Distributable Net Income (DNI)
Candlefocus EditorDNI is calculated by taking into account both the taxable income of the trust and the capital gains or losses on any trust investments. When the taxable income is calculated, distributions to beneficiaries can be deducted thus reducing the taxable amount even further. Once the taxable amount has been determined, the DNI will be generated and any income earned from the trust above that figure is then tax-free and available to the beneficiaries.
The amount of DNI available to beneficiaries is determined by the size of the trust investments, the capital gains or losses, and the trust's exemption or deductions. For example, if the trust incurred capital gains, the DNI figure would be higher as the trust's taxable income would be lower. Likewise, if the trust incurred capital losses, the DNI figure would be lower as the trust's taxable income would be higher.
The existence of DNI helps to provide a degree of security to fund beneficiaries as they can rely on income from the trust and will not be subject to higher taxes than the DNI figure, while still being able to access the capital gains from the trust without taxation.
In many cases, trust and partnership agreements give trustees or partners decision-making power over the DNI, so it is important to be aware of the regulations applicable for the particular trust and its investments in order to understand the implications for DNI and its beneficiaries.
Overall, DNI provides a reliable source of income for trust beneficiaries while promoting the efficient use of the trust’s funds. Trustees and partners should be aware of the regulations governing DNI to ensure the best outcome for their beneficiaries at the same time as minimizing the effect of taxes.