2006 -- S 2265

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LC01365

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STATE OF RHODE ISLAND

IN GENERAL ASSEMBLY

JANUARY SESSION, A.D. 2006

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A N A C T

RELATING TO FIDUCIARIES

     Introduced By: Senators Tassoni, McBurney, and Doyle

     Date Introduced: February 02, 2006

     Referred To: Senate Judiciary

It is enacted by the General Assembly as follows:

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     SECTION 1. Title 18 of the General Laws entitled "Fiduciaries" is hereby amended by

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adding thereto the following chapter:

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     CHAPTER 17

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UNIFORM PRINCIPAL AND INCOME ACT

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     PART 1

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     18-17-101. Short title. -- This act may be cited as the Uniform Principal and Income Act.

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     18-17-102. Definitions. -- In this chapter: (1) “Accounting period” means a calendar year

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unless another twelve (12) month period is selected by a fiduciary. The term includes a portion of

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a calendar year or other twelve (12) month period that begins when an income interest begins or

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ends when an income interest ends.

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     (2) “Beneficiary” includes, in the case of a decedent’s estate, an heir, legatee, and/or

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devisee and, in the case of a trust, an income beneficiary and a remainder beneficiary.

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     (3) “Fiduciary” means a personal representative or a trustee. The term includes an

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executor, administrator, successor, personal representative, special administrator, and a person

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performing substantially the same function.

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     (4) “Income” means money or property that a fiduciary receives as current return from a

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principal asset. The term includes a portion of receipts from a sale, exchange, or liquidation of a

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principal asset, to the extent provided in part 4 of this chapter.

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     (5) “Income beneficiary” means a person to whom net income of a trust is or may be

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payable.

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     (6) “Income interest” means the right of an income beneficiary to receive all or part of

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net income, whether the terms of the trust require it to be distributed or authorize it to be

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distributed in the trustee’s discretion.

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     (7) “Mandatory income interest” means the right of an income beneficiary to receive net

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income that the terms of the trust require the fiduciary to distribute.

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     (8) “Net income” means the total receipts allocated to income during an accounting

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period minus the disbursements made from income during the period, plus or minus transfers

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under this chapter or from income during the period.

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     (9) “Person” means an individual, corporation, business trust, estate, trust, partnership,

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limited liability company, association, joint venture, government; governmental subdivision,

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agency, or instrumentality; public corporation, or any other legal or commercial entity.

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     (10) “Principal” means property held in trust for distribution to a remainder beneficiary

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when the trust terminates.

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     (11) “Remainder beneficiary” means a person entitled to receive principal when an

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income interest ends.

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     (12) “Terms of a trust” means the manifestation of the intent of a settlor or decedent with

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respect to the trust, expressed in a manner that admits of its proof in a judicial proceeding,

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whether by written or spoken words or by conduct.

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     (13) “Trustee” includes an original, additional, or successor trustee, whether or not

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appointed or confirmed by a court.

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     18-17-103. Fiduciary duties – General principles. -- (a) In allocating receipts and

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disbursements to or between principal and income, and with respect to any matter within the

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scope of parts 2 and 3, a fiduciary:

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     (1) shall administer a trust or estate in accordance with the terms of the trust or the will,

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even if there is a different provision in this chapter;

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     (2) may administer a trust or estate by the exercise of a discretionary power of

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administration given to the fiduciary by the terms of the trust or the will, even if the exercise of

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the power produces a result different from a result required or permitted by this chapter;

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     (3) shall administer a trust or estate in accordance with this chapter if the terms of the

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trust or the will do not contain a different provision or do not give the fiduciary a discretionary

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power of administration; and

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     (4) shall add a receipt or charge a disbursement to principal to the extent that the terms of

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the trust and this chapter do not provide a rule for allocating the receipt or disbursement to or

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between principal and income.

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     (b) In exercising the power to adjust under section 18-17-104(a) or a discretionary power

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of administration regarding a matter within the scope of this chapter, whether granted by the

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terms of a trust, a will, or this chapter, a fiduciary shall administer a trust or estate impartially,

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based on what is fair and reasonable to all of the beneficiaries, except to the extent that the terms

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of the trust or the will clearly manifest an intention that the fiduciary shall or may favor one or

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more of the beneficiaries. A determination in accordance with this chapter is presumed to be fair

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and reasonable to all of the beneficiaries.

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     18-17-104. Trustee’s power to adjust. -- (a) A trustee may adjust between principal

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and income to the extent the trustee considers necessary if the trustee invests and manages trust

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assets as a prudent investor, the terms of the trust describe the amount that may or must be

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distributed to a beneficiary by referring to the trust’s income, and the trustee determines, after

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applying the rules in section 18-17-103(a), that the trustee is unable to comply with section 18-

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17-103(b).

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     (b) In deciding whether and to what extent to exercise the power conferred by subsection

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(a), a trustee shall consider all factors relevant to the trust and its beneficiaries, including the

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following factors to the extent they are relevant:

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     (1) the nature, purpose, and expected duration of the trust;

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     (2) the intent of the settlor;

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     (3) the identity and circumstances of the beneficiaries;

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     (4) the needs for liquidity, regularity of income, and preservation and appreciation of

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capital;

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     (5) the assets held in the trust; the extent to which they consist of financial assets,

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interests in closely held enterprises, tangible and intangible personal property, or real property;

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the extent to which an asset is used by a beneficiary; and whether an asset was purchased by the

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trustee or received from the settlor;

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     (6) the net amount allocated to income under the other sections of this chapter and the

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increase or decrease in the value of the principal assets, which the trustee may estimate as to

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assets for which market values are not readily available;

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     (7) whether and to what extent the terms of the trust give the trustee the power to invade

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principal or accumulate income or prohibit the trustee from invading principal or accumulating

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income, and the extent to which the trustee has exercised a power from time to time to invade

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principal or accumulate income;

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     (8) the actual and anticipated effect of economic conditions on principal and income and

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effects of inflation and deflation; and

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     (9) the anticipated tax consequences of an adjustment.

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     (c) A trustee may not make an adjustment:

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     (1) that diminishes the income interest in a trust that requires all of the income to be paid

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at least annually to a surviving spouse and for which an estate tax or gift tax marital deduction

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would be allowed, in whole or in part, if the trustee did not have the power to make the

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adjustment;

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     (2) that reduces the actuarial value of the income interest in a trust to which a person

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transfers property with the intent to qualify for a gift tax exclusion;

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     (3) that changes the amount payable to a beneficiary as a fixed annuity or a fixed fraction

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of the value of the trust assets;

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     (4) from any amount that is permanently set aside for charitable purposes under a will or

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the terms of a trust unless both income and principal are so set aside;

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     (5) if possessing or exercising the power to make an adjustment causes an individual to

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be treated as the owner of all or part of the trust for income tax purposes, and the individual

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would not be treated as the owner if the trustee did not possess the power to make an adjustment;

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     (6) if possessing or exercising the power to make an adjustment causes all or part of the

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trust assets to be included for estate tax purposes in the estate of an individual who has the power

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to remove a trustee or appoint a trustee, or both, and the assets would not be included in the estate

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of the individual if the trustee did not possess the power to make an adjustment;

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     (7) if the trustee is a beneficiary of the trust; or

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     (8) if the trustee is not a beneficiary, but the adjustment would benefit the trustee directly

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or indirectly.

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     (d) If subsection (c)(5), (6), (7), or (8) applies to a trustee and there is more than one

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trustee, a co-trustee to whom the provision does not apply may make the adjustment unless the

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exercise of the power by the remaining trustee or trustees is not permitted by the terms of the

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trust.

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     (e) A trustee may release the entire power conferred by subsection (a) or may release

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only the power to adjust from income to principal or the power to adjust from principal to income

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if the trustee is uncertain about whether possessing or exercising the power will cause a result

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described in subsection (c)(1) through (6) or (c)(8) or if the trustee determines that possessing or

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exercising the power will or may deprive the trust of a tax benefit or impose a tax burden not

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described in subsection (c). The release may be permanent or for a specified period, including a

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period measured by the life of an individual.

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     (f) Terms of a trust that limit the power of a trustee to make an adjustment between

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principal and income do not affect the application of this section unless it is clear from the terms

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of the trust that the terms are intended to deny the trustee the power of adjustment conferred by

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subsection (a).

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     PART 2

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     DECEDENT’S ESTATE OR TERMINATING INCOME INTEREST

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     18-17-201. Determination and distribution of net income. -- After a decedent dies, in

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the case of an estate, or after an income interest in a trust ends, the following rules apply:

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     (1) A fiduciary of an estate or of a terminating income interest shall determine the

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amount of net income and net principal receipts received from property specifically given to a

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beneficiary under the rules in parts 3 through 5 of this chapter which apply to trustees and the

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rules in paragraph (5) herein. The fiduciary shall distribute the net income and net principal

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receipts to the beneficiary who is to receive the specific property.

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     (2) A fiduciary shall determine the remaining net income of a decedent’s estate or a

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terminating income interest under the rules in parts 3 through 5 which apply to trustees and by:

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     (A) including in net income all income from property used to discharge liabilities;

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     (B) paying from income or principal, in the fiduciary’s discretion, fees of attorneys,

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accountants, and fiduciaries; court costs and other expenses of administration; and interest on

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death taxes, but the fiduciary may pay those expenses from income of property passing to a trust

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for which the fiduciary claims an estate tax marital or charitable deduction only to the extent that

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the payment of those expenses from income will not cause the reduction or loss of the deduction;

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and

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     (C) paying from principal all other disbursements made or incurred in connection with

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the settlement of a decedent’s estate or the winding up of a terminating income interest, including

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debts, funeral expenses, disposition of remains, family allowances, and death taxes and related

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penalties that are apportioned to the estate or terminating income interest by the will, the terms of

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the trust, or applicable law.

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     (3) A fiduciary shall distribute to a beneficiary who receives a pecuniary amount outright

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the interest or any other amount provided by the will, the terms of the trust, or applicable law

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from net income determined under paragraph (2) herein or from principal to the extent that net

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income is insufficient. If a beneficiary is to receive a pecuniary amount outright from a trust after

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an income interest ends and no interest or other amount is provided for by the terms of the trust or

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applicable law, the fiduciary shall distribute the interest or other amount to which the beneficiary

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would be entitled under applicable law if the pecuniary amount were required to be paid under a

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will.

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     (4) A fiduciary shall distribute the net income remaining after distributions required by

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paragraph (3) herein in the manner described in section 18-17-202 to all other beneficiaries,

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including a beneficiary who receives a pecuniary amount in trust, even if the beneficiary holds an

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unqualified power to withdraw assets from the trust or other presently exercisable general power

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of appointment over the trust.

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     (5) A fiduciary may not reduce principal or income receipts from property described in

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paragraph (1) because of a payment described in sections 18-17-501 or 18-17-502 to the extent

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that the will, the terms of the trust, or applicable law requires the fiduciary to make the payment

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from assets other than the property or to the extent that the fiduciary recovers or expects to

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recover the payment from a third party. The net income and principal receipts from the property

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are determined by including all of the amounts the fiduciary receives or pays with respect to the

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property, whether those amounts accrued or became due before, on, or after the date of a

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decedent’s death or an income interest’s terminating event, and by making a reasonable provision

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for amounts that the fiduciary believes the estate or terminating income interest may become

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obligated to pay after the property is distributed.

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     18-17-202. Distribution to residuary and remainder beneficiaries. -- (a) Each

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beneficiary described in section 18-17-201(4) shall be entitled to receive a portion of the net

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income equal to the beneficiary’s fractional interest in undistributed principal assets, using values

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as of the distribution date. If a fiduciary makes more than one distribution of assets to

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beneficiaries to whom this section applies, each beneficiary, including one who does not receive

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part of the distribution, is entitled, as of each distribution date, to the net income the fiduciary has

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received after the date of death or terminating event or earlier distribution date but has not

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distributed as of the current distribution date.

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     (b) In determining a beneficiary’s share of net income, the following rules apply:

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     (1) The beneficiary shall be entitled to receive a portion of the net income equal to the

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beneficiary’s fractional interest in the undistributed principal assets immediately before the

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distribution date, including assets that later may be sold to meet principal obligations.

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     (2) The beneficiary’s fractional interest in the undistributed principal assets must be

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calculated without regard to property specifically given to a beneficiary and property required to

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pay pecuniary amounts not in trust.

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     (3) The beneficiary’s fractional interest in the undistributed principal assets must be

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calculated on the basis of the aggregate value of those assets as of the distribution date without

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reducing the value by any unpaid principal obligation.

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     (4) The distribution date for purposes of this section may be the date as of which the

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fiduciary calculates the value of the assets if that date is reasonably near the date on which the

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assets are actually distributed.

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     (c) If a fiduciary does not distribute all of the collected but undistributed net income to

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each person as of a distribution date, the fiduciary shall maintain appropriate records showing the

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interest of each beneficiary in that net income.

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     (d) A trustee may apply the rules in this section, to the extent that the trustee considers it

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appropriate, to net gain or loss realized after the date of death or terminating event or earlier

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distribution date from the disposition of a principal asset if this section applies to the income from

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the asset.

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     PART 3

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     APPORTIONMENT AT BEGINNING AND END OF INCOME INTEREST

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     18-17-301. When right to income begins and ends. -- (a) An income beneficiary is

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entitled to net income from the date on which the income interest begins. An income interest

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begins on the date specified in the terms of the trust or, if no date is specified, on the date an asset

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becomes subject to a trust or successive income interest.

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     (b) An asset becomes subject to a trust:

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     (1) on the date it is transferred to the trust in the case of an asset that is transferred to a

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trust during the transferor’s life;

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     (2) on the date of a testator’s death in the case of an asset that becomes subject to a trust

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by reason of a will, even if there is an intervening period of administration of the testator’s estate;

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or

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     (3) on the date of an individual’s death in the case of an asset that is transferred to a

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fiduciary by a third party because of the individual’s death.

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     (c) An asset becomes subject to a successive income interest on the day after the

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preceding income interest ends, as determined under subsection (d), even if there is an

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intervening period of administration to wind up the preceding income interest.

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     (d) An income interest ends on the day before an income beneficiary dies or another

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terminating event occurs, or on the last day of a period during which there is no beneficiary to

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whom a trustee may distribute income.

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     18-17-302. Apportionment of receipts and disbursements when decedent dies or

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income interest begins. -- (a) A trustee shall allocate an income receipt or disbursement other

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than one (1) to which section 18-17-201(1) applies to principal if its due date occurs before a

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decedent dies in the case of an estate or before an income interest begins in the case of a trust or

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successive income interest.

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     (b) A trustee shall allocate an income receipt or disbursement to income if its due date

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occurs on or after the date on which a decedent dies or an income interest begins and it is a

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periodic due date. An income receipt or disbursement must be treated as accruing from day to

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day if its due date is not periodic or it has no due date. The portion of the receipt or disbursement

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accruing before the date on which a decedent dies or an income interest begins must be allocated

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to principal and the balance must be allocated to income.

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     (c) An item of income or an obligation is due on the date the payer is required to make a

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payment. If a payment date is not stated, there is no due date for the purposes of this chapter.

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Distributions to shareholders or other owners from an entity to which section 18-17-401 applies

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are deemed to be due on the date fixed by the entity for determining who is entitled to receive the

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distribution or, if no date is fixed, on the declaration date for the distribution. A due date is

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periodic for receipts or disbursements that must be paid at regular intervals under a lease or an

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obligation to pay interest or if an entity customarily makes distributions at regular intervals.

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      18-17-303. Apportionment when income interest ends. -- (a) In this section,

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“undistributed income” means net income received before the date on which an income interest

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ends. The term does not include an item of income or expense that is due or accrued or net

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income that has been added or is required to be added to principal under the terms of the trust.

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      (b) When a mandatory income interest ends, the trustee shall pay to a mandatory income

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beneficiary who survives that date, or the estate of a deceased mandatory income beneficiary

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whose death causes the interest to end, the beneficiary’s share of the undistributed income that is

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not disposed of under the terms of the trust unless the beneficiary has an unqualified power to

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revoke more than five percent (5%) of the trust immediately before the income interest ends. In

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the latter case, the undistributed income of the trust from the portion that may be revoked must be

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added to principal.

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     (c) When a trustee’s obligation to pay a fixed annuity or a fixed fraction of the value of

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the trust’s assets ends, the trustee shall prorate the final payment if and to the extent required by

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applicable law to accomplish a purpose of the trust or its settlor relating to income, gift, estate, or

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other tax requirements.

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     PART 4

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     ALLOCATION OF RECEIPTS DURING ADMINISTRATION OF TRUST

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      18-17-401. Character of receipts. - - (a) In this section, “entity” means a corporation,

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partnership, limited liability company, regulated investment company, real estate investment

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trust, common trust fund, or any other organization in which a trustee has an interest other than a

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trust or estate to which the provisions of section 18-17-402 apply, a business or activity to which

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section 18-17-403 applies, or an asset-backed security to which the provisions of section 18-17-

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415 apply.

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      (b) Except as otherwise provided in this section, a trustee shall allocate to income money

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received from an entity.

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      (c) A trustee shall allocate the following receipts from an entity to principal:

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      (1) property other than money;

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      (2) money received in one distribution or a series of related distributions in exchange for

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part or all of a trust’s interest in the entity;

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      (3) money received in total or partial liquidation of the entity; and

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      (4) money received from an entity that is a regulated investment company or a real estate

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investment trust if the money distributed is a capital gain dividend for federal income tax

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purposes.

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      (d) Money is received in partial liquidation:

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      (1) to the extent that the entity, at or near the time of a distribution, indicates that it is a

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distribution in partial liquidation; or

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      (2) if the total amount of money and property received in a distribution or series of

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related distributions is greater than twenty percent (20%) of the entity’s gross assets, as shown by

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the entity’s year-end financial statements immediately preceding the initial receipt.

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      (e) Money is not received in partial liquidation, nor may it be taken into account under

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subsection (d)(2), to the extent that it does not exceed the amount of income tax that a trustee or

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beneficiary must pay on taxable income of the entity that distributes the money.

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      (f) A trustee may rely upon a statement made by an entity about the source or character of

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a distribution if the statement is made at or near the time of distribution by the entity’s board of

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directors or other person or group of persons authorized to exercise powers to pay money or

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transfer property comparable to those of a corporation’s board of directors.

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      18-17-402. Distribution from trust or estate. – A trustee shall allocate to income an

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amount received as a distribution of income from a trust or an estate in which the trust has an

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interest other than a purchased interest, and shall allocate to principal an amount received as a

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distribution of principal from such a trust or estate. If a trustee purchases an interest in a trust that

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is an investment entity, or a decedent or donor transfers an interest in such a trust to a trustee,

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sections 18-17-401 or 18-17-415 applies to a receipt from the trust.

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      18-17-403. Business and other activities conducted by trustee. – (a) If a trustee who

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conducts a business or other activity determines that it is in the best interest of all the

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beneficiaries to account separately for the business or activity instead of accounting for it as part

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of the trust’s general accounting records, the trustee may maintain separate accounting records for

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its transactions, whether or not its assets are segregated from other trust assets.

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      (b) A trustee who accounts separately for a business or other activity may determine the

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extent to which its net cash receipts must be retained for working capital, the acquisition or

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replacement of fixed assets, and other reasonably foreseeable needs of the business or activity,

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and the extent to which the remaining net cash receipts are accounted for as principal or income

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in the trust’s general accounting records. If a trustee sells assets of the business or other activity,

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other than in the ordinary course of the business or activity, the trustee shall account for the net

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amount received as principal in the trust’s general accounting records to the extent the trustee

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determines that the amount received is no longer required in the conduct of business.

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      (c) Activities for which a trustee may maintain separate accounting records include:

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      (1) retail, manufacturing, service, and other traditional business activities;

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      (2) farming;

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      (3) raising and selling livestock and other animals;

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      (4) management of rental properties;

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      (5) extraction of minerals and other natural resources;

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      (6) timber operations; and

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      (7) activities to which section 18-17-414 applies.

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     SUBPART 4-B

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     RECEIPTS NOT NORMALLY APPORTIONED

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      18-17-404. Principal receipts. – A trustee shall allocate to principal:

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      (1) to the extent not allocated to income under this act, assets received from a transferor

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during the transferor’s lifetime, a decedent’s estate, a trust with a terminating income interest, or a

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payer under a contract naming the trust or its trustee as beneficiary;

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      (2) money or other property received from the sale, exchange, liquidation, or change in

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form of a principal asset, including realized profit, subject to this article;

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      (3) amounts recovered from third parties to reimburse the trust because of disbursements

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described in section 18-17-502(a)(7) or for other reasons to the extent not based on the loss of

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income;

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      (4) proceeds of property taken by eminent domain, but a separate award made for the loss

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of income with respect to an accounting period during which a current income beneficiary had a

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mandatory income interest is income;

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      (5) net income received in an accounting period during which there is no beneficiary to

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whom a trustee may or must distribute income; and

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      (6) other receipts as provided pursuant to the provisions of part 3 of this chapter.

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     18-17-405. Rental property. -- To the extent that a trustee accounts for receipts from

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rental property pursuant to this section, the trustee shall allocate to income an amount received as

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rent of real or personal property, including an amount received for cancellation or renewal of a

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lease. An amount received as a refundable deposit, including a security deposit or a deposit that

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is to be applied as rent for future periods, must be added to principal and held subject to the terms

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of the lease and is not available for distribution to a beneficiary until the trustee’s contractual

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obligations have been satisfied with respect to that amount.

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     18-17-406. Obligation to pay money. -- (a) An amount received as interest, whether

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determined at a fixed, variable, or floating rate, on an obligation to pay money to the trustee,

11-13

including an amount received as consideration for prepaying principal, must be allocated to

11-14

income without any provision for amortization of premium.

11-15

     (b) A trustee shall allocate to principal an amount received from the sale, redemption, or

11-16

other disposition of an obligation to pay money to the trustee more than one year after it is

11-17

purchased or acquired by the trustee, including an obligation whose purchase price or value when

11-18

it is acquired is less than its value at maturity. If the obligation matures within one year after it is

11-19

purchased or acquired by the trustee, an amount received in excess of its purchase price or its

11-20

value when acquired by the trust must be allocated to income.

11-21

     (c) This section does not apply to an obligation to which sections 18-17-409, 18-17-410,

11-22

18-17-411, 18-17-412, 18-17-414, or 18-17-415 applies.

11-23

     18-17-407. Insurance policies and similar contracts. -- (a) Except as otherwise

11-24

provided in subsection (b), herein, a trustee shall allocate to principal the proceeds of a life

11-25

insurance policy or other contract in which the trust or its trustee is named as beneficiary,

11-26

including a contract that insures the trust or its trustee against loss for damage to, destruction of,

11-27

or loss of title to a trust asset. The trustee shall allocate dividends on an insurance policy to

11-28

income if the premiums on the policy are paid from income, and to principal if the premiums are

11-29

paid from principal.

11-30

     (b) A trustee shall allocate to income proceeds of a contract that insures the trustee

11-31

against loss of occupancy or other use by an income beneficiary, loss of income, or, subject to

11-32

section 18-17-403, loss of profits from a business.

11-33

     (c) This section does not apply to a contract to which section 18-17-409 applies.

11-34

     SUBPART 4-C

12-1

     RECEIPTS NORMALLY APPORTIONED

12-2

     18-17-408. Insubstantial allocations not required. -- If a trustee determines that an

12-3

allocation between principal and income required by sections 18-17-409, 18-17-410, 18-17-411,

12-4

18-17-412, or 18-17-415 is insubstantial, the trustee may allocate the entire amount to principal

12-5

unless one of the circumstances described in section 18-17-104(c) applies to the allocation. This

12-6

power may be exercised by a cotrustee in the circumstances described in section 18-17-104(d)

12-7

and may be released for the reasons and in the manner described in section 18-17-104(e). An

12-8

allocation is presumed to be insubstantial if:

12-9

     (1) the amount of the allocation would increase or decrease net income in an accounting

12-10

period, as determined before the allocation, by less than ten percent (10%) ; or

12-11

     (2) the value of the asset producing the receipt for which the allocation would be made is

12-12

less than ten percent (10%) of the total value of the trust’s assets at the beginning of the

12-13

accounting period.

12-14

     18-17-409. Deferred compensation, annuities, and similar payments.-- (a) In this

12-15

section, “payment” means a payment that a trustee may receive over a fixed number of years or

12-16

during the life of one or more individuals because of services rendered or property transferred to

12-17

the payer in exchange for future payments. The term includes a payment made in money or

12-18

property from the payer’s general assets or from a separate fund created by the payer, including a

12-19

private or commercial annuity, an individual retirement account, and a pension, profit-sharing,

12-20

stock-bonus, or stock-ownership plan.

12-21

     (b) To the extent that a payment is characterized as interest or a dividend or a payment

12-22

made in lieu of interest or a dividend, a trustee shall allocate it to income. The trustee shall

12-23

allocate to principal the balance of the payment and any other payment received in the same

12-24

accounting period that is not characterized as interest, a dividend, or an equivalent payment.

12-25

     (c) If no part of a payment is characterized as interest, a dividend, or an equivalent

12-26

payment, and all or part of the payment is required to be made, a trustee shall allocate to income

12-27

ten percent (10%) of the part that is required to be made during the accounting period and the

12-28

balance to principal. If no part of a payment is required to be made or the payment received is the

12-29

entire amount to which the trustee is entitled, the trustee shall allocate the entire payment to

12-30

principal. For purposes of this subsection, a payment is not “required to be made” to the extent

12-31

that it is made because the trustee exercises a right of withdrawal.

12-32

     (d) If, to obtain an estate tax marital deduction for a trust, a trustee must allocate more of

12-33

a payment to income than provided for by this section, the trustee shall allocate to income the

12-34

additional amount necessary to obtain the marital deduction.

13-1

     (e) This section does not apply to payments to which section 18-17-410 applies.

13-2

     18-17-410. Liquidating asset. -- (a) In this section, “liquidating asset” means an asset

13-3

whose value will diminish or terminate because the asset is expected to produce receipts for a

13-4

period of limited duration. The term includes a leasehold, patent, copyright, royalty right, and

13-5

right to receive payments during a period of more than one year under an arrangement that does

13-6

not provide for the payment of interest on the unpaid balance. The term does not include a

13-7

payment subject to section 18-17-409, resources subject to section 18-17-411, timber subject to

13-8

section 18-17-412, an activity subject to section 18-17-414, an asset subject to section 18-17-415,

13-9

or any asset for which the trustee establishes a reserve for depreciation under section 18-17-503.

13-10

     (b) A trustee shall allocate to income ten percent (10%) of the receipts from a liquidating

13-11

asset and the balance to principal.

13-12

     18-17-411. Minerals, water, and other natural resources. -- (a) To the extent that a

13-13

trustee accounts for receipts from an interest in minerals or other natural resources pursuant to

13-14

this section, the trustee shall allocate them as follows:

13-15

     (1) If received as nominal delay rental or nominal annual rent on a lease, a receipt must

13-16

be allocated to income.

13-17

     (2) If received from a production payment, a receipt must be allocated to income if and to

13-18

the extent that the agreement creating the production payment provides a factor for interest or its

13-19

equivalent. The balance must be allocated to principal.

13-20

     (3) If an amount received as a royalty, shut-in-well payment, take-or-pay payment, bonus,

13-21

or delay rental is more than nominal ninety percent (90%) must be allocated to principal and the

13-22

balance to income.

13-23

     (4) If an amount is received from a working interest or any other interest not provided for

13-24

in paragraph (1), (2), or (3), ninety percent (90%) of the net amount received must be allocated to

13-25

principal and the balance to income.

13-26

     (b) An amount received on account of an interest in water that is renewable must be

13-27

allocated to income. If the water is not renewable ninety percent (90%) of the amount must be

13-28

allocated to principal and the balance to income.

13-29

     (c) This chapter applies whether or not a decedent or donor was extracting minerals,

13-30

water, or other natural resources before the interest became subject to the trust.

13-31

     (d) If a trust owns an interest in minerals, water, or other natural resources on [the

13-32

effective date of this chapter], the trustee may allocate receipts from the interest as provided in

13-33

this chapter or in the manner used by the trustee before [the effective date of this chapter]. If the

13-34

trust acquires an interest in minerals, water, or other natural resources after [the effective date of

14-1

this chapter], the trustee shall allocate receipts from the interest as provided in this chapter.

14-2

     18-17-412. Timber. -- (a) To the extent that a trustee accounts for receipts from the sale

14-3

of timber and related products pursuant to this section, the trustee shall allocate the net receipts:

14-4

     (1) to income to the extent that the amount of timber removed from the land does not

14-5

exceed the rate of growth of the timber during the accounting periods in which a beneficiary has a

14-6

mandatory income interest;

14-7

     (2) to principal to the extent that the amount of timber removed from the land exceeds the

14-8

rate of growth of the timber or the net receipts are from the sale of standing timber;

14-9

     (3) to or between income and principal if the net receipts are from the lease of timberland

14-10

or from a contract to cut timber from land owned by a trust, by determining the amount of timber

14-11

removed from the land under the lease or contract and applying the rules in paragraphs (1) and

14-12

(2); or

14-13

     (4) to principal to the extent that advance payments, bonuses, and other payments are not

14-14

allocated pursuant to paragraph (1), (2), or (3).

14-15

     (b) In determining net receipts to be allocated pursuant to subsection (a), a trustee shall

14-16

deduct and transfer to principal a reasonable amount for depletion.

14-17

     (c) This chapter applies whether or not a decedent or transferor was harvesting timber

14-18

from the property before it became subject to the trust.

14-19

     (d) If a trust owns an interest in timberland on the effective date of this chapter, the

14-20

trustee may allocate net receipts from the sale of timber and related products as provided in this

14-21

chapter or in the manner used by the trustee before the effective date of this chapter. If the trust

14-22

acquires an interest in timberland after the effective date of this chapter, the trustee shall allocate

14-23

net receipts from the sale of timber and related products as provided in this chapter.

14-24

     18-17-413. Property not productive of income. -- (a) If a marital deduction is allowed

14-25

for all or part of a trust whose assets consist substantially of property that does not provide the

14-26

surviving spouse with sufficient income from or use of the trust assets, and if the amounts that the

14-27

trustee transfers from principal to income under section 18-17-104 and distributes to the spouse

14-28

from principal pursuant to the terms of the trust are insufficient to provide the spouse with the

14-29

beneficial enjoyment required to obtain the marital deduction, the spouse may require the trustee

14-30

to make property productive of income, convert property within a reasonable time, or exercise the

14-31

power conferred by section 18-17-104(a). The trustee may decide which action or combination

14-32

of actions to take.

14-33

     (b) In cases not governed by subsection (a) herein, proceeds from the sale or other

14-34

disposition of an asset are principal without regard to the amount of income the asset produces

15-1

during any accounting period.

15-2

     18-17-414. Derivatives and options. -- (a) In this section, “derivative” means a contract

15-3

or financial instrument or a combination of contracts and financial instruments which gives a trust

15-4

the right or obligation to participate in some or all changes in the price of a tangible or intangible

15-5

asset or group of assets, or changes in a rate, an index of prices or rates, or other market indicator

15-6

for an asset or a group of assets.

15-7

     (b) To the extent that a trustee does not account under section 18-17-403 for transactions

15-8

in derivatives, the trustee shall allocate to principal receipts from and disbursements made in

15-9

connection with those transactions.

15-10

     (c) If a trustee grants an option to buy property from the trust, whether or not the trust

15-11

owns the property when the option is granted, grants an option that permits another person to sell

15-12

property to the trust, or acquires an option to buy property for the trust or an option to sell an

15-13

asset owned by the trust, and the trustee or other owner of the asset is required to deliver the asset

15-14

if the option is exercised, an amount received for granting the option must be allocated to

15-15

principal. An amount paid to acquire the option must be paid from principal. A gain or loss

15-16

realized upon the exercise of an option, including an option granted to a settlor of the trust for

15-17

services rendered, must be allocated to principal.

15-18

     18-17-415. Asset-backed securities. -- (a) In this section, “asset-backed security” means

15-19

an asset whose value is based upon the right it gives the owner to receive distributions from the

15-20

proceeds of financial assets that provide collateral for the security. The term includes an asset

15-21

that gives the owner the right to receive from the collateral financial assets only the interest or

15-22

other current return or only the proceeds other than interest or current return. The term does not

15-23

include an asset to which sections 18-17-401 or 18-17-409 applies.

15-24

     (b) If a trust receives a payment from interest or other current return and from other

15-25

proceeds of the collateral financial assets, the trustee shall allocate to income the portion of the

15-26

payment which the payer identifies as being from interest or other current return and shall

15-27

allocate the balance of the payment to principal.

15-28

     (c) If a trust receives one or more payments in exchange for the trust’s entire interest in

15-29

an asset-backed security in one accounting period, the trustee shall allocate the payments to

15-30

principal. If a payment is one of a series of payments that will result in the liquidation of the

15-31

trust’s interest in the security over more than one accounting period, the trustee shall allocate ten

15-32

percent (10%) of the payment to income and the balance to principal.

15-33

     PART 5

15-34

     ALLOCATION OF DISBURSEMENTS DURING

16-1

     ADMINISTRATION OF TRUST

16-2

     18-17-501. Disbursements from income. -- A trustee shall make the following

16-3

disbursements from income to the extent that they are not disbursements to which sections 18-17-

16-4

201(2)(B) or (C) applies:

16-5

     (1) one-half (1/2) of the regular compensation of the trustee and of any person providing

16-6

investment advisory or custodial services to the trustee;

16-7

     (2) one-half (1/2) of all expenses for accountings, judicial proceedings, or other matters

16-8

that involve both the income and remainder interests;

16-9

     (3) all of the other ordinary expenses incurred in connection with the administration,

16-10

management, or preservation of trust property and the distribution of income, including interest,

16-11

ordinary repairs, regularly recurring taxes assessed against principal, and expenses of a

16-12

proceeding or other matter that concerns primarily the income interest; and

16-13

     (4) recurring premiums on insurance covering the loss of a principal asset or the loss of

16-14

income from or use of the asset.

16-15

     18-17-502. Disbursements from principal. -- (a) A trustee shall make the following

16-16

disbursements from principal:

16-17

     (1) the remaining one-half (1/2) of the disbursements described in sections 18-17-501 (1)

16-18

and (2);

16-19

     (2) all of the trustee’s compensation calculated on principal as a fee for acceptance,

16-20

distribution or termination, and disbursements made to prepare property for sale;

16-21

      (3) payments on the principal of a trust debt;

16-22

     (4) expenses of a proceeding that concerns primarily principal, including a proceeding to

16-23

construe the trust or to protect the trust or its property;

16-24

     (5) premiums paid on a policy of insurance not described in section 18-17-501(4) of

16-25

which the trust is the owner and beneficiary;

16-26

     (6) estate, inheritance, and other transfer taxes, including penalties, apportioned to the

16-27

trust; and

16-28

     (7) disbursements related to environmental matters, including reclamation, assessing

16-29

environmental conditions, remedying and removing environmental contamination, monitoring

16-30

remedial activities and the release of substances, preventing future releases of substances,

16-31

collecting amounts from persons liable or potentially liable for the costs of those activities,

16-32

penalties imposed under environmental laws or regulations and other payments made to comply

16-33

with those laws or regulations statutory or common law claims by third parties, and defending

16-34

claims based on environmental matters.

17-1

     (b) If a principal asset is encumbered with an obligation that requires income from that

17-2

asset to be paid directly to the creditor, the trustee shall transfer from principal to income an

17-3

amount equal to the income paid to the creditor in reduction of the principal balance of the

17-4

obligation.

17-5

     18-17-503. Transfers from income to principal for depreciation. -- (a) In this

17-6

section, “depreciation” means a reduction in value due to wear, tear, decay, corrosion, or gradual

17-7

obsolescence of a fixed asset having a useful life of more than one year.

17-8

     (b) A trustee may transfer to principal a reasonable amount of the net cash receipts from

17-9

a principal asset that is subject to depreciation, but may not transfer any amount for depreciation:

17-10

     (1) of that portion of real property used or available for use by a beneficiary as a

17-11

residence or of tangible personal property held or made available for the personal use or

17-12

enjoyment of a beneficiary;

17-13

     (2) during the administration of a decedent’s estate; or

17-14

     (3) under this section if the trustee is accounting under section 18-17-403 for the business

17-15

or activity in which the asset is used.

17-16

     (c) An amount transferred to principal need not be held as a separate fund.

17-17

     18-17-504. Transfers from income to reimburse principal. -- (a) If a trustee makes or

17-18

expects to make a principal disbursement described in this section, the trustee may transfer an

17-19

appropriate amount from income to principal in one or more accounting periods to reimburse

17-20

principal or to provide a reserve for future principal disbursements.

17-21

     (b) Principal disbursements to which subsection (a) herein applies include the following,

17-22

but only to the extent that the trustee has not been and does not expect to be reimbursed by a third

17-23

party:

17-24

     (1) an amount chargeable to income but paid from principal because it is unusually large,

17-25

including extraordinary repairs;

17-26

     (2) a capital improvement to a principal asset, whether in the form of changes to an

17-27

existing asset or the construction of a new asset, including special assessments;

17-28

     (3) disbursements made to prepare property for rental, including tenant allowances,

17-29

leasehold improvements, and broker’s commissions;

17-30

     (4) periodic payments on an obligation secured by a principal asset to the extent that the

17-31

amount transferred from income to principal for depreciation is less than the periodic payments;

17-32

and

17-33

     (5) disbursements described in section 18-17-502(a)(7).

17-34

     (c) If the asset whose ownership gives rise to the disbursements becomes subject to a

18-1

successive income interest after an income interest ends, a trustee may continue to transfer

18-2

amounts from income to principal as provided in subsection (a) herein.

18-3

     18-17-505. Income taxes. – (a) A tax required to be paid by a trustee based on receipts

18-4

allocated to income must be paid from income.

18-5

     (b) A tax required to be paid by a trustee based on receipts allocated to principal must be

18-6

paid from principal, even if the tax is called an income tax by the taxing authority.

18-7

     (c) A tax required to be paid by a trustee on the trust’s share of an entity’s taxable

18-8

income must be paid proportionately:

18-9

     (1) from income to the extent that receipts from the entity are allocated to income; and

18-10

     (2) from principal to the extent that:

18-11

     (i) receipts from the entity are allocated to principal; and

18-12

     (ii) the trust’s share of the entity’s taxable income exceeds the total receipts described in

18-13

paragraphs (1) and (2)(i) herein.

18-14

     (d) For purposes of this section, receipts allocated to principal or income must be

18-15

reduced by the amount distributed to a beneficiary from principal or income for which the trust

18-16

receives a deduction in calculating the tax.

18-17

     18-17-506. Adjustments between principal and income because of taxes. -- (a) A

18-18

fiduciary may make adjustments between principal and income to offset the shifting of economic

18-19

interests or tax benefits between income beneficiaries and remainder beneficiaries which arise

18-20

from:

18-21

     (1) elections and decisions, other than those described in subsection (b), that the

18-22

fiduciary makes from time to time regarding tax matters;

18-23

     (2) an income tax or any other tax that is imposed upon the fiduciary or a beneficiary as

18-24

a result of a transaction involving or a distribution from the estate or trust; or

18-25

     (3) the ownership by an estate or trust of an interest in an entity whose taxable income,

18-26

whether or not distributed, is includable in the taxable income of the estate trust, or beneficiary.

18-27

     (b) If the amount of an estate tax marital deduction or charitable contribution deduction

18-28

is reduced because a fiduciary deducts an amount paid from principal for income tax purposes

18-29

instead of deducting it for estate tax purposes, and as a result estate taxes paid from principal are

18-30

increased and income taxes paid by an estate, trust, or beneficiary are decreased, each estate,

18-31

trust, or beneficiary that benefits from the decrease in income tax shall reimburse the principal

18-32

from which the increase in estate tax is paid. The total reimbursement must equal the increase in

18-33

the estate tax to the extent that the principal used to pay the increase would have qualified for a

18-34

marital deduction or charitable contribution deduction but for the payment. The proportionate

19-1

share of the reimbursement for each estate, trust, or beneficiary whose income taxes are reduced

19-2

must be the same as it proportionate share of the total decrease in income tax. An estate or trust

19-3

shall reimburse principal from income.

19-4

     PART 6

19-5

     MISCELLANEOUS PROVISIONS

19-6

     18-17-601. Uniformity of application and construction. -- In applying and construing

19-7

this uniform act, consideration must be given to the need to promote uniformity of the law with

19-8

respect to its subject matter among states that enact it.

19-9

     18-17-602. Severability clause. -- If any provision of the chapter or its application to

19-10

any person or circumstance is held invalid, the invalidity does not affect other provisions or

19-11

applications of the chapter which can be given effect without the invalid provision or application,

19-12

and to this end the provisions of this chapter are severable.

19-13

     18-17-603. Application of chapter to existing trusts and estates. -- This chapter

19-14

applies to every trust or decedent’s estate existing on the effective date of this chapter except as

19-15

otherwise expressly provided in the will or terms of the trust or the provisions of this chapter.

19-16

     SECTION 2. This act shall take effect upon passage.

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LC01365

========

EXPLANATION

BY THE LEGISLATIVE COUNCIL

OF

A N A C T

RELATING TO FIDUCIARIES

***

20-1

     This act would establish the Uniform Principal and Income Act.

20-2

     This act would take effect upon passage.

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LC01365

=======