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Hi, this is Keith Davidson from Albertson & Davidson. In this video, I want to discuss the difference between trust principal and trust income. So everything that goes into a trust, all the property, all the assets, all the money that go into a trust. It gets broken down into one of two categories, it’s either principal, which is the property that the trust starts with or receives. And then there’s income and that’s the amount of money and other things that the asset principal generates. So if you have a stock, for example, the stock would be principal and if that stock pays a dividend, then the dividend payment would be income. Same thing for rental property. So if you have an apartment building or a rental home, the home itself, the building itself would be principal, but the rents that come in off that property, that would be income.
There are times when it can get a little tricky. For example, if you sell a stock and you trigger a capital gain, that gain amount is actually principal, not income – even though it is subject to income tax as a capital gain, it’s still not income in the eyes of trust. It’s actually a principal receipt.
So that’s kind of the difference between principal and income.
And it’s important to understand these differences, because different people might have different rights to principal versus income. So, for example, it’s fairly common in a trust that’s set up for a surviving spouse where the surviving spouse might be entitled to all of the income. So all the income goes to the spouse, but the principal either doesn’t get distributed at all or if it is distributed, it’s based on a standard. Like the spouse can use it for health, education, maintenance or suppose.
So the two different types of property are going to be distributed out of the trust, based on different stands. So you have to understand what is principal and what is income so that you know what property is the beneficiary entitled to and what property is more limited or discretionary in the eyes of the trustee.
You can also have beneficiaries that have an income only interest and other beneficiaries that have a principal only interest. So sometimes they’re actually separated out based on income beneficiaries and principal beneficiaries. Two separate groups of people. And so obviously there you also want to know what is income so you can pay the right amount out to the income beneficiaries versus the principal beneficiaries.
So it’s very important to understand these distinctions. It’s important to be able to categorize the principal and income appropriately. And then, obviously, you want to distribute it appropriately. And that’s a little something about trust principal and income.