All revocable living trusts are, effectively, flow-through entities for income tax purposes and not treated as an independent taxpayer. The same is not true of irrevocable trusts. An irrevocable trust’s income is made up of the character of the returns from its investments. Thus the investment choices in irrevocable trusts make a big difference to the net after-tax returns of the trust and its beneficiaries. In general, an irrevocable trust is a taxpayer, much like a person is. However, when distributions are made in the same year the income is earned, the tax burden shifts to the beneficiary, at least to the extent of the distribution amount. To provide consistency in this shift, and to limit the beneficiary’s tax liability to the income earned that year, an allocation method was devised by the IRS. This allocation method (called Distributable Net Income, or DNI), generally, limits the income “pass-through” to the beneficiary of an irrevocable trust to the current year’s income, and does not include net long-term capital gains. The reason gains are excluded is because they are considered to be related to the rise and fall of the value of the underlying asset which is to pass to the remainder beneficiary, not as “income” to the current beneficiary.