The Uldis Trust reports distributable net income for the year of $100,000 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 is empowered to 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 gross income equal to the total amount distributed to her from the trust, minus any amounts that constitute a return of her basis in the trust.

In this case, Sally received $75,000 as a mandatory distribution and an additional $30,000 at the trustee's discretion, for a total of $105,000. Since this amount exceeds the trust's distributable net income of $100,000, it includes $5,000 of principal.

However, since Sally's basis in the trust is likely zero (or close to it), the entire $105,000 must be included in her gross income. Therefore, the correct answer is B) $50,000.

The Uldis Trust Reports Distributable Net Income for the Year