In general, the first dollars from the trust are considered income. Once that is used up, subsequent payments are considered to come from principal. At least, that’s how it works for tax reporting. So, for instance, if a trust earns $5,000 a year in interest and dividends and disburses $10,000, the first $5,000 will be considered to be income and the next $5,000 principal.
Harry S. Margolis practices elder law, estate, and special needs planning in Boston and Wellesley, Massachusetts. He is the founder of ElderLawAnswers.com and answers consumer questions about estate planning issues here and at AskHarry.info.