Trust Accounting Income

Trust accounting income is the income and expense items that are used to determine the amount, certain beneficiaries will receive from the trust each year. Generally speaking, it is all revenue less all expenses paid. 

First let’s look at the 2 types of trust funds. A trust that must pay out all accounting income earned in the year is a Simple trust. A Complex trust can pay out dividends and principle to beneficiaries, or can just accumulate the accounting income.

Simple trusts cannot pay out principle, they must be changed to a complex trust to do that. This is why these types of trust funds are popular to give to kids or grandkids, it allows cash flow income, but will not dwindle the source. Also, 2 types of beneficiaries are set-up, remainder and income beneficiaries. If the accounting income has not already been cleared, it must all be paid out at the end of the year to “income beneficiaries”. The principle is preserved for the remainder beneficiaries. Simple trusts cannot have any charitable beneficiaries.

Complex trusts have much more freedom and versatility. Accounting income can be paid out or not. Principle can be paid out or not. And also, complex trusts have the option to utilize charitable beneficiaries. However, charitable contributions, for trusts, have many regulations and stipulations. The contributions must be from the gross accounting income and come from the principle amount. Charitable donations can be deductible if they are paid specifically from the current year’s gross accounting income. Keep in mind, this is if the state and local laws allow for these processes.

The items that are calculated into the asset side of accounting income may include dividends, rental income, royalty income, partnership income, tax exempt interest, capital gain, ordinary gain, and other estate income.

The accounting income liability factors that can weigh in on the expense side are investment fees, fiduciary fees, state taxes, federal taxes, real estate taxes, and property taxes. These fees and taxes are usually paid by both the principle and the accounting income. Although, any arrangement can be made for satisfying these expenses. If the fees are paid by the accounting income, it will decrease the cash flow to the income beneficiary, but the income source will remain producing the same dividends.

Hopefully the asset side is larger than the expense side so that there is accounting income left to collect. If it's not, you need to change accounting services or get a better financial advisor. Since the main objective to having a trust is to gain accounting income and cash flow, it would be counter-productive to have more expenses than income.