Trusts generally pay income annually to one
group of beneficiaries (income beneficiaries) while preserving principal
for another group (remainder beneficiaries). The term "accounting
income" refers to the income and expense items that are used to
determine the amount the income beneficiaries are entitled to receive from
the trust or estate each year. Items of income and expense that are
allocated to principal are not used in calculating accounting income.
Interest, dividends and other items of ordinary income are typically
allocated to income while capital gains are allocated to principal.
Fiduciary fees and administrative expenses are typically divided between
accounting income and principal but may be allocated entirely to income or
to principal. An trust or estate's accounting income may be specified in the will
or trust agreement. When the controlling document is silent, allocation to
accounting income and principal is determined by the Uniform Principal and
Income Act or similar state law governing the trust or estate.
Note: Accounting
income is only used to determine the amount required to be distributed to
the income beneficiaries. Accounting income does not determine the amount
of taxable income allocated between the trust or estate and the beneficiaries.
Taxable income allocated to the beneficiaries is determined by the income
distribution deduction.
