What is the name of your state (only U.S. law)? NH or MA
I live in NH but am putting together an annual accounting for an irrevocable trust established in the state of MA. According to the terms of the trust, "income" but not principal can be distributed. This should be obvious but I want to make sure that "income" as referred to by the trust is defined properly. Here's a hypothetical scenario (using wild numbers):
The trust is funded by the grantor with a principal of 100,000 on Jan 1, 2007. The trustees invest the money in a mutual fund for which the NAV is $20. Therefore the trustees can purchase 5,000 shares. In December 2007, the trust receives a capital gain distribution of $10,000, but now the NAV of the mutual fun is $10. The trust value is now equal to:
5,000 shares * $10 per share = 50,000
plus the $10,000 capital gain, so a total of $60,000.
In this year the value of the trust has fallen below the principal, and so even though the tax forms will show a capital gain "income" of $10,000, the total trust value is $40,000 less than the value of the initial principal. Thus, in the year end accounting, the trust has a $40,000 loss and not a $10,000 gain.
The provisions of the trust allow discretionary distributions of trust "income" AND also specifically disallow distributions of the principal from the trust.
My question is, according to the provisions of the trust, is there a distributable "income" for this year?
If trust income is defined as <total trust value> minus <trust principal>, then the trust does not have distributable income according to its provisions.
However
If trust income is defined as capital gains + interest income, no matter the NAV of the principal, then the trust does have distributable income of $10,000.
Which accounting is correct?
SSSWhat is the name of your state (only U.S. law)?
I live in NH but am putting together an annual accounting for an irrevocable trust established in the state of MA. According to the terms of the trust, "income" but not principal can be distributed. This should be obvious but I want to make sure that "income" as referred to by the trust is defined properly. Here's a hypothetical scenario (using wild numbers):
The trust is funded by the grantor with a principal of 100,000 on Jan 1, 2007. The trustees invest the money in a mutual fund for which the NAV is $20. Therefore the trustees can purchase 5,000 shares. In December 2007, the trust receives a capital gain distribution of $10,000, but now the NAV of the mutual fun is $10. The trust value is now equal to:
5,000 shares * $10 per share = 50,000
plus the $10,000 capital gain, so a total of $60,000.
In this year the value of the trust has fallen below the principal, and so even though the tax forms will show a capital gain "income" of $10,000, the total trust value is $40,000 less than the value of the initial principal. Thus, in the year end accounting, the trust has a $40,000 loss and not a $10,000 gain.
The provisions of the trust allow discretionary distributions of trust "income" AND also specifically disallow distributions of the principal from the trust.
My question is, according to the provisions of the trust, is there a distributable "income" for this year?
If trust income is defined as <total trust value> minus <trust principal>, then the trust does not have distributable income according to its provisions.
However
If trust income is defined as capital gains + interest income, no matter the NAV of the principal, then the trust does have distributable income of $10,000.
Which accounting is correct?
SSSWhat is the name of your state (only U.S. law)?