Question:
In a simple trust, when determining the distributable income, I subtract the expenses (accounting and trustee fees) from the interest and dividend income. Do I subtract 100% of the expenses OR do I subtract 1/3 of the expenses? I am asking because I read that 1/3 of expenses were charged as income and 2/3 of expenses were charged against principal.
Response:
You can deduct all the expenses against the trust income. What you’re referring to has to do with internal trust accounting as opposed to tax reporting. If the trust has different income and principal beneficiaries, it would be unfair to charge all the expenses against one set of beneficiaries and not another. The one-third/two-thirds split you suggest sounds fair. Traditional trust accounting can get pretty complicated since they, in effect, keep two separate books, one for the income and one for the principal, and sometimes show transfers from one to the other. But most trusts have common beneficiaries for both income and principal, in which case, the accounts can be much simpler and there’s no need to attribute expenses to principal or income since it all comes out of the same pot.
