Client is the income beneficiary of a QTIP trust that was set up at the death of her husband. The trustee has decided, with the approval of the income and remainder beneficiaries to convert the trust to a total return unitrust. Under this option the trust will pay to my client 5% of the trust assets as of the end of the last calendar year on a monthly basis. For example, the trust held $2,000,000 in assets on 12/31/06, so my client gets $8333.33 per month ($100,000 this year). But, the trust only generates $56,000 in income consisting of $12,000 in taxable interest, $12,000 in non taxable interest, $30,000 in dividends and $4000 in CG. Is my client taxed on the $100,000 or is she taxed on the actual income?
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