How are capital gain dividends received by a trust from a mutual fund to be treated?
Under Article 11-A Uniform Principal and Income Act of New York’s Estates, Powers and Trusts Law, the presumptive characterization for fiduciary accounting purposes of capital gain distributions received from a mutual fund are as receipts of principal. Per Article 11-A, “A trustee shall allocate the following receipts from an entity as principal: … money received from an entity that is a regulated investment company or a real estate investment trust if the money distributed is a capital gain dividend for federal income tax purposes” [(EPTL 11-A-4.1(c)(4)]. Note that for federal income tax purposes, short-term capital gain dividends, unlike long-term capital gain dividends, are ordinary income.
