after Jan. 2, 2004, and raise issues that practitioners are increasingly facing. But to understand the regulations, fiduciaries first must have a solid command of the DNI concept and calculation. Then they can see how DNI interacts with capital gains, and how this interplay affects such increasingly common situations as unitrusts and trust ownership of partnerships.

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