The Exeter Trust instrument provides that Tamara, the sole income beneficiary, is to receive $30,000 annually. If trust accounting income is not sufficient to pay this amount, the Exeter trustee is empowered to invade corpus to the extent necessary. During the current year, the trust has distributable net income (DNI) of $100,000, including $20,000 of tax-exempt interest. In accordance with the trust instrument, $30,000 is paid to Tamara. What is Tamara's gross income from Exeter for the current year?

Question

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Tamara's gross income from the trust is $24,000, which is the portion of the $30,000 distribution that is taxable. The $30,000 distribution includes $20,000 of tax-exempt interest, so only $10,000 of the distribution is tax-exempt. Therefore, $30,000 - $10,000 = $20,000 is taxable. However, since the trust's DNI is $100,000 and includes $20,000 of tax-exempt interest, the taxable portion of the DNI is $80,000. The distribution to Tamara is $30,000, of which $6,000 (20% of $30,000) is tax-exempt, leaving $24,000 as taxable gross income.

The Exeter Trust Instrument Provides That Tamara, the Sole Income