HF 1572

as introduced - 85th Legislature (2007 - 2008) Posted on 12/15/2009 12:00am

A bill for an act
relating to uniform laws; proposing enactment of the Uniform Principal and
Income Act of 2000; proposing coding for new law as Minnesota Statutes,
chapter 501C; repealing Minnesota Statutes 2006, sections 501B.59; 501B.60;
501B.61; 501B.62; 501B.63; 501B.64; 501B.65; 501B.665; 501B.67; 501B.68;
501B.69; 501B.705; 501B.71; 501B.72; 501B.73; 501B.74; 501B.75; 501B.76.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF MINNESOTA:

ARTICLE 1

DEFINITIONS AND FIDUCIARY DUTIES

Section 1.

new text begin [501C.101] SHORT TITLE.
new text end

new text begin This act may be cited as the Uniform Principal and Income Act (2000).
new text end

Sec. 2.

new text begin [501C.102] DEFINITIONS.
new text end

new text begin In this act:
new text end

new text begin (1) "Accounting period" means a calendar year unless another 12-month period is
selected by a fiduciary. The term includes a portion of a calendar year or other 12-month
period that begins when an income interest begins or ends when an income interest ends.
new text end

new text begin (2) "Beneficiary" includes, in the case of a decedent's estate, an heir, legatee, and
devisee and, in the case of a trust, an income beneficiary and a remainder beneficiary.
new text end

new text begin (3) "Fiduciary" means a personal representative or a trustee. The term includes an
executor, administrator, successor personal representative, special administrator, and a
person performing substantially the same function.
new text end

new text begin (4) "Income" means money or property that a fiduciary receives as current return
from a principal asset. The term includes a portion of receipts from a sale, exchange, or
liquidation of a principal asset, to the extent provided in article 4.
new text end

new text begin (5) "Income beneficiary" means a person to whom net income of a trust is or may be
payable.
new text end

new text begin (6) "Income interest" means the right of an income beneficiary to receive all or part
of net income, whether the terms of the trust require it to be distributed or authorize it to
be distributed in the trustee's discretion.
new text end

new text begin (7) "Mandatory income interest" means the right of an income beneficiary to receive
net income that the terms of the trust require the fiduciary to distribute.
new text end

new text begin (8) "Net income" means the total receipts allocated to income during an accounting
period minus the disbursements made from income during the period, plus or minus
transfers under this act to or from income during the period.
new text end

new text begin (9) "Person" means an individual, corporation, business trust, estate, trust,
partnership, limited liability company, association, joint venture, government;
governmental subdivision, agency, or instrumentality; public corporation, or any other
legal or commercial entity.
new text end

new text begin (10) "Principal" means property held in trust for distribution to a remainder
beneficiary when the trust terminates.
new text end

new text begin (11) "Remainder beneficiary" means a person entitled to receive principal when
an income interest ends.
new text end

new text begin (12) "Terms of a trust" means the manifestation of the intent of a settlor or decedent
with respect to the trust, expressed in a manner that admits of its proof in a judicial
proceeding, whether by written or spoken words or by conduct.
new text end

new text begin (13) "Trustee" includes an original, additional, or successor trustee, whether or not
appointed or confirmed by a court.
new text end

Sec. 3.

new text begin [501C.103] FIDUCIARY DUTIES; GENERAL PRINCIPLES.
new text end

new text begin (a) In allocating receipts and disbursements to or between principal and income, and
with respect to any matter within the scope of articles 2 and 3, a fiduciary:
new text end

new text begin (1) shall administer a trust or estate in accordance with the terms of the trust or the
will, even if there is a different provision in this act;
new text end

new text begin (2) may administer a trust or estate by the exercise of a discretionary power of
administration given to the fiduciary by the terms of the trust or the will, even if the
exercise of the power produces a result different from a result required or permitted by
this act;
new text end

new text begin (3) shall administer a trust or estate in accordance with this act if the terms of
the trust or the will do not contain a different provision or do not give the fiduciary a
discretionary power of administration; and
new text end

new text begin (4) shall add a receipt or charge a disbursement to principal to the extent that
the terms of the trust and this act do not provide a rule for allocating the receipt or
disbursement to or between principal and income.
new text end

new text begin (b) In exercising the power to adjust under section 501C.104(a) or a discretionary
power of administration regarding a matter within the scope of this act, whether granted
by the terms of a trust, a will, or this act, a fiduciary shall administer a trust or estate
impartially, based on what is fair and reasonable to all of the beneficiaries, except to the
extent that the terms of the trust or the will clearly manifest an intention that the fiduciary
shall or may favor one or more of the beneficiaries. A determination in accordance with
this act is presumed to be fair and reasonable to all of the beneficiaries.
new text end

Sec. 4.

new text begin [501C.104] TRUSTEE'S POWER TO ADJUST.
new text end

new text begin (a) A trustee may adjust between principal and income to the extent the trustee
considers necessary if the trustee invests and manages trust assets as a prudent investor,
the terms of the trust describe the amount that may or must be distributed to a beneficiary
by referring to the trust's income, and the trustee determines, after applying the rules in
section 501C.103(a), that the trustee is unable to comply with section 501C.103(b).
new text end

new text begin (b) In deciding whether and to what extent to exercise the power conferred by
subsection (a), a trustee shall consider all factors relevant to the trust and its beneficiaries,
including the following factors to the extent they are relevant:
new text end

new text begin (1) the nature, purpose, and expected duration of the trust;
new text end

new text begin (2) the intent of the settlor;
new text end

new text begin (3) the identity and circumstances of the beneficiaries;
new text end

new text begin (4) the needs for liquidity, regularity of income, and preservation and appreciation
of capital;
new text end

new text begin (5) the assets held in the trust; the extent to which they consist of financial assets,
interests in closely held enterprises, tangible and intangible personal property, or real
property; the extent to which an asset is used by a beneficiary; and whether an asset was
purchased by the trustee or received from the settlor;
new text end

new text begin (6) the net amount allocated to income under the other sections of this act and the
increase or decrease in the value of the principal assets, which the trustee may estimate as
to assets for which market values are not readily available;
new text end

new text begin (7) whether and to what extent the terms of the trust give the trustee the power to
invade principal or accumulate income or prohibit the trustee from invading principal or
accumulating income, and the extent to which the trustee has exercised a power from time
to time to invade principal or accumulate income;
new text end

new text begin (8) the actual and anticipated effect of economic conditions on principal and income
and effects of inflation and deflation; and
new text end

new text begin (9) the anticipated tax consequences of an adjustment.
new text end

new text begin (c) A trustee may not make an adjustment:
new text end

new text begin (1) that diminishes the income interest in a trust that requires all of the income
to be paid at least annually to a spouse and for which an estate tax or gift tax marital
deduction would be allowed, in whole or in part, if the trustee did not have the power
to make the adjustment;
new text end

new text begin (2) that reduces the actuarial value of the income interest in a trust to which a person
transfers property with the intent to qualify for a gift tax exclusion;
new text end

new text begin (3) that changes the amount payable to a beneficiary as a fixed annuity or a fixed
fraction of the value of the trust assets;
new text end

new text begin (4) from any amount that is permanently set aside for charitable purposes under a
will or the terms of a trust unless both income and principal are so set aside;
new text end

new text begin (5) if possessing or exercising the power to make an adjustment causes an individual
to be treated as the owner of all or part of the trust for income tax purposes, and the
individual would not be treated as the owner if the trustee did not possess the power
to make an adjustment;
new text end

new text begin (6) if possessing or exercising the power to make an adjustment causes all or part of
the trust assets to be included for estate tax purposes in the estate of an individual who
has the power to remove a trustee or appoint a trustee, or both, and the assets would
not be included in the estate of the individual if the trustee did not possess the power
to make an adjustment;
new text end

new text begin (7) if the trustee is a beneficiary of the trust; or
new text end

new text begin (8) if the trustee is not a beneficiary, but the adjustment would benefit the trustee
directly or indirectly.
new text end

new text begin (d) If subsection (c)(5), (6), (7), or (8) applies to a trustee and there is more than
one trustee, a cotrustee to whom the provision does not apply may make the adjustment
unless the exercise of the power by the remaining trustee or trustees is not permitted
by the terms of the trust.
new text end

new text begin (e) A trustee may release the entire power conferred by subsection (a) or may release
only the power to adjust from income to principal or the power to adjust from principal to
income if the trustee is uncertain about whether possessing or exercising the power will
cause a result described in subsection (c)(1) to (6) or (c)(8) or if the trustee determines
that possessing or exercising the power will or may deprive the trust of a tax benefit or
impose a tax burden not described in subsection (c). The release may be permanent or for
a specified period, including a period measured by the life of an individual.
new text end

new text begin (f) Terms of a trust that limit the power of a trustee to make an adjustment between
principal and income do not affect the application of this section unless it is clear from the
terms of the trust that the terms are intended to deny the trustee the power of adjustment
conferred by subsection (a).
new text end

Sec. 5.

new text begin [501C.105] JUDICIAL CONTROL OF DISCRETIONARY POWER.
new text end

new text begin (a) The court may not order a fiduciary to change a decision to exercise or not to
exercise a discretionary power conferred by this act unless it determines that the decision
was an abuse of the fiduciary's discretion. A fiduciary's decision is not an abuse of
discretion merely because the court would have exercised the power in a different manner
or would not have exercised the power.
new text end

new text begin (b) The decisions to which subsection (a) apply include:
new text end

new text begin (1) a decision under section 501C.104(a) as to whether and to what extent an amount
should be transferred from principal to income or from income to principal; and
new text end

new text begin (2) a decision regarding the factors that are relevant to the trust and its beneficiaries,
the extent to which the factors are relevant, and the weight, if any, to be given to those
factors, in deciding whether and to what extent to exercise the discretionary power
conferred by section 501C.104(a).
new text end

new text begin (c) If the court determines that a fiduciary has abused the fiduciary's discretion, the
court may place the income and remainder beneficiaries in the positions they would have
occupied if the discretion had not been abused, according to the following rules:
new text end

new text begin (1) To the extent that the abuse of discretion has resulted in no distribution to a
beneficiary or in a distribution that is too small, the court shall order the fiduciary to
distribute from the trust to the beneficiary an amount that the court determines will restore
the beneficiary, in whole or in part, to the beneficiary's appropriate position.
new text end

new text begin (2) To the extent that the abuse of discretion has resulted in a distribution to a
beneficiary which is too large, the court shall place the beneficiaries, the trust, or both,
in whole or in part, in their appropriate positions by ordering the fiduciary to withhold
an amount from one or more future distributions to the beneficiary who received the
distribution that was too large or ordering that beneficiary to return some or all of the
distribution to the trust.
new text end

new text begin (3) To the extent that the court is unable, after applying paragraphs (1) and (2), to
place the beneficiaries, the trust, or both, in the positions they would have occupied if the
discretion had not been abused, the court may order the fiduciary to pay an appropriate
amount from its own funds to one or more of the beneficiaries or the trust, or both.
new text end

new text begin (d) Upon petition by the fiduciary, the court having jurisdiction over a trust or
estate shall determine whether a proposed exercise or nonexercise by the fiduciary of
a discretionary power conferred by this act will result in an abuse of the fiduciary's
discretion. If the petition describes the proposed exercise or nonexercise of the power and
contains sufficient information to inform the beneficiaries of the reasons for the proposal,
the facts upon which the fiduciary relies, and an explanation of how the income and
remainder beneficiaries will be affected by the proposed exercise or nonexercise of the
power, a beneficiary who challenges the proposed exercise or nonexercise has the burden
of establishing that it will result in an abuse of discretion.
new text end

ARTICLE 2

DECEDENT'S ESTATE OR

TERMINATING INCOME INTEREST

Sec. 6.

new text begin [501C.201] DETERMINATION AND DISTRIBUTION OF NET
INCOME.
new text end

new text begin After a decedent dies, in the case of an estate, or after an income interest in a trust
ends, the following rules apply:
new text end

new text begin (1) A fiduciary of an estate or of a terminating income interest shall determine the
amount of net income and net principal receipts received from property specifically given
to a beneficiary under the rules in articles 3 to 5 which apply to trustees and the rules in
paragraph (5). The fiduciary shall distribute the net income and net principal receipts to
the beneficiary who is to receive the specific property.
new text end

new text begin (2) A fiduciary shall determine the remaining net income of a decedent's estate or a
terminating income interest under the rules in articles 3 to 5 which apply to trustees and by:
new text end

new text begin (A) including in net income all income from property used to discharge liabilities;
new text end

new text begin (B) paying from income or principal, in the fiduciary's discretion, fees of attorneys,
accountants, and fiduciaries; court costs and other expenses of administration; and interest
on death taxes, but the fiduciary may pay those expenses from income of property passing
to a trust for which the fiduciary claims an estate tax marital or charitable deduction only
to the extent that the payment of those expenses from income will not cause the reduction
or loss of the deduction; and
new text end

new text begin (C) paying from principal all other disbursements made or incurred in connection
with the settlement of a decedent's estate or the winding up of a terminating income
interest, including debts, funeral expenses, disposition of remains, family allowances, and
death taxes and related penalties that are apportioned to the estate or terminating income
interest by the will, the terms of the trust, or applicable law.
new text end

new text begin (3) A fiduciary shall distribute to a beneficiary who receives a pecuniary amount
outright the interest or any other amount provided by the will, the terms of the trust, or
applicable law from net income determined under paragraph (2) or from principal to the
extent that net income is insufficient. If a beneficiary is to receive a pecuniary amount
outright from a trust after an income interest ends and no interest or other amount is
provided for by the terms of the trust or applicable law, the fiduciary shall distribute the
interest or other amount to which the beneficiary would be entitled under applicable law if
the pecuniary amount were required to be paid under a will.
new text end

new text begin (4) A fiduciary shall distribute the net income remaining after distributions required
by paragraph (3) in the manner described in section 501C.202 to all other beneficiaries,
including a beneficiary who receives a pecuniary amount in trust, even if the beneficiary
holds an unqualified power to withdraw assets from the trust or other presently exercisable
general power of appointment over the trust.
new text end

new text begin (5) A fiduciary may not reduce principal or income receipts from property described
in paragraph (1) because of a payment described in section 501C.501 or 501C.502 to the
extent that the will, the terms of the trust, or applicable law requires the fiduciary to make
the payment from assets other than the property or to the extent that the fiduciary recovers
or expects to recover the payment from a third party. The net income and principal receipts
from the property are determined by including all of the amounts the fiduciary receives or
pays with respect to the property, whether those amounts accrued or became due before,
on, or after the date of a decedent's death or an income interest's terminating event, and
by making a reasonable provision for amounts that the fiduciary believes the estate or
terminating income interest may become obligated to pay after the property is distributed.
new text end

Sec. 7.

new text begin [501C.202] DISTRIBUTION TO RESIDUARY AND REMAINDER
BENEFICIARIES.
new text end

new text begin (a) Each beneficiary described in section 501C.201(4) is entitled to receive a
portion of the net income equal to the beneficiary's fractional interest in undistributed
principal assets, using values as of the distribution date. If a fiduciary makes more than
one distribution of assets to beneficiaries to whom this section applies, each beneficiary,
including one who does not receive part of the distribution, is entitled, as of each
distribution date, to the net income the fiduciary has received after the date of death or
terminating event or earlier distribution date but has not distributed as of the current
distribution date.
new text end

new text begin (b) In determining a beneficiary's share of net income, the following rules apply:
new text end

new text begin (1) The beneficiary is entitled to receive a portion of the net income equal to the
beneficiary's fractional interest in the undistributed principal assets immediately before the
distribution date, including assets that later may be sold to meet principal obligations.
new text end

new text begin (2) The beneficiary's fractional interest in the undistributed principal assets must
be calculated without regard to property specifically given to a beneficiary and property
required to pay pecuniary amounts not in trust.
new text end

new text begin (3) The beneficiary's fractional interest in the undistributed principal assets must be
calculated on the basis of the aggregate value of those assets as of the distribution date
without reducing the value by any unpaid principal obligation.
new text end

new text begin (4) The distribution date for purposes of this section may be the date as of which
the fiduciary calculates the value of the assets if that date is reasonably near the date
on which assets are actually distributed.
new text end

new text begin (c) If a fiduciary does not distribute all of the collected but undistributed net income
to each person as of a distribution date, the fiduciary shall maintain appropriate records
showing the interest of each beneficiary in that net income.
new text end

new text begin (d) A fiduciary may apply the rules in this section, to the extent that the fiduciary
considers it appropriate, to net gain or loss realized after the date of death or terminating
event or earlier distribution date from the disposition of a principal asset if this section
applies to the income from the asset.
new text end

ARTICLE 3

APPORTIONMENT AT BEGINNING AND END

OF INCOME INTEREST

Sec. 8.

new text begin [501C.301] WHEN RIGHT TO INCOME BEGINS AND ENDS.
new text end

new text begin (a) An income beneficiary is entitled to net income from the date on which the
income interest begins. An income interest begins on the date specified in the terms
of the trust or, if no date is specified, on the date an asset becomes subject to a trust or
successive income interest.
new text end

new text begin (b) An asset becomes subject to a trust:
new text end

new text begin (1) on the date it is transferred to the trust in the case of an asset that is transferred to
a trust during the transferor's life;
new text end

new text begin (2) on the date of a testator's death in the case of an asset that becomes subject to a
trust by reason of a will, even if there is an intervening period of administration of the
testator's estate; or
new text end

new text begin (3) on the date of an individual's death in the case of an asset that is transferred to a
fiduciary by a third party because of the individual's death.
new text end

new text begin (c) An asset becomes subject to a successive income interest on the day after the
preceding income interest ends, as determined under subsection (d), even if there is an
intervening period of administration to wind up the preceding income interest.
new text end

new text begin (d) An income interest ends on the day before an income beneficiary dies or another
terminating event occurs, or on the last day of a period during which there is no beneficiary
to whom a trustee may distribute income.
new text end

Sec. 9.

new text begin [501C.302] APPORTIONMENT OF RECEIPTS AND DISBURSEMENTS
WHEN DECEDENT DIES OR INCOME INTEREST BEGINS.
new text end

new text begin (a) A trustee shall allocate an income receipt or disbursement other than one to
which section 501C.201(1) applies to principal if its due date occurs before a decedent
dies in the case of an estate or before an income interest begins in the case of a trust or
successive income interest.
new text end

new text begin (b) A trustee shall allocate an income receipt or disbursement to income if its due
date occurs on or after the date on which a decedent dies or an income interest begins and
it is a periodic due date. An income receipt or disbursement must be treated as accruing
from day to day if its due date is not periodic or it has no due date. The portion of the
receipt or disbursement accruing before the date on which a decedent dies or an income
interest begins must be allocated to principal and the balance must be allocated to income.
new text end

new text begin (c) An item of income or an obligation is due on the date the payer is required to
make a payment. If a payment date is not stated, there is no due date for the purposes of
this act. Distributions to shareholders or other owners from an entity to which section
501C.401 applies are deemed to be due on the date fixed by the entity for determining
who is entitled to receive the distribution or, if no date is fixed, on the declaration date for
the distribution. A due date is periodic for receipts or disbursements that must be paid at
regular intervals under a lease or an obligation to pay interest or if an entity customarily
makes distributions at regular intervals.
new text end

Sec. 10.

new text begin [501C.303] APPORTIONMENT WHEN INCOME INTEREST ENDS.
new text end

new text begin (a) In this section, "undistributed income" means net income received before the
date on which an income interest ends. The term does not include an item of income or
expense that is due or accrued or net income that has been added or is required to be added
to principal under the terms of the trust.
new text end

new text begin (b) When a mandatory income interest ends, the trustee shall pay to a mandatory
income beneficiary who survives that date, or the estate of a deceased mandatory
income beneficiary whose death causes the interest to end, the beneficiary's share of
the undistributed income that is not disposed of under the terms of the trust unless
the beneficiary has an unqualified power to revoke more than five percent of the trust
immediately before the income interest ends. In the latter case, the undistributed income
from the portion of the trust that may be revoked must be added to principal.
new text end

new text begin (c) When a trustee's obligation to pay a fixed annuity or a fixed fraction of the value
of the trust's assets ends, the trustee shall prorate the final payment if and to the extent
required by applicable law to accomplish a purpose of the trust or its settlor relating to
income, gift, estate, or other tax requirements.
new text end

ARTICLE 4

ALLOCATION OF RECEIPTS DURING

ADMINISTRATION OF TRUST

PART 1

RECEIPTS FROM ENTITIES

Sec. 11.

new text begin [501C.401] CHARACTER OF RECEIPTS.
new text end

new text begin (a) In this section, "entity" means a corporation, partnership, limited liability
company, regulated investment company, real estate investment trust, common trust fund,
or any other organization in which a trustee has an interest other than a trust or estate to
which section 501C.402 applies, a business or activity to which section 501C.403 applies,
or an asset-backed security to which section 501C.415 applies.
new text end

new text begin (b) Except as otherwise provided in this section, a trustee shall allocate to income
money received from an entity.
new text end

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

new text begin (1) property other than money;
new text end

new text begin (2) money received in one distribution or a series of related distributions in exchange
for part or all of a trust's interest in the entity;
new text end

new text begin (3) money received in total or partial liquidation of the entity; and
new text end

new text begin (4) money received from an entity that is a regulated investment company or a
real estate investment trust if the money distributed is a capital gain dividend for federal
income tax purposes.
new text end

new text begin (d) Money is received in partial liquidation:
new text end

new text begin (1) to the extent that the entity, at or near the time of a distribution, indicates that it
is a distribution in partial liquidation; or
new text end

new text begin (2) if the total amount of money and property received in a distribution or series of
related distributions is greater than 20 percent of the entity's gross assets, as shown by the
entity's year-end financial statements immediately preceding the initial receipt.
new text end

new text begin (e) Money is not received in partial liquidation, nor may it be taken into account
under subsection (d)(2), to the extent that it does not exceed the amount of income tax that
a trustee or beneficiary must pay on taxable income of the entity that distributes the money.
new text end

new text begin (f) A trustee may rely upon a statement made by an entity about the source or
character of a distribution if the statement is made at or near the time of distribution by
the entity's board of directors or other person or group of persons authorized to exercise
powers to pay money or transfer property comparable to those of a corporation's board of
directors.
new text end

Sec. 12.

new text begin [501C.402] DISTRIBUTION FROM TRUST OR ESTATE.
new text end

new text begin A trustee shall allocate to income an amount received as a distribution of income
from a trust or an estate in which the trust has an interest other than a purchased interest,
and shall allocate to principal an amount received as a distribution of principal from such
a trust or estate. If a trustee purchases an interest in a trust that is an investment entity, or a
decedent or donor transfers an interest in such a trust to a trustee, section 501C.401 or
501C.415 applies to a receipt from the trust.
new text end

Sec. 13.

new text begin [501C.403] BUSINESS AND OTHER ACTIVITIES CONDUCTED
BY TRUSTEE.
new text end

new text begin (a) If a trustee who conducts a business or other activity determines that it is in
the best interest of all the beneficiaries to account separately for the business or activity
instead of accounting for it as part of the trust's general accounting records, the trustee
may maintain separate accounting records for its transactions, whether or not its assets are
segregated from other trust assets.
new text end

new text begin (b) A trustee who accounts separately for a business or other activity may determine
the extent to which its net cash receipts must be retained for working capital, the
acquisition or replacement of fixed assets, and other reasonably foreseeable needs of the
business or activity, and the extent to which the remaining net cash receipts are accounted
for as principal or income in the trust's general accounting records. If a trustee sells assets
of the business or other activity, other than in the ordinary course of the business or
activity, the trustee shall account for the net amount received as principal in the trust's
general accounting records to the extent the trustee determines that the amount received is
no longer required in the conduct of the business.
new text end

new text begin (c) Activities for which a trustee may maintain separate accounting records include:
new text end

new text begin (1) retail, manufacturing, service, and other traditional business activities;
new text end

new text begin (2) farming;
new text end

new text begin (3) raising and selling livestock and other animals;
new text end

new text begin (4) management of rental properties;
new text end

new text begin (5) extraction of minerals and other natural resources;
new text end

new text begin (6) timber operations; and
new text end

new text begin (7) activities to which section 501C.414 applies.
new text end

PART 2

RECEIPTS NOT NORMALLY APPORTIONED

Sec. 14.

new text begin [501C.404] PRINCIPAL RECEIPTS.
new text end

new text begin A trustee shall allocate to principal:
new text end

new text begin (1) to the extent not allocated to income under this chapter, assets received from a
transferor during the transferor's lifetime, a decedent's estate, a trust with a terminating
income interest, or a payer under a contract naming the trust or its trustee as beneficiary;
new text end

new text begin (2) money or other property received from the sale, exchange, liquidation, or change
in form of a principal asset, including realized profit, subject to this article;
new text end

new text begin (3) amounts recovered from third parties to reimburse the trust because of
disbursements described in section 501C.502(a)(7) or for other reasons to the extent
not based on the loss of income;
new text end

new text begin (4) proceeds of property taken by eminent domain, but a separate award made for
the loss of income with respect to an accounting period during which a current income
beneficiary had a mandatory income interest is income;
new text end

new text begin (5) net income received in an accounting period during which there is no beneficiary
to whom a trustee may or must distribute income; and
new text end

new text begin (6) other receipts as provided in Part 3.
new text end

Sec. 15.

new text begin [501C.405] RENTAL PROPERTY.
new text end

new text begin To the extent that a trustee accounts for receipts from rental property pursuant to
this section, the trustee shall allocate to income an amount received as rent of real or
personal property, including an amount received for cancellation or renewal of a lease. An
amount received as a refundable deposit, including a security deposit or a deposit that is to
be applied as rent for future periods, must be added to principal and held subject to the
terms of the lease and is not available for distribution to a beneficiary until the trustee's
contractual obligations have been satisfied with respect to that amount.
new text end

Sec. 16.

new text begin [501C.406] OBLIGATION TO PAY MONEY.
new text end

new text begin (a) An amount received as interest, whether determined at a fixed, variable, or
floating rate, on an obligation to pay money to the trustee, including an amount received as
consideration for prepaying principal, must be allocated to income without any provision
for amortization of premium.
new text end

new text begin (b) A trustee shall allocate to principal an amount received from the sale, redemption,
or other disposition of an obligation to pay money to the trustee more than one year after it
is purchased or acquired by the trustee, including an obligation whose purchase price or
value when it is acquired is less than its value at maturity. If the obligation matures within
one year after it is purchased or acquired by the trustee, an amount received in excess of
its purchase price or its value when acquired by the trust must be allocated to income.
new text end

new text begin (c) This section does not apply to an obligation to which section 501C.409,
501C.410, 501C.411, 501C.412, 501C.414, or 501C.415 applies.
new text end

Sec. 17.

new text begin [501C.407] INSURANCE POLICIES AND SIMILAR CONTRACTS.
new text end

new text begin (a) Except as otherwise provided in subsection (b), a trustee shall allocate to
principal the proceeds of a life insurance policy or other contract in which the trust or its
trustee is named as beneficiary, including a contract that insures the trust or its trustee
against loss for damage to, destruction of, or loss of title to a trust asset. The trustee shall
allocate dividends on an insurance policy to income if the premiums on the policy are paid
from income, and to principal if the premiums are paid from principal.
new text end

new text begin (b) A trustee shall allocate to income proceeds of a contract that insures the trustee
against loss of occupancy or other use by an income beneficiary, loss of income, or, subject
to section 501C.403, loss of profits from a business.
new text end

new text begin (c) This section does not apply to a contract to which section 501C.409 applies.
new text end

PART 3

RECEIPTS NORMALLY APPORTIONED

Sec. 18.

new text begin [501C.408] INSUBSTANTIAL ALLOCATIONS NOT REQUIRED.
new text end

new text begin If a trustee determines that an allocation between principal and income required
by section 501C.409, 501C.410, 501C.411, 501C.412, or 501C.415 is insubstantial,
the trustee may allocate the entire amount to principal unless one of the circumstances
described in section 501C.104(c) applies to the allocation. This power may be exercised
by a cotrustee in the circumstances described in section 501C.104(d) and may be released
for the reasons and in the manner described in section 501C.104(e). An allocation is
presumed to be insubstantial if:
new text end

new text begin (1) the amount of the allocation would increase or decrease net income in an
accounting period, as determined before the allocation, by less than ten percent; or
new text end

new text begin (2) the value of the asset producing the receipt for which the allocation would be
made is less than ten percent of the total value of the trust's assets at the beginning of the
accounting period.
new text end

Sec. 19.

new text begin [501C.409] DEFERRED COMPENSATION, ANNUITIES, AND
SIMILAR PAYMENTS.
new text end

new text begin (a) In this section, "payment" means a payment that a trustee may receive over a fixed
number of years or during the life of one or more individuals because of services rendered
or property transferred to the payer in exchange for future payments. The term includes a
payment made in money or property from the payer's general assets or from a separate
fund created by the payer, including a private or commercial annuity, an individual
retirement account, and a pension, profit-sharing, stock-bonus, or stock-ownership plan.
new text end

new text begin (b) To the extent that a payment is characterized as interest or a dividend or a
payment made in lieu of interest or a dividend, a trustee shall allocate it to income. The
trustee shall allocate to principal the balance of the payment and any other payment
received in the same accounting period that is not characterized as interest, a dividend, or
an equivalent payment.
new text end

new text begin (c) If no part of a payment is characterized as interest, a dividend, or an equivalent
payment, and all or part of the payment is required to be made, a trustee shall allocate to
income ten percent of the part that is required to be made during the accounting period and
the balance to principal. If no part of a payment is required to be made or the payment
received is the entire amount to which the trustee is entitled, the trustee shall allocate the
entire payment to principal. For purposes of this subsection, a payment is not "required to
be made" to the extent that it is made because the trustee exercises a right of withdrawal.
new text end

new text begin (d) If, to obtain an estate tax marital deduction for a trust, a trustee must allocate
more of a payment to income than provided for by this section, the trustee shall allocate to
income the additional amount necessary to obtain the marital deduction.
new text end

new text begin (e) This section does not apply to payments to which section 501C.410 applies.
new text end

Sec. 20.

new text begin [501C.410] LIQUIDATING ASSET.
new text end

new text begin (a) In this section, "liquidating asset" means an asset whose value will diminish
or terminate because the asset is expected to produce receipts for a period of limited
duration. The term includes a leasehold, patent, copyright, royalty right, and right to
receive payments during a period of more than one year under an arrangement that does
not provide for the payment of interest on the unpaid balance. The term does not include
a payment subject to section 501C.409, resources subject to section 501C.411, timber
subject to section 501C.412, an activity subject to section 501C.414, an asset subject to
section 501C.415, or any asset for which the trustee establishes a reserve for depreciation
under section 501C.503.
new text end

new text begin (b) A trustee shall allocate to income ten percent of the receipts from a liquidating
asset and the balance to principal.
new text end

Sec. 21.

new text begin [501C.411] MINERALS, WATER, AND OTHER NATURAL
RESOURCES.
new text end

new text begin (a) To the extent that a trustee accounts for receipts from an interest in minerals or
other natural resources pursuant to this section, the trustee shall allocate them as follows:
new text end

new text begin (1) If received as nominal delay rental or nominal annual rent on a lease, a receipt
must be allocated to income.
new text end

new text begin (2) If received from a production payment, a receipt must be allocated to income if
and to the extent that the agreement creating the production payment provides a factor for
interest or its equivalent. The balance must be allocated to principal.
new text end

new text begin (3) If an amount received as a royalty, shut-in-well payment, take-or-pay payment,
bonus, or delay rental is more than nominal, 90 percent must be allocated to principal
and the balance to income.
new text end

new text begin (4) If an amount is received from a working interest or any other interest not
provided for in paragraph (1), (2), or (3), 90 percent of the net amount received must be
allocated to principal and the balance to income.
new text end

new text begin (b) An amount received on account of an interest in water that is renewable must
be allocated to income. If the water is not renewable, 90 percent of the amount must be
allocated to principal and the balance to income.
new text end

new text begin (c) This act applies whether or not a decedent or donor was extracting minerals,
water, or other natural resources before the interest became subject to the trust.
new text end

new text begin (d) If a trust owns an interest in minerals, water, or other natural resources on the
effective date of this act, the trustee may allocate receipts from the interest as provided in
this act or in the manner used by the trustee before the effective date of this act. If the trust
acquires an interest in minerals, water, or other natural resources after the effective date of
this act, the trustee shall allocate receipts from the interest as provided in this act.
new text end

Sec. 22.

new text begin [501C.412] TIMBER.
new text end

new text begin (a) To the extent that a trustee accounts for receipts from the sale of timber and
related products pursuant to this section, the trustee shall allocate the net receipts:
new text end

new text begin (1) to income to the extent that the amount of timber removed from the land does
not exceed the rate of growth of the timber during the accounting periods in which a
beneficiary has a mandatory income interest;
new text end

new text begin (2) to principal to the extent that the amount of timber removed from the land exceeds
the rate of growth of the timber or the net receipts are from the sale of standing timber;
new text end

new text begin (3) to or between income and principal if the net receipts are from the lease of
timberland or from a contract to cut timber from land owned by a trust, by determining
the amount of timber removed from the land under the lease or contract and applying the
rules in paragraphs (1) and (2); or
new text end

new text begin (4) to principal to the extent that advance payments, bonuses, and other payments
are not allocated pursuant to paragraph (1), (2), or (3).
new text end

new text begin (b) In determining net receipts to be allocated pursuant to subsection (a), a trustee
shall deduct and transfer to principal a reasonable amount for depletion.
new text end

new text begin (c) This act applies whether or not a decedent or transferor was harvesting timber
from the property before it becomes subject to the trust.
new text end

new text begin (d) If a trust owns an interest in timberland on the effective date of this act, the
trustee may allocate net receipts from the sale of timber and related products as provided
in this act or in the manner used by the trustee before the effective date of this act. If the
trust acquires an interest in timberland after the effective date of this act, the trustee shall
allocate net receipts from the sale of timber and related products as provided in this act.
new text end

Sec. 23.

new text begin [501C.413] PROPERTY NOT PRODUCTIVE OF INCOME.
new text end

new text begin (a) If a marital deduction is allowed for all or part of a trust whose assets consist
substantially of property that does not provide the spouse with sufficient income from or
use of the trust assets, and if the amounts that the trustee transfers from principal to income
under section 501C.104 and distributes to the spouse from principal pursuant to the terms
of the trust are insufficient to provide the spouse with the beneficial enjoyment required
to obtain the marital deduction, the spouse may require the trustee to make property
productive of income, convert property within a reasonable time, or exercise the power
conferred by section 501C.104(a). The trustee may decide which action or combination
of actions to take.
new text end

new text begin (b) In cases not governed by subsection (a), proceeds from the sale or other
disposition of an asset are principal without regard to the amount of income the asset
produces during any accounting period.
new text end

Sec. 24.

new text begin [501C.414] DERIVATIVES AND OPTIONS.
new text end

new text begin (a) In this section, "derivative" means a contract or financial instrument or a
combination of contracts and financial instruments which gives a trust the right or
obligation to participate in some or all changes in the price of a tangible or intangible
asset or group of assets, or changes in a rate, an index of prices or rates, or other market
indicator for an asset or a group of assets.
new text end

new text begin (b) To the extent that a trustee does not account under section 501C.403 for
transactions in derivatives, the trustee shall allocate to principal receipts from and
disbursements made in connection with those transactions.
new text end

new text begin (c) If a trustee grants an option to buy property from the trust, whether or not the
trust owns the property when the option is granted, grants an option that permits another
person to sell property to the trust, or acquires an option to buy property for the trust or an
option to sell an asset owned by the trust, and the trustee or other owner of the asset is
required to deliver the asset if the option is exercised, an amount received for granting the
option must be allocated to principal. An amount paid to acquire the option must be paid
from principal. A gain or loss realized upon the exercise of an option, including an option
granted to a settlor of the trust for services rendered, must be allocated to principal.
new text end

Sec. 25.

new text begin [501C.415] ASSET-BACKED SECURITIES.
new text end

new text begin (a) In this section, "asset-backed security" means an asset whose value is based upon
the right it gives the owner to receive distributions from the proceeds of financial assets
that provide collateral for the security. The term includes an asset that gives the owner
the right to receive from the collateral financial assets only the interest or other current
return or only the proceeds other than interest or current return. The term does not include
an asset to which section 501C.401 or 501C.409 applies.
new text end

new text begin (b) If a trust receives a payment from interest or other current return and from other
proceeds of the collateral financial assets, the trustee shall allocate to income the portion
of the payment which the payer identifies as being from interest or other current return
and shall allocate the balance of the payment to principal.
new text end

new text begin (c) If a trust receives one or more payments in exchange for the trust's entire
interest in an asset-backed security in one accounting period, the trustee shall allocate the
payments to principal. If a payment is one of a series of payments that will result in the
liquidation of the trust's interest in the security over more than one accounting period, the
trustee shall allocate ten percent of the payment to income and the balance to principal.
new text end

ARTICLE 5

ALLOCATION OF DISBURSEMENTS DURING

ADMINISTRATION OF TRUST

Sec. 26.

new text begin [501C.501] DISBURSEMENTS FROM INCOME.
new text end

new text begin A trustee shall make the following disbursements from income to the extent that
they are not disbursements to which section 501C.201(2)(B) or (C) applies:
new text end

new text begin (1) one-half of the regular compensation of the trustee and of any person providing
investment advisory or custodial services to the trustee;
new text end

new text begin (2) one-half of all expenses for accountings, judicial proceedings, or other matters
that involve both the income and remainder interests;
new text end

new text begin (3) all of the other ordinary expenses incurred in connection with the administration,
management, or preservation of trust property and the distribution of income, including
interest, ordinary repairs, regularly recurring taxes assessed against principal, and
expenses of a proceeding or other matter that concerns primarily the income interest; and
new text end

new text begin (4) recurring premiums on insurance covering the loss of a principal asset or the
loss of income from or use of the asset.
new text end

Sec. 27.

new text begin [501C.502] DISBURSEMENTS FROM PRINCIPAL.
new text end

new text begin (a) A trustee shall make the following disbursements from principal:
new text end

new text begin (1) the remaining one-half of the disbursements described in section 501C.501(1)
and (2);
new text end

new text begin (2) all of the trustee's compensation calculated on principal as a fee for acceptance,
distribution, or termination, and disbursements made to prepare property for sale;
new text end

new text begin (3) payments on the principal of a trust debt;
new text end

new text begin (4) expenses of a proceeding that concerns primarily principal, including a
proceeding to construe the trust or to protect the trust or its property;
new text end

new text begin (5) premiums paid on a policy of insurance not described in section 501C.501(4) of
which the trust is the owner and beneficiary;
new text end

new text begin (6) estate, inheritance, and other transfer taxes, including penalties, apportioned to
the trust; and
new text end

new text begin (7) disbursements related to environmental matters, including reclamation, assessing
environmental conditions, remedying and removing environmental contamination,
monitoring remedial activities and the release of substances, preventing future releases
of substances, collecting amounts from persons liable or potentially liable for the costs
of those activities, penalties imposed under environmental laws or regulations and other
payments made to comply with those laws or regulations, statutory or common law claims
by third parties, and defending claims based on environmental matters.
new text end

new text begin (b) If a principal asset is encumbered with an obligation that requires income from
that asset to be paid directly to the creditor, the trustee shall transfer from principal to
income an amount equal to the income paid to the creditor in reduction of the principal
balance of the obligation.
new text end

Sec. 28.

new text begin [501C.503] TRANSFERS FROM INCOME TO PRINCIPAL FOR
DEPRECIATION.
new text end

new text begin (a) In this section, "depreciation" means a reduction in value due to wear, tear,
decay, corrosion, or gradual obsolescence of a fixed asset having a useful life of more
than one year.
new text end

new text begin (b) A trustee may transfer to principal a reasonable amount of the net cash receipts
from a principal asset that is subject to depreciation, but may not transfer any amount for
depreciation:
new text end

new text begin (1) of that portion of real property used or available for use by a beneficiary as a
residence or of tangible personal property held or made available for the personal use or
enjoyment of a beneficiary;
new text end

new text begin (2) during the administration of a decedent's estate; or
new text end

new text begin (3) under this section if the trustee is accounting under section 501C.403 for the
business or activity in which the asset is used.
new text end

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

Sec. 29.

new text begin [501C.504] TRANSFERS FROM INCOME TO REIMBURSE
PRINCIPAL.
new text end

new text begin (a) If a trustee makes or expects to make a principal disbursement described in
this section, the trustee may transfer an appropriate amount from income to principal in
one or more accounting periods to reimburse principal or to provide a reserve for future
principal disbursements.
new text end

new text begin (b) Principal disbursements to which subsection (a) applies include the following,
but only to the extent that the trustee has not been and does not expect to be reimbursed by
a third party:
new text end

new text begin (1) an amount chargeable to income but paid from principal because it is unusually
large, including extraordinary repairs;
new text end

new text begin (2) a capital improvement to a principal asset, whether in the form of changes to an
existing asset or the construction of a new asset, including special assessments;
new text end

new text begin (3) disbursements made to prepare property for rental, including tenant allowances,
leasehold improvements, and broker's commissions;
new text end

new text begin (4) periodic payments on an obligation secured by a principal asset to the extent
that the amount transferred from income to principal for depreciation is less than the
periodic payments; and
new text end

new text begin (5) disbursements described in section 501C.502(a)(7).
new text end

new text begin (c) If the asset whose ownership gives rise to the disbursements becomes subject to a
successive income interest after an income interest ends, a trustee may continue to transfer
amounts from income to principal as provided in subsection (a).
new text end

Sec. 30.

new text begin [501C.505] INCOME TAXES.
new text end

new text begin (a) A tax required to be paid by a trustee based on receipts allocated to income
must be paid from income.
new text end

new text begin (b) A tax required to be paid by a trustee based on receipts allocated to principal
must be paid from principal, even if the tax is called an income tax by the taxing authority.
new text end

new text begin (c) A tax required to be paid by a trustee on the trust's share of an entity's taxable
income must be paid proportionately:
new text end

new text begin (1) from income to the extent that receipts from the entity are allocated to income;
and
new text end

new text begin (2) from principal to the extent that:
new text end

new text begin (A) receipts from the entity are allocated to principal; and
new text end

new text begin (B) the trust's share of the entity's taxable income exceeds the total receipts described
in paragraphs (1) and (2)(A).
new text end

new text begin (d) For purposes of this section, receipts allocated to principal or income must be
reduced by the amount distributed to a beneficiary from principal or income for which the
trust receives a deduction in calculating the tax.
new text end

Sec. 31.

new text begin [501C.506] ADJUSTMENTS BETWEEN PRINCIPAL AND INCOME
BECAUSE OF TAXES.
new text end

new text begin (a) A fiduciary may make adjustments between principal and income to offset the
shifting of economic interests or tax benefits between income beneficiaries and remainder
beneficiaries which arise from:
new text end

new text begin (1) elections and decisions, other than those described in subsection (b), that the
fiduciary makes from time to time regarding tax matters;
new text end

new text begin (2) an income tax or any other tax that is imposed upon the fiduciary or a beneficiary
as a result of a transaction involving or a distribution from the estate or trust; or
new text end

new text begin (3) the ownership by an estate or trust of an interest in an entity whose taxable
income, whether or not distributed, is includable in the taxable income of the estate,
trust, or a beneficiary.
new text end

new text begin (b) If the amount of an estate tax marital deduction or charitable contribution
deduction is reduced because a fiduciary deducts an amount paid from principal for
income tax purposes instead of deducting it for estate tax purposes, and as a result
estate taxes paid from principal are increased and income taxes paid by an estate, trust,
or beneficiary are decreased, each estate, trust, or beneficiary that benefits from the
decrease in income tax shall reimburse the principal from which the increase in estate tax
is paid. The total reimbursement must equal the increase in the estate tax to the extent
that the principal used to pay the increase would have qualified for a marital deduction
or charitable contribution deduction but for the payment. The proportionate share of the
reimbursement for each estate, trust, or beneficiary whose income taxes are reduced must
be the same as its proportionate share of the total decrease in income tax. An estate or
trust shall reimburse principal from income.
new text end

Sec. 32. new text begin APPLICATION OF ACT TO EXISTING TRUSTS AND ESTATES.
new text end

new text begin This act applies to every trust or decedent's estate existing on the effective date of
this act except as otherwise expressly provided in the will or terms of the trust or in this act.
new text end

Sec. 33. new text begin REPEALER.
new text end

new text begin Minnesota Statutes 2006, sections 501B.59; 501B.60; 501B.61; 501B.62; 501B.63;
501B.64; 501B.65; 501B.665; 501B.67; 501B.68; 501B.69; 501B.705; 501B.71; 501B.72;
501B.73; 501B.74; 501B.75; and 501B.76, new text end new text begin are repealed.
new text end