The Uldis Trust reports distributable net income of $100,000 for the year and no income from tax-exempt sources. Under the terms of the trust instrument, the trustee must distribute $75,000 to Roger and $75,000 to Sally. After paying these amounts, the trustee can make additional distributions at its discretion. Exercising this authority, the Uldis trustee distributes an additional $10,000 to Roger and $30,000 to Sally. How much gross income from the trust must Sally recognize?

Question

Quizplus · Accepted Answer

Sally must recognize $50,000 of gross income from the trust. This is calculated by adding the mandatory distribution of $75,000 to both beneficiaries, which exceeds the distributable net income of $100,000, so each beneficiary's share of the distributable net income is based on the proportion of their distribution to the total distribution ($75,000 + $75,000 + $10,000 + $30,000 = $190,000). Sally's distributions total $105,000, which is 55.26% of the total distributions. However, because the distributable net income is only $100,000, Sally's share is limited to $100,000 * 55.26% = $55,260, but since distributions are considered first from distributable net income, her gross income recognition is capped at her actual distribution of $105,000, which is more than the distributable net income. Given the choices, the closest correct interpretation based on the provided options and the mistake in calculation would be that Sally should recognize her proportionate share of the distributable net income based on her distributions. However, the correct calculation based on the information should consider the proportionate share of the $100,000 distributable net income, leading to a different interpretation of how much Sally must recognize. Given the error in the explanation, the correct approach is to allocate the distributable net income based on the initial mandatory distributions, which are within the distributable net income limit. Since the total mandatory distributions ($75,000 to Roger and $75,000 to Sally) exceed the distributable net income, and the question focuses on Sally's recognition without specifying the allocation method beyond the distributions, it implies focusing on the distributions relative to the distributable net income. Sally's mandatory distribution is within the distributable net income, making the additional discretionary distribution the focus for her gross income recognition from the trust.

The Uldis Trust Reports Distributable Net Income of $100,000 for the Year