It is a fact of life (or a result of law school) that attorneys tend to speak "legalese". This means that we can take a perfectly well known English word - like "income" - ascribe a very specific meaning to it, and then bandy the word about without you having the benefit of knowing the specific definition we are referring to. So what is "income", or "principal" for that matter, from a trust or estate planning perspective? And what makes up a trust anyway?
Trusts are a legal construct (see - more legalese). This means that a trust doesn't exist in a tangible sense. Instead, it is "formed" on paper (the "Trust Agreement") and given life by the people who carry out the terms of the trust. Who are those people?
"Grantor" or "Settlor" - The person who creates the trust.
"Beneficiary" - The people the trust is made for, or intended to benefit.
"Trustee" - The person who operates the trust for the benefit of the Beneficiaries.
If you think of a trust like a small business, the Trustee is akin to the President, and the Beneficiaries are like the Shareholders. Everything that the Trustee/President does is for the benefit of the Beneficiaries/Shareholders.
A Beneficiary can be further described as having rights to "income" and/or "principal".
Income - For trust purposes income is defined as interest and dividends. Capital gains are generally not part of the trust definition of income. So a person entitled to income would be entitled to any interest on bond payments, or any dividends on stock, but not the proceeds from the sale of an asset that resulting in a capital gain.
Principal - Principal is the bulk of the trust. This is what the Trustee invests and distributes to the beneficiaries. Any capital gain would be added back to income to be reinvested.
There are myriad ways how income and principal can be designed to be allocated to the beneficiaries, and the level of discretion the Trustee has regarding those distributions. However, that is a subject for another post.