Distributions to beneficiaries are taxed as what?

• A. Tax-free
• B. Capital gains
• C. Ordinary income
• D. Favorable rates

Answer: (C)

Distributions from a trust to a beneficiary are taxed to the beneficiary as ordinary income to the extent the trust has distributable net income. The trust’s income that is distributed is passed through to the beneficiary and taxed at ordinary income rates, preserving the character of the income. While distributions that actually represent capital gains can be taxed at capital gains rates if they arise from the trust’s capital gains, the general rule emphasized here is that distributions are ordinary income.