SF 666

as introduced - 82nd Legislature (2001 - 2002) Posted on 12/15/2009 12:00am

  1.1                          A bill for an act 
  1.2             relating to uniform laws; proposing enactment of the 
  1.3             Uniform Principal and Income Act of 1997; proposing 
  1.4             coding for new law as Minnesota Statutes, chapter 
  1.5             501C; repealing Minnesota Statutes 2000, sections 
  1.6             501B.59; 501B.60; 501B.61; 501B.62; 501B.63; 501B.64; 
  1.7             501B.65; 501B.66; 501B.67; 501B.68; 501B.69; 501B.70; 
  1.8             501B.71; 501B.72; 501B.73; 501B.74; 501B.75; and 
  1.9             501B.76. 
  1.10  BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF MINNESOTA: 
  1.11                             ARTICLE 1 
  1.12                  DEFINITIONS AND FIDUCIARY DUTIES
  1.13     Section 1.  [501C.101] [SHORT TITLE.] 
  1.14     This act may be cited as the Uniform Principal and Income 
  1.15  Act (1997). 
  1.16     Sec. 2.  [501C.102] [DEFINITIONS.] 
  1.17     In this act: 
  1.18     (1) "Accounting period" means a calendar year unless 
  1.19  another 12-month period is selected by a fiduciary.  The term 
  1.20  includes a portion of a calendar year or other 12-month period 
  1.21  that begins when an income interest begins or ends when an 
  1.22  income interest ends. 
  1.23     (2) "Beneficiary" includes, in the case of a decedent's 
  1.24  estate, an heir, legatee, and devisee and, in the case of a 
  1.25  trust, an income beneficiary and a remainder beneficiary. 
  1.26     (3) "Fiduciary" means a personal representative or a 
  1.27  trustee.  The term includes an executor, administrator, 
  2.1   successor personal representative, special administrator, and a 
  2.2   person performing substantially the same function. 
  2.3      (4) "Income" means money or property that a fiduciary 
  2.4   receives as current return from a principal asset.  The term 
  2.5   includes a portion of receipts from a sale, exchange, or 
  2.6   liquidation of a principal asset, to the extent provided in 
  2.7   article 4. 
  2.8      (5) "Income beneficiary" means a person to whom net income 
  2.9   of a trust is or may be payable. 
  2.10     (6) "Income interest" means the right of an income 
  2.11  beneficiary to receive all or part of net income, whether the 
  2.12  terms of the trust require it to be distributed or authorize it 
  2.13  to be distributed in the trustee's discretion. 
  2.14     (7) "Mandatory income interest" means the right of an 
  2.15  income beneficiary to receive net income that the terms of the 
  2.16  trust require the fiduciary to distribute. 
  2.17     (8) "Net income" means the total receipts allocated to 
  2.18  income during an accounting period minus the disbursements made 
  2.19  from income during the period, plus or minus transfers under 
  2.20  this act to or from income during the period. 
  2.21     (9) "Person" means an individual, corporation, business 
  2.22  trust, estate, trust, partnership, limited liability company, 
  2.23  association, joint venture, government; governmental 
  2.24  subdivision, agency, or instrumentality; public corporation, or 
  2.25  any other legal or commercial entity. 
  2.26     (10) "Principal" means property held in trust for 
  2.27  distribution to a remainder beneficiary when the trust 
  2.28  terminates. 
  2.29     (11) "Remainder beneficiary" means a person entitled to 
  2.30  receive principal when an income interest ends. 
  2.31     (12) "Terms of a trust" means the manifestation of the 
  2.32  intent of a settlor or decedent with respect to the trust, 
  2.33  expressed in a manner that admits of its proof in a judicial 
  2.34  proceeding, whether by written or spoken words or by conduct. 
  2.35     (13) "Trustee" includes an original, additional, or 
  2.36  successor trustee, whether or not appointed or confirmed by a 
  3.1   court. 
  3.2      Sec. 3.  [501C.103] [FIDUCIARY DUTIES; GENERAL PRINCIPLES.] 
  3.3      (a) In allocating receipts and disbursements to or between 
  3.4   principal and income, and with respect to any matter within the 
  3.5   scope of articles 2 and 3, a fiduciary: 
  3.6      (1) shall administer a trust or estate in accordance with 
  3.7   the terms of the trust or the will, even if there is a different 
  3.8   provision in this act; 
  3.9      (2) may administer a trust or estate by the exercise of a 
  3.10  discretionary power of administration given to the fiduciary by 
  3.11  the terms of the trust or the will, even if the exercise of the 
  3.12  power produces a result different from a result required or 
  3.13  permitted by this act; 
  3.14     (3) shall administer a trust or estate in accordance with 
  3.15  this act if the terms of the trust or the will do not contain a 
  3.16  different provision or do not give the fiduciary a discretionary 
  3.17  power of administration; and 
  3.18     (4) shall add a receipt or charge a disbursement to 
  3.19  principal to the extent that the terms of the trust and this act 
  3.20  do not provide a rule for allocating the receipt or disbursement 
  3.21  to or between principal and income. 
  3.22     (b) In exercising the power to adjust under section 
  3.23  501C.104(a) or a discretionary power of administration regarding 
  3.24  a matter within the scope of this act, whether granted by the 
  3.25  terms of a trust, a will, or this act, a fiduciary shall 
  3.26  administer a trust or estate impartially, based on what is fair 
  3.27  and reasonable to all of the beneficiaries, except to the extent 
  3.28  that the terms of the trust or the will clearly manifest an 
  3.29  intention that the fiduciary shall or may favor one or more of 
  3.30  the beneficiaries.  A determination in accordance with this act 
  3.31  is presumed to be fair and reasonable to all of the 
  3.32  beneficiaries. 
  3.33     Sec. 4.  [501C.104] [TRUSTEE'S POWER TO ADJUST.] 
  3.34     (a) A trustee may adjust between principal and income to 
  3.35  the extent the trustee considers necessary if the trustee 
  3.36  invests and manages trust assets as a prudent investor, the 
  4.1   terms of the trust describe the amount that may or must be 
  4.2   distributed to a beneficiary by referring to the trust's income, 
  4.3   and the trustee determines, after applying the rules in section 
  4.4   501C.103(a), that the trustee is unable to comply with section 
  4.5   501C.103(b). 
  4.6      (b) In deciding whether and to what extent to exercise the 
  4.7   power conferred by subsection (a), a trustee shall consider all 
  4.8   factors relevant to the trust and its beneficiaries, including 
  4.9   the following factors to the extent they are relevant: 
  4.10     (1) the nature, purpose, and expected duration of the 
  4.11  trust; 
  4.12     (2) the intent of the settlor; 
  4.13     (3) the identity and circumstances of the beneficiaries; 
  4.14     (4) the needs for liquidity, regularity of income, and 
  4.15  preservation and appreciation of capital; 
  4.16     (5) the assets held in the trust; the extent to which they 
  4.17  consist of financial assets, interests in closely held 
  4.18  enterprises, tangible and intangible personal property, or real 
  4.19  property; the extent to which an asset is used by a beneficiary; 
  4.20  and whether an asset was purchased by the trustee or received 
  4.21  from the settlor; 
  4.22     (6) the net amount allocated to income under the other 
  4.23  sections of this act and the increase or decrease in the value 
  4.24  of the principal assets, which the trustee may estimate as to 
  4.25  assets for which market values are not readily available; 
  4.26     (7) whether and to what extent the terms of the trust give 
  4.27  the trustee the power to invade principal or accumulate income 
  4.28  or prohibit the trustee from invading principal or accumulating 
  4.29  income, and the extent to which the trustee has exercised a 
  4.30  power from time to time to invade principal or accumulate 
  4.31  income; 
  4.32     (8) the actual and anticipated effect of economic 
  4.33  conditions on principal and income and effects of inflation and 
  4.34  deflation; and 
  4.35     (9) the anticipated tax consequences of an adjustment. 
  4.36     (c) A trustee may not make an adjustment: 
  5.1      (1) that diminishes the income interest in a trust that 
  5.2   requires all of the income to be paid at least annually to a 
  5.3   spouse and for which an estate tax or gift tax marital deduction 
  5.4   would be allowed, in whole or in part, if the trustee did not 
  5.5   have the power to make the adjustment; 
  5.6      (2) that reduces the actuarial value of the income interest 
  5.7   in a trust to which a person transfers property with the intent 
  5.8   to qualify for a gift tax exclusion; 
  5.9      (3) that changes the amount payable to a beneficiary as a 
  5.10  fixed annuity or a fixed fraction of the value of the trust 
  5.11  assets; 
  5.12     (4) from any amount that is permanently set aside for 
  5.13  charitable purposes under a will or the terms of a trust unless 
  5.14  both income and principal are so set aside; 
  5.15     (5) if possessing or exercising the power to make an 
  5.16  adjustment causes an individual to be treated as the owner of 
  5.17  all or part of the trust for income tax purposes, and the 
  5.18  individual would not be treated as the owner if the trustee did 
  5.19  not possess the power to make an adjustment; 
  5.20     (6) if possessing or exercising the power to make an 
  5.21  adjustment causes all or part of the trust assets to be included 
  5.22  for estate tax purposes in the estate of an individual who has 
  5.23  the power to remove a trustee or appoint a trustee, or both, and 
  5.24  the assets would not be included in the estate of the individual 
  5.25  if the trustee did not possess the power to make an adjustment; 
  5.26     (7) if the trustee is a beneficiary of the trust; or 
  5.27     (8) if the trustee is not a beneficiary, but the adjustment 
  5.28  would benefit the trustee directly or indirectly. 
  5.29     (d) If subsection (c)(5), (6), (7), or (8) applies to a 
  5.30  trustee and there is more than one trustee, a cotrustee to whom 
  5.31  the provision does not apply may make the adjustment unless the 
  5.32  exercise of the power by the remaining trustee or trustees is 
  5.33  not permitted by the terms of the trust. 
  5.34     (e) A trustee may release the entire power conferred by 
  5.35  subsection (a) or may release only the power to adjust from 
  5.36  income to principal or the power to adjust from principal to 
  6.1   income if the trustee is uncertain about whether possessing or 
  6.2   exercising the power will cause a result described in subsection 
  6.3   (c)(1) to (6) or (c)(8) or if the trustee determines that 
  6.4   possessing or exercising the power will or may deprive the trust 
  6.5   of a tax benefit or impose a tax burden not described in 
  6.6   subsection (c).  The release may be permanent or for a specified 
  6.7   period, including a period measured by the life of an individual.
  6.8      (f) Terms of a trust that limit the power of a trustee to 
  6.9   make an adjustment between principal and income do not affect 
  6.10  the application of this section unless it is clear from the 
  6.11  terms of the trust that the terms are intended to deny the 
  6.12  trustee the power of adjustment conferred by subsection (a). 
  6.13     Sec. 5.  [501C.105] [JUDICIAL CONTROL OF DISCRETIONARY 
  6.14  POWERS.] 
  6.15     (a) A court shall not change a fiduciary's decision to 
  6.16  exercise or not to exercise a discretionary power conferred by 
  6.17  this act unless it determines that the decision was an abuse of 
  6.18  the fiduciary's discretion.  A court shall not determine that a 
  6.19  fiduciary abused its discretion merely because the court would 
  6.20  have exercised the discretion in a different manner or would not 
  6.21  have exercised the discretion. 
  6.22     (b) The decisions to which subsection (a) applies include: 
  6.23     (1) A determination under section 501C.104(a) of whether 
  6.24  and to what extent an amount should be transferred from 
  6.25  principal to income or from income to principal. 
  6.26     (2) A determination of the factors that are relevant to the 
  6.27  trust and its beneficiaries, the extent to which they are 
  6.28  relevant, and the weight, if any, to be given to the relevant 
  6.29  factors, in deciding whether and to what extent to exercise the 
  6.30  power conferred by section 501C.104(a). 
  6.31     (c) If a court determines that a fiduciary has abused its 
  6.32  discretion, the remedy is to restore the income and remainder 
  6.33  beneficiaries to the positions they would have occupied if the 
  6.34  fiduciary had not abused its discretion, according to the 
  6.35  following rules: 
  6.36     (1) To the extent that the abuse of discretion has resulted 
  7.1   in no distribution to a beneficiary or a distribution that is 
  7.2   too small, the court shall require the fiduciary to distribute 
  7.3   from the trust to the beneficiary an amount that the court 
  7.4   determines will restore the beneficiary, in whole or in part, to 
  7.5   the beneficiary's appropriate position. 
  7.6      (2) To the extent that the abuse of discretion has resulted 
  7.7   in a distribution to a beneficiary that is too large, the court 
  7.8   shall restore the beneficiaries, the trust, or both, in whole or 
  7.9   in part, to their appropriate positions by requiring the 
  7.10  fiduciary to withhold an amount from one or more future 
  7.11  distributions to the beneficiary who received the distribution 
  7.12  that was too large or requiring that beneficiary to return some 
  7.13  or all of the distribution to the trust. 
  7.14     (3) To the extent that the court is unable, after applying 
  7.15  paragraphs (1) and (2), to restore the beneficiaries, the trust, 
  7.16  or both, to the positions they would have occupied if the 
  7.17  fiduciary had not abused its discretion, the court may require 
  7.18  the fiduciary to pay an appropriate amount from its own funds to 
  7.19  one or more of the beneficiaries or the trust or both. 
  7.20     (d) Upon a petition by the fiduciary, the court having 
  7.21  jurisdiction over the trust or estate shall determine whether a 
  7.22  proposed exercise or nonexercise by the fiduciary of a 
  7.23  discretionary power conferred by the act will result in an abuse 
  7.24  of the fiduciary's discretion.  If the petition describes the 
  7.25  proposed exercise or nonexercise of the power and contains 
  7.26  sufficient information to inform the beneficiaries of the 
  7.27  reasons for the proposal, the facts upon which the fiduciary 
  7.28  relies, and an explanation of how the income and remainder 
  7.29  beneficiaries will be affected by the proposed exercise or 
  7.30  nonexercise of the power, a beneficiary who challenges the 
  7.31  proposed exercise or nonexercise has the burden of establishing 
  7.32  that it will result in an abuse of discretion. 
  7.33                             ARTICLE 2 
  7.34          DECEDENT'S ESTATE OR TERMINATING INCOME INTEREST 
  7.35     Sec. 6.  [501C.201] [DETERMINATION AND DISTRIBUTION OF NET 
  7.36  INCOME.] 
  8.1      After a decedent dies, in the case of an estate, or after 
  8.2   an income interest in a trust ends, the following rules apply: 
  8.3      (1) A fiduciary of an estate or of a terminating income 
  8.4   interest shall determine the amount of net income and net 
  8.5   principal receipts received from property specifically given to 
  8.6   a beneficiary under the rules in articles 3 to 5 which apply to 
  8.7   trustees and the rules in paragraph (5).  The fiduciary shall 
  8.8   distribute the net income and net principal receipts to the 
  8.9   beneficiary who is to receive the specific property. 
  8.10     (2) A fiduciary shall determine the remaining net income of 
  8.11  a decedent's estate or a terminating income interest under the 
  8.12  rules in articles 3 to 5 which apply to trustees and by: 
  8.13     (A) including in net income all income from property used 
  8.14  to discharge liabilities; 
  8.15     (B) paying from income or principal, in the fiduciary's 
  8.16  discretion, fees of attorneys, accountants, and fiduciaries; 
  8.17  court costs and other expenses of administration; and interest 
  8.18  on death taxes, but the fiduciary may pay those expenses from 
  8.19  income of property passing to a trust for which the fiduciary 
  8.20  claims an estate tax marital or charitable deduction only to the 
  8.21  extent that the payment of those expenses from income will not 
  8.22  cause the reduction or loss of the deduction; and 
  8.23     (C) paying from principal all other disbursements made or 
  8.24  incurred in connection with the settlement of a decedent's 
  8.25  estate or the winding up of a terminating income interest, 
  8.26  including debts, funeral expenses, disposition of remains, 
  8.27  family allowances, and death taxes and related penalties that 
  8.28  are apportioned to the estate or terminating income interest by 
  8.29  the will, the terms of the trust, or applicable law. 
  8.30     (3) A fiduciary shall distribute to a beneficiary who 
  8.31  receives a pecuniary amount outright the interest or any other 
  8.32  amount provided by the will, the terms of the trust, or 
  8.33  applicable law from net income determined under paragraph (2) or 
  8.34  from principal to the extent that net income is insufficient.  
  8.35  If a beneficiary is to receive a pecuniary amount outright from 
  8.36  a trust after an income interest ends and no interest or other 
  9.1   amount is provided for by the terms of the trust or applicable 
  9.2   law, the fiduciary shall distribute the interest or other amount 
  9.3   to which the beneficiary would be entitled under applicable law 
  9.4   if the pecuniary amount were required to be paid under a will. 
  9.5      (4) A fiduciary shall distribute the net income remaining 
  9.6   after distributions required by paragraph (3) in the manner 
  9.7   described in section 501C.202 to all other beneficiaries, 
  9.8   including a beneficiary who receives a pecuniary amount in 
  9.9   trust, even if the beneficiary holds an unqualified power to 
  9.10  withdraw assets from the trust or other presently exercisable 
  9.11  general power of appointment over the trust. 
  9.12     (5) A fiduciary may not reduce principal or income receipts 
  9.13  from property described in paragraph (1) because of a payment 
  9.14  described in section 501C.501 or 501C.502 to the extent that the 
  9.15  will, the terms of the trust, or applicable law requires the 
  9.16  fiduciary to make the payment from assets other than the 
  9.17  property or to the extent that the fiduciary recovers or expects 
  9.18  to recover the payment from a third party.  The net income and 
  9.19  principal receipts from the property are determined by including 
  9.20  all of the amounts the fiduciary receives or pays with respect 
  9.21  to the property, whether those amounts accrued or became due 
  9.22  before, on, or after the date of a decedent's death or an income 
  9.23  interest's terminating event, and by making a reasonable 
  9.24  provision for amounts that the fiduciary believes the estate or 
  9.25  terminating income interest may become obligated to pay after 
  9.26  the property is distributed. 
  9.27     Sec. 7.  [501C.202] [DISTRIBUTION TO RESIDUARY AND 
  9.28  REMAINDER BENEFICIARIES.] 
  9.29     (a) Each beneficiary described in section 501C.201(4) is 
  9.30  entitled to receive a portion of the net income equal to the 
  9.31  beneficiary's fractional interest in undistributed principal 
  9.32  assets, using values as of the distribution date.  If a 
  9.33  fiduciary makes more than one distribution of assets to 
  9.34  beneficiaries to whom this section applies, each beneficiary, 
  9.35  including one who does not receive part of the distribution, is 
  9.36  entitled, as of each distribution date, to the net income the 
 10.1   fiduciary has received after the date of death or terminating 
 10.2   event or earlier distribution date but has not distributed as of 
 10.3   the current distribution date. 
 10.4      (b) In determining a beneficiary's share of net income, the 
 10.5   following rules apply: 
 10.6      (1) The beneficiary is entitled to receive a portion of the 
 10.7   net income equal to the beneficiary's fractional interest in the 
 10.8   undistributed principal assets immediately before the 
 10.9   distribution date, including assets that later may be sold to 
 10.10  meet principal obligations. 
 10.11     (2) The beneficiary's fractional interest in the 
 10.12  undistributed principal assets must be calculated without regard 
 10.13  to property specifically given to a beneficiary and property 
 10.14  required to pay pecuniary amounts not in trust. 
 10.15     (3) The beneficiary's fractional interest in the 
 10.16  undistributed principal assets must be calculated on the basis 
 10.17  of the aggregate value of those assets as of the distribution 
 10.18  date without reducing the value by any unpaid principal 
 10.19  obligation. 
 10.20     (4) The distribution date for purposes of this section may 
 10.21  be the date as of which the fiduciary calculates the value of 
 10.22  the assets if that date is reasonably near the date on which 
 10.23  assets are actually distributed. 
 10.24     (c) If a fiduciary does not distribute all of the collected 
 10.25  but undistributed net income to each person as of a distribution 
 10.26  date, the fiduciary shall maintain appropriate records showing 
 10.27  the interest of each beneficiary in that net income. 
 10.28     (d) A fiduciary may apply the rules in this section, to the 
 10.29  extent that the fiduciary considers it appropriate, to net gain 
 10.30  or loss realized after the date of death or terminating event or 
 10.31  earlier distribution date from the disposition of a principal 
 10.32  asset if this section applies to the income from the asset. 
 10.33                             ARTICLE 3 
 10.34       APPORTIONMENT AT BEGINNING AND END OF INCOME INTEREST 
 10.35     Sec. 8.  [501C.301] [WHEN RIGHT TO INCOME BEGINS AND ENDS.] 
 10.36     (a) An income beneficiary is entitled to net income from 
 11.1   the date on which the income interest begins.  An income 
 11.2   interest begins on the date specified in the terms of the trust 
 11.3   or, if no date is specified, on the date an asset becomes 
 11.4   subject to a trust or successive income interest. 
 11.5      (b) An asset becomes subject to a trust: 
 11.6      (1) on the date it is transferred to the trust in the case 
 11.7   of an asset that is transferred to a trust during the 
 11.8   transferor's life; 
 11.9      (2) on the date of a testator's death in the case of an 
 11.10  asset that becomes subject to a trust by reason of a will, even 
 11.11  if there is an intervening period of administration of the 
 11.12  testator's estate; or 
 11.13     (3) on the date of an individual's death in the case of an 
 11.14  asset that is transferred to a fiduciary by a third party 
 11.15  because of the individual's death. 
 11.16     (c) An asset becomes subject to a successive income 
 11.17  interest on the day after the preceding income interest ends, as 
 11.18  determined under subsection (d), even if there is an intervening 
 11.19  period of administration to wind up the preceding income 
 11.20  interest. 
 11.21     (d) An income interest ends on the day before an income 
 11.22  beneficiary dies or another terminating event occurs, or on the 
 11.23  last day of a period during which there is no beneficiary to 
 11.24  whom a trustee may distribute income. 
 11.25     Sec. 9.  [501C.302] [APPORTIONMENT OF RECEIPTS AND 
 11.26  DISBURSEMENTS WHEN DECEDENT DIES OR INCOME INTEREST BEGINS.] 
 11.27     (a) A trustee shall allocate an income receipt or 
 11.28  disbursement other than one to which section 501C.201(1) applies 
 11.29  to principal if its due date occurs before a decedent dies in 
 11.30  the case of an estate or before an income interest begins in the 
 11.31  case of a trust or successive income interest. 
 11.32     (b) A trustee shall allocate an income receipt or 
 11.33  disbursement to income if its due date occurs on or after the 
 11.34  date on which a decedent dies or an income interest begins and 
 11.35  it is a periodic due date.  An income receipt or disbursement 
 11.36  must be treated as accruing from day to day if its due date is 
 12.1   not periodic or it has no due date.  The portion of the receipt 
 12.2   or disbursement accruing before the date on which a decedent 
 12.3   dies or an income interest begins must be allocated to principal 
 12.4   and the balance must be allocated to income. 
 12.5      (c) An item of income or an obligation is due on the date 
 12.6   the payer is required to make a payment.  If a payment date is 
 12.7   not stated, there is no due date for the purposes of this act. 
 12.8   Distributions to shareholders or other owners from an entity to 
 12.9   which section 501C.401 applies are deemed to be due on the date 
 12.10  fixed by the entity for determining who is entitled to receive 
 12.11  the distribution or, if no date is fixed, on the declaration 
 12.12  date for the distribution.  A due date is periodic for receipts 
 12.13  or disbursements that must be paid at regular intervals under a 
 12.14  lease or an obligation to pay interest or if an entity 
 12.15  customarily makes distributions at regular intervals. 
 12.16     Sec. 10.  [501C.303] [APPORTIONMENT WHEN INCOME INTEREST 
 12.17  ENDS.] 
 12.18     (a) In this section, "undistributed income" means net 
 12.19  income received before the date on which an income interest 
 12.20  ends.  The term does not include an item of income or expense 
 12.21  that is due or accrued or net income that has been added or is 
 12.22  required to be added to principal under the terms of the trust. 
 12.23     (b) When a mandatory income interest ends, the trustee 
 12.24  shall pay to a mandatory income beneficiary who survives that 
 12.25  date, or the estate of a deceased mandatory income beneficiary 
 12.26  whose death causes the interest to end, the beneficiary's share 
 12.27  of the undistributed income that is not disposed of under the 
 12.28  terms of the trust unless the beneficiary has an unqualified 
 12.29  power to revoke more than five percent of the trust immediately 
 12.30  before the income interest ends.  In the latter case, the 
 12.31  undistributed income from the portion of the trust that may be 
 12.32  revoked must be added to principal. 
 12.33     (c) When a trustee's obligation to pay a fixed annuity or a 
 12.34  fixed fraction of the value of the trust's assets ends, the 
 12.35  trustee shall prorate the final payment if and to the extent 
 12.36  required by applicable law to accomplish a purpose of the trust 
 13.1   or its settlor relating to income, gift, estate, or other tax 
 13.2   requirements. 
 13.3                              ARTICLE 4 
 13.4        ALLOCATION OF RECEIPTS DURING ADMINISTRATION OF TRUST 
 13.5                                PART 1 
 13.6                        RECEIPTS FROM ENTITIES 
 13.7      Sec. 11.  [501C.401] [CHARACTER OF RECEIPTS.] 
 13.8      (a) In this section, "entity" means a corporation, 
 13.9   partnership, limited liability company, regulated investment 
 13.10  company, real estate investment trust, common trust fund, or any 
 13.11  other organization in which a trustee has an interest other than 
 13.12  a trust or estate to which section 501C.402 applies, a business 
 13.13  or activity to which section 501C.403 applies, or an 
 13.14  asset-backed security to which section 501C.415 applies. 
 13.15     (b) Except as otherwise provided in this section, a trustee 
 13.16  shall allocate to income money received from an entity. 
 13.17     (c) A trustee shall allocate the following receipts from an 
 13.18  entity to principal: 
 13.19     (1) property other than money; 
 13.20     (2) money received in one distribution or a series of 
 13.21  related distributions in exchange for part or all of a trust's 
 13.22  interest in the entity; 
 13.23     (3) money received in total or partial liquidation of the 
 13.24  entity; and 
 13.25     (4) money received from an entity that is a regulated 
 13.26  investment company or a real estate investment trust if the 
 13.27  money distributed is a capital gain dividend for federal income 
 13.28  tax purposes. 
 13.29     (d) Money is received in partial liquidation: 
 13.30     (1) to the extent that the entity, at or near the time of a 
 13.31  distribution, indicates that it is a distribution in partial 
 13.32  liquidation; or 
 13.33     (2) if the total amount of money and property received in a 
 13.34  distribution or series of related distributions is greater than 
 13.35  20 percent of the entity's gross assets, as shown by the 
 13.36  entity's year-end financial statements immediately preceding the 
 14.1   initial receipt. 
 14.2      (e) Money is not received in partial liquidation, nor may 
 14.3   it be taken into account under subsection (d)(2), to the extent 
 14.4   that it does not exceed the amount of income tax that a trustee 
 14.5   or beneficiary must pay on taxable income of the entity that 
 14.6   distributes the money. 
 14.7      (f) A trustee may rely upon a statement made by an entity 
 14.8   about the source or character of a distribution if the statement 
 14.9   is made at or near the time of distribution by the entity's 
 14.10  board of directors or other person or group of persons 
 14.11  authorized to exercise powers to pay money or transfer property 
 14.12  comparable to those of a corporation's board of directors. 
 14.13     Sec. 12.  [501C.402] [DISTRIBUTION FROM TRUST OR ESTATE.] 
 14.14     A trustee shall allocate to income an amount received as a 
 14.15  distribution of income from a trust or an estate in which the 
 14.16  trust has an interest other than a purchased interest, and shall 
 14.17  allocate to principal an amount received as a distribution of 
 14.18  principal from such a trust or estate.  If a trustee purchases 
 14.19  an interest in a trust that is an investment entity, or a 
 14.20  decedent or donor transfers an interest in such a trust to a 
 14.21  trustee, section 501C.401 or 501C.415 applies to a receipt from 
 14.22  the trust. 
 14.23     Sec. 13.  [501C.403] [BUSINESS AND OTHER ACTIVITIES 
 14.24  CONDUCTED BY TRUSTEE.] 
 14.25     (a) If a trustee who conducts a business or other activity 
 14.26  determines that it is in the best interest of all the 
 14.27  beneficiaries to account separately for the business or activity 
 14.28  instead of accounting for it as part of the trust's general 
 14.29  accounting records, the trustee may maintain separate accounting 
 14.30  records for its transactions, whether or not its assets are 
 14.31  segregated from other trust assets. 
 14.32     (b) A trustee who accounts separately for a business or 
 14.33  other activity may determine the extent to which its net cash 
 14.34  receipts must be retained for working capital, the acquisition 
 14.35  or replacement of fixed assets, and other reasonably foreseeable 
 14.36  needs of the business or activity, and the extent to which the 
 15.1   remaining net cash receipts are accounted for as principal or 
 15.2   income in the trust's general accounting records.  If a trustee 
 15.3   sells assets of the business or other activity, other than in 
 15.4   the ordinary course of the business or activity, the trustee 
 15.5   shall account for the net amount received as principal in the 
 15.6   trust's general accounting records to the extent the trustee 
 15.7   determines that the amount received is no longer required in the 
 15.8   conduct of the business. 
 15.9      (c) Activities for which a trustee may maintain separate 
 15.10  accounting records include: 
 15.11     (1) retail, manufacturing, service, and other traditional 
 15.12  business activities; 
 15.13     (2) farming; 
 15.14     (3) raising and selling livestock and other animals; 
 15.15     (4) management of rental properties; 
 15.16     (5) extraction of minerals and other natural resources; 
 15.17     (6) timber operations; and 
 15.18     (7) activities to which section 501C.414 applies. 
 15.19                               PART 2 
 15.20                 RECEIPTS NOT NORMALLY APPORTIONED 
 15.21     Sec. 14.  [501C.404] [PRINCIPAL RECEIPTS.] 
 15.22     A trustee shall allocate to principal: 
 15.23     (1) to the extent not allocated to income under this act, 
 15.24  assets received from a transferor during the transferor's 
 15.25  lifetime, a decedent's estate, a trust with a terminating income 
 15.26  interest, or a payer under a contract naming the trust or its 
 15.27  trustee as beneficiary; 
 15.28     (2) money or other property received from the sale, 
 15.29  exchange, liquidation, or change in form of a principal asset, 
 15.30  including realized profit, subject to this article; 
 15.31     (3) amounts recovered from third parties to reimburse the 
 15.32  trust because of disbursements described in section 
 15.33  501C.502(a)(7) or for other reasons to the extent not based on 
 15.34  the loss of income; 
 15.35     (4) proceeds of property taken by eminent domain, but a 
 15.36  separate award made for the loss of income with respect to an 
 16.1   accounting period during which a current income beneficiary had 
 16.2   a mandatory income interest is income; 
 16.3      (5) net income received in an accounting period during 
 16.4   which there is no beneficiary to whom a trustee may or must 
 16.5   distribute income; and 
 16.6      (6) other receipts as provided in Part 3. 
 16.7      Sec. 15.  [501C.405] [RENTAL PROPERTY.] 
 16.8      To the extent that a trustee accounts for receipts from 
 16.9   rental property pursuant to this section, the trustee shall 
 16.10  allocate to income an amount received as rent of real or 
 16.11  personal property, including an amount received for cancellation 
 16.12  or renewal of a lease.  An amount received as a refundable 
 16.13  deposit, including a security deposit or a deposit that is to be 
 16.14  applied as rent for future periods, must be added to principal 
 16.15  and held subject to the terms of the lease and is not available 
 16.16  for distribution to a beneficiary until the trustee's 
 16.17  contractual obligations have been satisfied with respect to that 
 16.18  amount. 
 16.19     Sec. 16.  [501C.406] [OBLIGATION TO PAY MONEY.] 
 16.20     (a) An amount received as interest, whether determined at a 
 16.21  fixed, variable, or floating rate, on an obligation to pay money 
 16.22  to the trustee, including an amount received as consideration 
 16.23  for prepaying principal, must be allocated to income without any 
 16.24  provision for amortization of premium. 
 16.25     (b) A trustee shall allocate to principal an amount 
 16.26  received from the sale, redemption, or other disposition of an 
 16.27  obligation to pay money to the trustee more than one year after 
 16.28  it is purchased or acquired by the trustee, including an 
 16.29  obligation whose purchase price or value when it is acquired is 
 16.30  less than its value at maturity.  If the obligation matures 
 16.31  within one year after it is purchased or acquired by the 
 16.32  trustee, an amount received in excess of its purchase price or 
 16.33  its value when acquired by the trust must be allocated to income.
 16.34     (c) This section does not apply to an obligation to which 
 16.35  section 501C.409, 501C.410, 501C.411, 501C.412, 501C.414, or 
 16.36  501C.415 applies. 
 17.1      Sec. 17.  [501C.407] [INSURANCE POLICIES AND SIMILAR 
 17.2   CONTRACTS.] 
 17.3      (a) Except as otherwise provided in subsection (b), a 
 17.4   trustee shall allocate to principal the proceeds of a life 
 17.5   insurance policy or other contract in which the trust or its 
 17.6   trustee is named as beneficiary, including a contract that 
 17.7   insures the trust or its trustee against loss for damage to, 
 17.8   destruction of, or loss of title to a trust asset.  The trustee 
 17.9   shall allocate dividends on an insurance policy to income if the 
 17.10  premiums on the policy are paid from income, and to principal if 
 17.11  the premiums are paid from principal. 
 17.12     (b) A trustee shall allocate to income proceeds of a 
 17.13  contract that insures the trustee against loss of occupancy or 
 17.14  other use by an income beneficiary, loss of income, or, subject 
 17.15  to section 501C.403, loss of profits from a business. 
 17.16     (c) This section does not apply to a contract to which 
 17.17  section 501C.409 applies. 
 17.18                               PART 3 
 17.19                   RECEIPTS NORMALLY APPORTIONED 
 17.20     Sec. 18.  [501C.408] [INSUBSTANTIAL ALLOCATIONS NOT 
 17.21  REQUIRED.] 
 17.22     If a trustee determines that an allocation between 
 17.23  principal and income required by section 501C.409, 501C.410, 
 17.24  501C.411, 501C.412, or 501C.415 is insubstantial, the trustee 
 17.25  may allocate the entire amount to principal unless one of the 
 17.26  circumstances described in section 501C.104(c) applies to the 
 17.27  allocation.  This power may be exercised by a cotrustee in the 
 17.28  circumstances described in section 501C.104(d) and may be 
 17.29  released for the reasons and in the manner described in section 
 17.30  501C.104(e).  An allocation is presumed to be insubstantial if: 
 17.31     (1) the amount of the allocation would increase or decrease 
 17.32  net income in an accounting period, as determined before the 
 17.33  allocation, by less than ten percent; or 
 17.34     (2) the value of the asset producing the receipt for which 
 17.35  the allocation would be made is less than ten percent of the 
 17.36  total value of the trust's assets at the beginning of the 
 18.1   accounting period. 
 18.2      Sec. 19.  [501C.409] [DEFERRED COMPENSATION, ANNUITIES, AND 
 18.3   SIMILAR PAYMENTS.] 
 18.4      (a) In this section, "payment" means a payment that a 
 18.5   trustee may receive over a fixed number of years or during the 
 18.6   life of one or more individuals because of services rendered or 
 18.7   property transferred to the payer in exchange for future 
 18.8   payments.  The term includes a payment made in money or property 
 18.9   from the payer's general assets or from a separate fund created 
 18.10  by the payer, including a private or commercial annuity, an 
 18.11  individual retirement account, and a pension, profit-sharing, 
 18.12  stock-bonus, or stock-ownership plan. 
 18.13     (b) To the extent that a payment is characterized as 
 18.14  interest or a dividend or a payment made in lieu of interest or 
 18.15  a dividend, a trustee shall allocate it to income.  The trustee 
 18.16  shall allocate to principal the balance of the payment and any 
 18.17  other payment received in the same accounting period that is not 
 18.18  characterized as interest, a dividend, or an equivalent payment. 
 18.19     (c) If no part of a payment is characterized as interest, a 
 18.20  dividend, or an equivalent payment, and all or part of the 
 18.21  payment is required to be made, a trustee shall allocate to 
 18.22  income ten percent of the part that is required to be made 
 18.23  during the accounting period and the balance to principal.  If 
 18.24  no part of a payment is required to be made or the payment 
 18.25  received is the entire amount to which the trustee is entitled, 
 18.26  the trustee shall allocate the entire payment to principal.  For 
 18.27  purposes of this subsection, a payment is not "required to be 
 18.28  made" to the extent that it is made because the trustee 
 18.29  exercises a right of withdrawal. 
 18.30     (d) If, to obtain an estate tax marital deduction for a 
 18.31  trust, a trustee must allocate more of a payment to income than 
 18.32  provided for by this section, the trustee shall allocate to 
 18.33  income the additional amount necessary to obtain the marital 
 18.34  deduction. 
 18.35     (e) This section does not apply to payments to which 
 18.36  section 501C.410 applies. 
 19.1      Sec. 20.  [501C.410] [LIQUIDATING ASSET.] 
 19.2      (a) In this section, "liquidating asset" means an asset 
 19.3   whose value will diminish or terminate because the asset is 
 19.4   expected to produce receipts for a period of limited duration.  
 19.5   The term includes a leasehold, patent, copyright, royalty right, 
 19.6   and right to receive payments during a period of more than one 
 19.7   year under an arrangement that does not provide for the payment 
 19.8   of interest on the unpaid balance.  The term does not include a 
 19.9   payment subject to section 501C.409, resources subject to 
 19.10  section 501C.411, timber subject to section 501C.412, an 
 19.11  activity subject to section 501C.414, an asset subject to 
 19.12  section 501C.415, or any asset for which the trustee establishes 
 19.13  a reserve for depreciation under section 501C.503. 
 19.14     (b) A trustee shall allocate to income ten percent of the 
 19.15  receipts from a liquidating asset and the balance to principal. 
 19.16     Sec. 21.  [501C.411] [MINERALS, WATER, AND OTHER NATURAL 
 19.17  RESOURCES.] 
 19.18     (a) To the extent that a trustee accounts for receipts from 
 19.19  an interest in minerals or other natural resources pursuant to 
 19.20  this section, the trustee shall allocate them as follows: 
 19.21     (1) If received as nominal delay rental or nominal annual 
 19.22  rent on a lease, a receipt must be allocated to income. 
 19.23     (2) If received from a production payment, a receipt must 
 19.24  be allocated to income if and to the extent that the agreement 
 19.25  creating the production payment provides a factor for interest 
 19.26  or its equivalent.  The balance must be allocated to principal. 
 19.27     (3) If an amount received as a royalty, shut-in-well 
 19.28  payment, take-or-pay payment, bonus, or delay rental is more 
 19.29  than nominal, 90 percent must be allocated to principal and the 
 19.30  balance to income. 
 19.31     (4) If an amount is received from a working interest or any 
 19.32  other interest not provided for in paragraph (1), (2), or (3), 
 19.33  90 percent of the net amount received must be allocated to 
 19.34  principal and the balance to income. 
 19.35     (b) An amount received on account of an interest in water 
 19.36  that is renewable must be allocated to income.  If the water is 
 20.1   not renewable, 90 percent of the amount must be allocated to 
 20.2   principal and the balance to income. 
 20.3      (c) This act applies whether or not a decedent or donor was 
 20.4   extracting minerals, water, or other natural resources before 
 20.5   the interest became subject to the trust. 
 20.6      (d) If a trust owns an interest in minerals, water, or 
 20.7   other natural resources on the effective date of this act, the 
 20.8   trustee may allocate receipts from the interest as provided in 
 20.9   this act or in the manner used by the trustee before the 
 20.10  effective date of this act.  If the trust acquires an interest 
 20.11  in minerals, water, or other natural resources after the 
 20.12  effective date of this act, the trustee shall allocate receipts 
 20.13  from the interest as provided in this act. 
 20.14     Sec. 22.  [501C.412] [TIMBER.] 
 20.15     (a) To the extent that a trustee accounts for receipts from 
 20.16  the sale of timber and related products pursuant to this 
 20.17  section, the trustee shall allocate the net receipts: 
 20.18     (1) to income to the extent that the amount of timber 
 20.19  removed from the land does not exceed the rate of growth of the 
 20.20  timber during the accounting periods in which a beneficiary has 
 20.21  a mandatory income interest; 
 20.22     (2) to principal to the extent that the amount of timber 
 20.23  removed from the land exceeds the rate of growth of the timber 
 20.24  or the net receipts are from the sale of standing timber; 
 20.25     (3) to or between income and principal if the net receipts 
 20.26  are from the lease of timberland or from a contract to cut 
 20.27  timber from land owned by a trust, by determining the amount of 
 20.28  timber removed from the land under the lease or contract and 
 20.29  applying the rules in paragraphs (1) and (2); or 
 20.30     (4) to principal to the extent that advance payments, 
 20.31  bonuses, and other payments are not allocated pursuant to 
 20.32  paragraph (1), (2), or (3). 
 20.33     (b) In determining net receipts to be allocated pursuant to 
 20.34  subsection (a), a trustee shall deduct and transfer to principal 
 20.35  a reasonable amount for depletion. 
 20.36     (c) This act applies whether or not a decedent or 
 21.1   transferor was harvesting timber from the property before it 
 21.2   becomes subject to the trust. 
 21.3      (d) If a trust owns an interest in timberland on the 
 21.4   effective date of this act, the trustee may allocate net 
 21.5   receipts from the sale of timber and related products as 
 21.6   provided in this act or in the manner used by the trustee before 
 21.7   the effective date of this act.  If the trust acquires an 
 21.8   interest in timberland after the effective date of this act, the 
 21.9   trustee shall allocate net receipts from the sale of timber and 
 21.10  related products as provided in this act. 
 21.11     Sec. 23.  [501C.413] [PROPERTY NOT PRODUCTIVE OF INCOME.] 
 21.12     (a) If a marital deduction is allowed for all or part of a 
 21.13  trust whose assets consist substantially of property that does 
 21.14  not provide the spouse with sufficient income from or use of the 
 21.15  trust assets, and if the amounts that the trustee transfers from 
 21.16  principal to income under section 501C.104 and distributes to 
 21.17  the spouse from principal pursuant to the terms of the trust are 
 21.18  insufficient to provide the spouse with the beneficial enjoyment 
 21.19  required to obtain the marital deduction, the spouse may require 
 21.20  the trustee to make property productive of income, convert 
 21.21  property within a reasonable time, or exercise the power 
 21.22  conferred by section 501C.104(a).  The trustee may decide which 
 21.23  action or combination of actions to take. 
 21.24     (b) In cases not governed by subsection (a), proceeds from 
 21.25  the sale or other disposition of an asset are principal without 
 21.26  regard to the amount of income the asset produces during any 
 21.27  accounting period. 
 21.28     Sec. 24.  [501C.414] [DERIVATIVES AND OPTIONS.] 
 21.29     (a) In this section, "derivative" means a contract or 
 21.30  financial instrument or a combination of contracts and financial 
 21.31  instruments which gives a trust the right or obligation to 
 21.32  participate in some or all changes in the price of a tangible or 
 21.33  intangible asset or group of assets, or changes in a rate, an 
 21.34  index of prices or rates, or other market indicator for an asset 
 21.35  or a group of assets. 
 21.36     (b) To the extent that a trustee does not account under 
 22.1   section 501C.403 for transactions in derivatives, the trustee 
 22.2   shall allocate to principal receipts from and disbursements made 
 22.3   in connection with those transactions. 
 22.4      (c) If a trustee grants an option to buy property from the 
 22.5   trust, whether or not the trust owns the property when the 
 22.6   option is granted, grants an option that permits another person 
 22.7   to sell property to the trust, or acquires an option to buy 
 22.8   property for the trust or an option to sell an asset owned by 
 22.9   the trust, and the trustee or other owner of the asset is 
 22.10  required to deliver the asset if the option is exercised, an 
 22.11  amount received for granting the option must be allocated to 
 22.12  principal.  An amount paid to acquire the option must be paid 
 22.13  from principal.  A gain or loss realized upon the exercise of an 
 22.14  option, including an option granted to a settlor of the trust 
 22.15  for services rendered, must be allocated to principal. 
 22.16     Sec. 25.  [501C.415] [ASSET-BACKED SECURITIES.] 
 22.17     (a) In this section, "asset-backed security" means an asset 
 22.18  whose value is based upon the right it gives the owner to 
 22.19  receive distributions from the proceeds of financial assets that 
 22.20  provide collateral for the security.  The term includes an asset 
 22.21  that gives the owner the right to receive from the collateral 
 22.22  financial assets only the interest or other current return or 
 22.23  only the proceeds other than interest or current return.  The 
 22.24  term does not include an asset to which section 501C.401 or 
 22.25  501C.409 applies. 
 22.26     (b) If a trust receives a payment from interest or other 
 22.27  current return and from other proceeds of the collateral 
 22.28  financial assets, the trustee shall allocate to income the 
 22.29  portion of the payment which the payer identifies as being from 
 22.30  interest or other current return and shall allocate the balance 
 22.31  of the payment to principal. 
 22.32     (c) If a trust receives one or more payments in exchange 
 22.33  for the trust's entire interest in an asset-backed security in 
 22.34  one accounting period, the trustee shall allocate the payments 
 22.35  to principal.  If a payment is one of a series of payments that 
 22.36  will result in the liquidation of the trust's interest in the 
 23.1   security over more than one accounting period, the trustee shall 
 23.2   allocate ten percent of the payment to income and the balance to 
 23.3   principal. 
 23.4                              ARTICLE 5 
 23.5                  ALLOCATION OF DISBURSEMENTS DURING 
 23.6                       ADMINISTRATION OF TRUST 
 23.7      Sec. 26.  [501C.501] [DISBURSEMENTS FROM INCOME.] 
 23.8      A trustee shall make the following disbursements from 
 23.9   income to the extent that they are not disbursements to which 
 23.10  section 501C.201(2)(B) or (C) applies: 
 23.11     (1) one-half of the regular compensation of the trustee and 
 23.12  of any person providing investment advisory or custodial 
 23.13  services to the trustee; 
 23.14     (2) one-half of all expenses for accountings, judicial 
 23.15  proceedings, or other matters that involve both the income and 
 23.16  remainder interests; 
 23.17     (3) all of the other ordinary expenses incurred in 
 23.18  connection with the administration, management, or preservation 
 23.19  of trust property and the distribution of income, including 
 23.20  interest, ordinary repairs, regularly recurring taxes assessed 
 23.21  against principal, and expenses of a proceeding or other matter 
 23.22  that concerns primarily the income interest; and 
 23.23     (4) recurring premiums on insurance covering the loss of a 
 23.24  principal asset or the loss of income from or use of the asset. 
 23.25     Sec. 27.  [501C.502] [DISBURSEMENTS FROM PRINCIPAL.] 
 23.26     (a) A trustee shall make the following disbursements from 
 23.27  principal: 
 23.28     (1) the remaining one-half of the disbursements described 
 23.29  in section 501C.501(1) and (2); 
 23.30     (2) all of the trustee's compensation calculated on 
 23.31  principal as a fee for acceptance, distribution, or termination, 
 23.32  and disbursements made to prepare property for sale; 
 23.33     (3) payments on the principal of a trust debt; 
 23.34     (4) expenses of a proceeding that concerns primarily 
 23.35  principal, including a proceeding to construe the trust or to 
 23.36  protect the trust or its property; 
 24.1      (5) premiums paid on a policy of insurance not described in 
 24.2   section 501C.501(4) of which the trust is the owner and 
 24.3   beneficiary; 
 24.4      (6) estate, inheritance, and other transfer taxes, 
 24.5   including penalties, apportioned to the trust; and 
 24.6      (7) disbursements related to environmental matters, 
 24.7   including reclamation, assessing environmental conditions, 
 24.8   remedying and removing environmental contamination, monitoring 
 24.9   remedial activities and the release of substances, preventing 
 24.10  future releases of substances, collecting amounts from persons 
 24.11  liable or potentially liable for the costs of those activities, 
 24.12  penalties imposed under environmental laws or regulations and 
 24.13  other payments made to comply with those laws or regulations, 
 24.14  statutory or common law claims by third parties, and defending 
 24.15  claims based on environmental matters. 
 24.16     (b) If a principal asset is encumbered with an obligation 
 24.17  that requires income from that asset to be paid directly to the 
 24.18  creditor, the trustee shall transfer from principal to income an 
 24.19  amount equal to the income paid to the creditor in reduction of 
 24.20  the principal balance of the obligation. 
 24.21     Sec. 28.  [501C.503] [TRANSFERS FROM INCOME TO PRINCIPAL 
 24.22  FOR DEPRECIATION.] 
 24.23     (a) In this section, "depreciation" means a reduction in 
 24.24  value due to wear, tear, decay, corrosion, or gradual 
 24.25  obsolescence of a fixed asset having a useful life of more than 
 24.26  one year. 
 24.27     (b) A trustee may transfer to principal a reasonable amount 
 24.28  of the net cash receipts from a principal asset that is subject 
 24.29  to depreciation, but may not transfer any amount for 
 24.30  depreciation: 
 24.31     (1) of that portion of real property used or available for 
 24.32  use by a beneficiary as a residence or of tangible personal 
 24.33  property held or made available for the personal use or 
 24.34  enjoyment of a beneficiary; 
 24.35     (2) during the administration of a decedent's estate; or 
 24.36     (3) under this section if the trustee is accounting under 
 25.1   section 501C.403 for the business or activity in which the asset 
 25.2   is used. 
 25.3      (c) An amount transferred to principal need not be held as 
 25.4   a separate fund. 
 25.5      Sec. 29.  [501C.504] [TRANSFERS FROM INCOME TO REIMBURSE 
 25.6   PRINCIPAL.] 
 25.7      (a) If a trustee makes or expects to make a principal 
 25.8   disbursement described in this section, the trustee may transfer 
 25.9   an appropriate amount from income to principal in one or more 
 25.10  accounting periods to reimburse principal or to provide a 
 25.11  reserve for future principal disbursements. 
 25.12     (b) Principal disbursements to which subsection (a) applies 
 25.13  include the following, but only to the extent that the trustee 
 25.14  has not been and does not expect to be reimbursed by a third 
 25.15  party: 
 25.16     (1) an amount chargeable to income but paid from principal 
 25.17  because it is unusually large, including extraordinary repairs; 
 25.18     (2) a capital improvement to a principal asset, whether in 
 25.19  the form of changes to an existing asset or the construction of 
 25.20  a new asset, including special assessments; 
 25.21     (3) disbursements made to prepare property for rental, 
 25.22  including tenant allowances, leasehold improvements, and 
 25.23  broker's commissions; 
 25.24     (4) periodic payments on an obligation secured by a 
 25.25  principal asset to the extent that the amount transferred from 
 25.26  income to principal for depreciation is less than the periodic 
 25.27  payments; and 
 25.28     (5) disbursements described in section 501C.502(a)(7). 
 25.29     (c) If the asset whose ownership gives rise to the 
 25.30  disbursements becomes subject to a successive income interest 
 25.31  after an income interest ends, a trustee may continue to 
 25.32  transfer amounts from income to principal as provided in 
 25.33  subsection (a). 
 25.34     Sec. 30.  [501C.505] [INCOME TAXES.] 
 25.35     (a) A tax required to be paid by a trustee based on 
 25.36  receipts allocated to income must be paid from income. 
 26.1      (b) A tax required to be paid by a trustee based on 
 26.2   receipts allocated to principal must be paid from principal, 
 26.3   even if the tax is called an income tax by the taxing authority. 
 26.4      (c) A tax required to be paid by a trustee on the trust's 
 26.5   share of an entity's taxable income must be paid proportionately:
 26.6      (1) from income to the extent that receipts from the entity 
 26.7   are allocated to income; and 
 26.8      (2) from principal to the extent that: 
 26.9      (A) receipts from the entity are allocated to principal; 
 26.10  and 
 26.11     (B) the trust's share of the entity's taxable income 
 26.12  exceeds the total receipts described in paragraphs (1) and 
 26.13  (2)(A). 
 26.14     (d) For purposes of this section, receipts allocated to 
 26.15  principal or income must be reduced by the amount distributed to 
 26.16  a beneficiary from principal or income for which the trust 
 26.17  receives a deduction in calculating the tax. 
 26.18     Sec. 31.  [501C.506] [ADJUSTMENTS BETWEEN PRINCIPAL AND 
 26.19  INCOME BECAUSE OF TAXES.] 
 26.20     (a) A fiduciary may make adjustments between principal and 
 26.21  income to offset the shifting of economic interests or tax 
 26.22  benefits between income beneficiaries and remainder 
 26.23  beneficiaries which arise from: 
 26.24     (1) elections and decisions, other than those described in 
 26.25  subsection (b), that the fiduciary makes from time to time 
 26.26  regarding tax matters; 
 26.27     (2) an income tax or any other tax that is imposed upon the 
 26.28  fiduciary or a beneficiary as a result of a transaction 
 26.29  involving or a distribution from the estate or trust; or 
 26.30     (3) the ownership by an estate or trust of an interest in 
 26.31  an entity whose taxable income, whether or not distributed, is 
 26.32  includable in the taxable income of the estate, trust, or a 
 26.33  beneficiary. 
 26.34     (b) If the amount of an estate tax marital deduction or 
 26.35  charitable contribution deduction is reduced because a fiduciary 
 26.36  deducts an amount paid from principal for income tax purposes 
 27.1   instead of deducting it for estate tax purposes, and as a result 
 27.2   estate taxes paid from principal are increased and income taxes 
 27.3   paid by an estate, trust, or beneficiary are decreased, each 
 27.4   estate, trust, or beneficiary that benefits from the decrease in 
 27.5   income tax shall reimburse the principal from which the increase 
 27.6   in estate tax is paid.  The total reimbursement must equal the 
 27.7   increase in the estate tax to the extent that the principal used 
 27.8   to pay the increase would have qualified for a marital deduction 
 27.9   or charitable contribution deduction but for the payment.  The 
 27.10  proportionate share of the reimbursement for each estate, trust, 
 27.11  or beneficiary whose income taxes are reduced must be the same 
 27.12  as its proportionate share of the total decrease in income tax.  
 27.13  An estate or trust shall reimburse principal from income. 
 27.14     Sec. 32.  [APPLICATION OF ACT TO EXISTING TRUSTS AND 
 27.15  ESTATES.] 
 27.16     This act applies to every trust or decedent's estate 
 27.17  existing on the effective date of this act except as otherwise 
 27.18  expressly provided in the will or terms of the trust or in this 
 27.19  act. 
 27.20     Sec. 33.  [REPEALER.] 
 27.21     Minnesota Statutes 2000, sections 501B.59; 501B.60; 
 27.22  501B.61; 501B.62; 501B.63; 501B.64; 501B.65; 501B.66; 501B.67; 
 27.23  501B.68; 501B.69; 501B.70; 501B.71; 501B.72; 501B.73; 501B.74; 
 27.24  501B.75; and 501B.76, are repealed.