1976, March, Pg. 398. CPC Newsletter.

5 Colo.Law. 398

Colorado Lawyer

1976.

1976, March, Pg. 398.

CPC Newsletter

398CPC NewsletterProperty Distributions by Estates and Trusts --- How to Avoid Capital Gains!

Two of the most important concepts concerning the income taxation of estates and trusts are the "conduit" principle and the "distributable net income" (DNI). The conduit principle holds that estate or trust income should be taxed only once---either to the estate or trust if it is not distributed, or, if distributed, to the beneficiaries who received it. If the estate or trust does distribute the income, it is entitled to an income tax deduction for such distributions. The distributable net income of an estate or trust limits the amount of the deduction to which the estate or trust is entitled for distributions to beneficiaries and also limits the amount of income which such beneficiaries are required to report as a result of any distributions to them.(fn1)

The Distribution as income

Whether a distribution from an estate or trust is made to a beneficiary in cash or in property, to the extent that the amount of the distribution does not exceed the DNI of the estate or trust it will result in income to the beneficiary.(fn2) An exception to this rule is made for a gift or bequest of specific property or of a specific sum of money which is paid all at once or in not more than three installments to a beneficiary.(fn3)

Assuming that a property distribution does not fall within the above exception, the amount includible in the beneficiary's income for property distributed in kind is based upon the fair market value of the property at the time it was distributed.(fn4) On the other hand, whether or to what extent it will constitute income to the beneficiary depends upon the DNI of the estate or trust for the year of the distribution. The beneficiary's basis in the property is also its fair market value at the date of its distribution, but only to the extent that the value was included in the income of the beneficiary. If the value of the property distributed in kind is not included in the beneficiary's income, the beneficiary takes the same basis for the property as the estate or trust had at the date of the distribution.(fn5)

If the estate or trust distributes both cash and property in any taxable year, the cash distributions are considered as includible...