Distributable Net Income (DNI)

Definition

The term distributable net income is used to describe a calculation that allocates the income derived from a trust between its beneficiaries and the trust.  Calculating distributable net income prevents double taxation of the money generated by a trust.

Calculation

Distributable Net Income = Taxable Income - Capital Gain (or + Capital Loss) + Tax Exemption

Where:

  • Taxable Income = Interest Income + Dividends + Capital Gains (or - Capital Losses) - Fees - Tax Exemption

Explanation

The calculation of distributable net income, or DNI, is used to allocate income between a trust and its beneficiaries.  Distributable net income is the maximum taxable amount received by a beneficiary.  Any distribution made to a beneficiary in excess of DNI will be free of income taxes since it will consist of principal.

DNI is viewed by the Internal Revenue Service (IRS) as an estimate of the economic value derived from a distribution to a beneficiary.  In practice, DNI provides beneficiaries with a reliable source of income while minimizing income taxes paid by the trust.

Example

The assets of a trust generated income of $32,000, of which $12,000 was interest income and $20,000 was related to dividends.  The assets of the trust also realized a capital gain of $30,000. The trustees charged administrative fees of $2,000.

The taxable income for this trust would be calculated as:
= Interest Income ($12,000) + Dividends ($20,000) + Capital Gain ($30,000) - Fees ($2,000) - Exemption ($100)
= $12,000 + $20,000 +$30,000 - $2,000 - $100, or $59,900

The distributable net income of the trust would be calculated as:
= Taxable Income - Capital Gain + Exemption
= $59,900 - $30,000 + $100, or $30,000

Related Terms

fiduciary tax return, non-grantor trust, grantor trust, corpus