How is DNI calculated for an estate or trust?

DNI, or Distributable Net Income, represents the maximum amount that can be distributed to beneficiaries without incurring additional tax liabilities for the trust or estate. The correct way to calculate DNI involves looking at the estate's or trust's gross income and making necessary adjustments.

The calculation starts with the estate or trust's gross income. From this amount, allowable expenses are subtracted to determine the net income. However, it also includes tax-exempt income because this type of income is still part of what the beneficiaries might receive, even though it does not contribute to taxable income for the trust or estate. Therefore, by adding tax-exempt income back to the net income after expenses, you arrive at the correct DNI.

This approach allows trustees to ascertain the distribution amount while ensuring that tax considerations are correctly accounted for. As a result, it provides a fair and accurate representation of what can be distributed to beneficiaries while maintaining compliance with tax rules.