Are assets in a QTIP trust part of DNI when distributed to beneficiaries?

The question asks whether assets in a QTIP trust are part of DNI when distributed to beneficiaries. To answer this question, we need to understand the definitions and treatments of DNI and QTIP trusts under the Internal Revenue Code and Treasury Regulations.

Distributable Net Income (DNI) is defined in Subsection 643(a) as the taxable income of the estate or trust computed with certain modifications. One of these modifications, as stated in Subsection 643(a)(3), is that gains from the sale or exchange of capital assets are excluded to the extent that such gains are allocated to corpus and are not paid, credited, or required to be distributed to any beneficiary during the taxable year.

In the context of property distributions, Subsection 643(e) provides that the basis of any property received by a beneficiary in a distribution from an estate or trust shall be the adjusted basis of such property in the hands of the estate or trust immediately before the distribution, adjusted for any gain or loss recognized to the estate or trust on the distribution. In the case of any distribution of property (other than cash), the amount taken into account under sections 661(a)(2) and 662(a)(2) shall be the lesser of the basis of such property in the hands of the beneficiary or the fair market value of such property.A QTIP trust, as defined in Section 2056(b)(7) of the Code, is a type of trust that allows a surviving spouse to receive income from the trust for life, and the remaining assets pass to the beneficiaries upon the surviving spouse's death. The surviving spouse must be entitled to all of the income from the property payable annually or at more frequent intervals, and no person has the power to appoint any part of the property to any person other than the surviving spouse.

When assets are distributed from a QTIP trust to beneficiaries, they are considered part of the DNI to the extent that they are income under the terms of the trust and applicable local law, as per Subsection 643(b). However, the specific character and amount of the DNI that is included in the gross income of the beneficiaries is determined by the proportion of each class of items entering into the computation of the DNI of the trust, as per Section 652.

In conclusion, assets in a QTIP trust are part of DNI when distributed to beneficiaries, to the extent that they are income under the terms of the trust and applicable local law. The specific character and amount of the DNI that is included in the gross income of the beneficiaries is determined by the proportion of each class of items entering into the computation of the DNI of the trust.

Sources:

PLR 9321035

PLR 199931033

PLR 9322005

TAM 9220007

§ 652. Inclusion of amounts in gross income of beneficiaries of trusts distributing current income only

§ 643. Definitions applicable to subparts A, B, C, and D