Mutual Funds-Trusts and Trustees-Capital Gains Distributions From Mutual Funds: Income or Principal?
The growing prevalence of mutual fund shares in the assets of small and medium-sized estates has made the problem of allocating capital gains distributions between income and principal a matter of great concern to the trustees of such estates. A “capital gains” distribution represents a gain resulting from the profitable sale of securities held by the mutual fund. The uncertain state of the law regarding capital gains distributions from mutual funds presents a serious dilemma to the trustee: if he distributes the capital gains to the life beneficiary, the remainderman may claim that such distributions represent a partial liquidation of the fund and therefore are allocable to the principal of the estate; if he allocates the distribution to principal, the life beneficiaries may claim that the distributions are the result of the normal operations of the fund and consequently represent income. Recent decisions and legislation indicate a trend toward resolving this issue by allocating capital gains distributions to principal. This solution seems unsatisfactory for it fails to consider the essential characteristics of mutual funds and their distributions.