PRINTER'S NO. 1261
No. 1014 Session of 2001
INTRODUCED BY GREENLEAF, LEMMOND, COSTA, M. WHITE AND HOLL, JUNE 21, 2001
REFERRED TO JUDICIARY, JUNE 21, 2001
AN ACT 1 Amending Title 20 (Decedents, Estates and Fiduciaries) of the 2 Pennsylvania Consolidated Statutes, further providing for 3 situs of inter vivos trust, for rules of succession, for 4 power of decedent, for equitable apportionment of Federal 5 estate tax, for definitions and for termination of 6 custodianship; providing for delay in transfer of custodial 7 property after minor attains age 21; further providing for 8 effect of disclaimer; providing for power of trustee to 9 resign; extensively revising provisions on principal and 10 income; and making conforming amendments. 11 The General Assembly of the Commonwealth of Pennsylvania 12 hereby enacts as follows: 13 Section 1. Section 724 of Title 20 of the Pennsylvania 14 Consolidated Statutes is amended to read: 15 § 724. Situs of inter vivos trust. 16 (a) When provided for in trust instrument.--If the trust 17 instrument expressly provides for the situs of the inter vivos 18 trust, its situs shall be at the place within or without the 19 Commonwealth which is in accord with such provision. 20 (b) Not provided for in trust instrument.--If the trust 21 instrument does not expressly provide for the situs of the inter
1 vivos trust, its situs shall be: 2 (1) Resident settlor.--In the case of an inter vivos 3 trust whose settlor is domiciled in the Commonwealth: 4 (i) in the settlor's lifetime, either in the county 5 of his principal residence or in the county in which any 6 of the trustees resides or [is located] has a place of 7 business; and 8 (ii) after the settlor's death, either in the county 9 in which letters have been granted to his personal 10 representative, or in a county in which letters could 11 have been granted, or in a county which is the principal 12 place of the trust's administration in which any trustee 13 resides [or is located] or has a place of business. 14 (2) Nonresident settlor.--In the case of an inter vivos 15 trust whose settlor: 16 (i) is not domiciled in the Commonwealth at the time 17 when during his lifetime the first application is made to 18 a court concerning the trust; or 19 (ii) was not domiciled in the Commonwealth at his 20 death if the first application to a court concerning the 21 trust was made thereafter, 22 in a county which is the principal place of the trust's 23 administration or in which any trustee resides [or is 24 located,] or has a place of business and if there is no such 25 trustee, then in a county where property of the trust is 26 located. 27 Section 2. Section 2104 of Title 20 is amended by adding a 28 paragraph to read: 29 § 2104. Rules of succession. 30 The provisions of this chapter shall be applied to both real 20010S1014B1261 - 2 -
1 and personal estate in accordance with the following rules: 2 * * * 3 (11) Intestacy following valid prior estate.--In the 4 event of an intestacy occurring at the termination of a valid 5 prior estate, the identity and shares of the intestate heirs 6 then entitled to take shall be ascertained as though the 7 death of the testator, settlor or grantor had occurred at the 8 time of the termination of the prior estate. 9 Section 3. Section 3701 of Title 20 is amended to read: 10 § 3701. Power of decedent. 11 A testator, settlor, donor or possessor of any appropriate 12 power of appointment may direct how the Federal estate tax or 13 the Federal generation-skipping transfer tax due because of his 14 death, including interest and penalties, shall be apportioned or 15 may grant a discretionary power to another so to direct, but: 16 (1) any direction regarding apportionment of the Federal 17 generation-skipping transfer tax must expressly refer to that 18 tax[.]; and 19 (2) [Any] any direction waiving the right of recovery of 20 Federal estate tax, provided for under section 2207A of the 21 Internal Revenue Code of 1986 (Public Law 99-514, 26 U.S.C. § 22 2207A), on [the] property includable in the [taxable] gross 23 estate by reason of section 2044 of the Internal Revenue Code 24 of 1986, must expressly refer to that right. 25 Any such direction shall take precedence over the provisions of 26 this chapter insofar as the direction provides for the payment 27 of the tax or any part thereof from property the disposition of 28 which can be controlled by the instrument containing the 29 direction or delegating the power to another. 30 Section 4. Section 3702(f) and (h) of Title 20 are amended 20010S1014B1261 - 3 -
1 and the section is amended by adding a subsection to read: 2 § 3702. Equitable apportionment of Federal estate tax. 3 * * * 4 (f) Additional Federal estate tax.-- 5 (1) Any increase in Federal estate tax caused by the 6 inclusion under section 2044 of the Internal Revenue Code of 7 1986 (Public Law 99-514, 26 U.S.C. § 2044) of a qualified 8 terminable interest trust in the estate of a decedent shall 9 be apportioned against that trust. 10 (2) Any increase in Federal estate tax caused by a 11 taxable event occurring in a qualified domestic trust under 12 section 2056A of the Internal Revenue Code of 1986 (Public 13 Law 99-514, 26 U.S.C. § 2056A) shall be apportioned against 14 that trust notwithstanding the provisions of subsection (b) 15 or (c). 16 (3) Any additional Federal estate tax due because a 17 qualified heir disposes of qualified real property or ceases 18 to use it for the qualified use shall be apportioned against 19 the qualified heir notwithstanding the provisions of 20 subsection (b). 21 * * * 22 (h) Interest and penalties.--Interest and penalties shall be 23 apportioned in the same manner as the principal amount of the 24 Federal estate tax [unless the court finds it inequitable to do 25 so by reason of special circumstances in which case the court 26 may direct a different apportionment of interest and penalties.] 27 subject to a fiduciary's power to adjust under Chapter 81 28 (relating to principal and income). 29 * * * 30 (j) Gift tax.--Gift tax paid by the decedent and imposed on 20010S1014B1261 - 4 -
1 a gift by the decedent or his spouse within three years of the 2 date of his death and included in his gross estate shall be 3 treated in the same manner as though the amount of such gift tax 4 had been a preresiduary testamentary gift by the decedent to the 5 donee of the gift. 6 Section 5. Section 5164 of Title 20 is amended to read: 7 § 5164. Distributions for support and education. 8 All income received by a guardian of the estate of a minor, 9 including, subject to the requirements of Federal law relating 10 thereto, all funds received from the Department of Veterans' 11 Affairs, Social Security Administration and other periodic 12 retirement or disability payments under private or government 13 plans, in the exercise of a reasonable discretion, may be 14 expended in the care, maintenance and education of the minor 15 without the necessity of court approval. The court, for cause 16 shown and with only such notice as it considers appropriate in 17 the circumstances, may authorize or direct the payment or 18 application of any or all of the income or principal of the 19 estate of a minor for the care, maintenance or education of the 20 minor, his spouse or children, or for the reasonable funeral 21 expenses of the minor's spouse, child or indigent parent. In 22 proper cases, the court may order payment of amounts directly to 23 the ward for his maintenance or for incidental expenses and may 24 ratify payments made for these purposes. For purposes of this 25 section, the term "income" means income as determined in 26 accordance with the rules set forth in Chapter 81 (relating to 27 principal and income), other than the power to adjust and the 28 power to convert to a unitrust. 29 Section 6. The definition of "minor" in section 5301(b) of 30 Title 20 is amended to read: 20010S1014B1261 - 5 -
1 § 5301. Short title of chapter and definitions. 2 * * * 3 (b) Definitions.--The following words and phrases when used 4 in this chapter shall have the meanings given to them in this 5 subsection unless the context clearly indicates otherwise: 6 * * * 7 "Minor." An individual who has not attained 21 years of 8 age[.], except that when used with reference to the beneficiary 9 for whose benefit custodial property is held or is to be held, 10 an individual who has not attained the age at which the 11 custodian is required under sections 5320 (relating to 12 termination of custodianship) and 5321 (relating to delay in 13 transfer of custodial property after minor attains age 21) to 14 transfer the custodial property to the beneficiary. 15 * * * 16 Section 7. Section 5320 of Title 20 is amended to read: 17 § 5320. Termination of custodianship. 18 The custodian shall transfer in an appropriate manner the 19 custodial property to the minor or the minor's estate upon the 20 earlier of: 21 (1) the minor's attainment of 21 years of age with 22 respect to custodial property transferred by gift under 23 section 5304 (relating to transfer by gift or exercise of 24 power of appointment) [or 5305 (relating to transfer 25 authorized by will or trust)]; 26 [(2) the minor's attainment of majority under the laws 27 of this Commonwealth other than this chapter with respect to 28 custodial property transferred under section 5306 (relating 29 to other transfer by fiduciary) or 5307 (relating to transfer 30 by obligor); or 20010S1014B1261 - 6 -
1 (3) the minor's death.] 2 (2) the minor's attainment of 21 years of age with 3 respect to a custodian nominated under section 5303 (relating 4 to nomination of custodian) or with respect to custodial 5 property transferred by exercise of power of appointment 6 under section 5304 or by will or trust under section 5305 7 (relating to transfer authorized by will or trust), unless 8 the time of transfer of the custodial property to the minor 9 is delayed under section 5321 (relating to delay in transfer 10 of custodial property after minor attains age 21) to a time 11 after the minor attains 21 years of age; 12 (3) the time specified in the transfer pursuant to 13 section 5309 (relating to manner of creating custodial 14 property and effecting transfer) if the time of transfer of 15 the custodial property to the minor is delayed under section 16 5321 to a time after the time the minor attains 21 years of 17 age; 18 (4) the minor's attainment of majority under the laws of 19 this Commonwealth other than this chapter with respect to 20 custodial property transferred under section 5306 (relating 21 to other transfer by fiduciary) or 5307 (relating to transfer 22 by obligor); or 23 (5) the minor's death. 24 Section 8. Title 20 is amended by adding a section to read: 25 § 5321. Delay in transfer of custodial property after 26 minor attains age 21. 27 (a) General rule.--Subject to the requirements and 28 limitations of this section, the time for transfer to the minor 29 of custodial property transferred under or pursuant to section 30 5303 (relating to nomination of custodian), 5304 (relating to 20010S1014B1261 - 7 -
1 transfer by gift or exercise of power of appointment) or 5305 2 (relating to transfer authorized by will or trust) may be 3 delayed until a specified time after the time the minor attains 4 21 years of age, which time shall be specified in the transfer 5 pursuant to section 5309 (relating to manner of creating 6 custodial property and effecting transfer). 7 (b) How to specify a delayed time for transfer.--To specify 8 a delayed time for transfer to the minor of the custodial 9 property, the words "as custodian for (name of minor) until age 10 (age for delivery of property to minor) under the Pennsylvania 11 Uniform Transfers to Minors Act" shall be substituted in 12 substance for the words "as custodian for (name of minor) under 13 the Pennsylvania Uniform Transfers to Minors Act" in making the 14 transfer pursuant to section 5309. 15 (c) Transfer authorized by will or trust; nomination of 16 custodian.--The time for transfer to the minor of custodial 17 property transferred under or pursuant to section 5303 or 5305 18 may be delayed under this section only if the governing will or 19 trust or nomination provides in substance that the custodianship 20 is to continue until the time the minor attains a specified age, 21 which time may not be later than the time the minor attains 25 22 years of age, and in that case the governing will or trust or 23 nomination shall determine the time to be specified in the 24 transfer pursuant to section 5309. 25 (d) Transfer by exercise of power appointment.--The time for 26 transfer to the minor of custodial property transferred by the 27 irrevocable exercise of a power of appointment under section 28 5304 may be delayed under this section only if the transfer 29 pursuant to section 5309 provides in substance that the 30 custodianship is to continue until the time the minor attains a 20010S1014B1261 - 8 -
1 specified age, which time may not be later than the time the 2 minor attains 25 years of age. 3 (e) When section not applicable.--This section shall not 4 apply to the time for transfer to the minor of custodial 5 property transferred by irrevocable gift under section 5304. 6 (f) When transfer does not specify age.--If the transfer 7 pursuant to section 5309 does not specify any age, the time for 8 the transfer of the custodial property to the minor under 9 section 5320 (relating to termination of custodianship) is the 10 time when the minor attains 21 years of age. 11 (g) When transfer provides for a longer duration of 12 custodianship than permitted by this section.--If the transfer 13 pursuant to section 5309 provides in substance that the duration 14 of the custodianship is for a time longer than the maximum time 15 permitted by this section for the duration of a custodianship 16 created by that type of transfer, the custodianship shall be 17 deemed to continue only until the time the minor attains the 18 maximum age permitted by this section for the duration of a 19 custodianship created by that type of transfer. 20 Section 9. Section 5536(a) of Title 20 is amended to read: 21 § 5536. Distributions of income and principal during 22 incapacity. 23 (a) In general.--All income received by a guardian of the 24 estate of an incapacitated person, including (subject to the 25 requirements of Federal law relating thereto) all funds received 26 from the Veterans' Administration, Social Security 27 Administration and other periodic retirement or disability 28 payments under private or governmental plans, in the exercise of 29 a reasonable discretion, may be expended in the care and 30 maintenance of the incapacitated person, without the necessity 20010S1014B1261 - 9 -
1 of court approval. The court, for cause shown and with only such 2 notice as it considers appropriate in the circumstances, may 3 authorize or direct the payment or application of any or all of 4 the income or principal of the estate of an incapacitated person 5 for the care, maintenance or education of the incapacitated 6 person, his spouse, children or those for whom he was making 7 such provision before his incapacity, or for the reasonable 8 funeral expenses of the incapacitated person's spouse, child or 9 indigent parent. In proper cases, the court may order payment of 10 amounts directly to the incapacitated person for his maintenance 11 or for incidental expenses and may ratify payments made for 12 these purposes. For purposes of this subsection, the term 13 "income" means income as determined in accordance with the rules 14 set forth in Chapter 81 (relating to principal and income), 15 other than the power to adjust and the power to convert to a 16 unitrust. 17 * * * 18 Section 10. Section 6205(a) of Title 20 is amended and the 19 section is amended by adding a subsection to read: 20 § 6205. Effect of disclaimer. 21 (a) In general.--A disclaimer relates back for all purposes 22 to the date of the death of the decedent or the effective date 23 of the inter vivos transfer or third-party beneficiary contract 24 as the case may be. The disclaimer shall [be binding upon the 25 disclaimant and all persons claiming through or under him.] not 26 in any way diminish the interest of any person other than the 27 disclaimant in such person's own right under the instrument 28 creating the disclaimed interest or under the intestate laws nor 29 diminish any interest to which such person becomes entitled 30 under subsection (b) by reason of the disclaimer. 20010S1014B1261 - 10 -
1 * * * 2 (d) Rights of creditors of disclaimant.--Nothing in this 3 section shall determine the effect of a disclaimer upon the 4 rights of creditors of the disclaimant. 5 Section 11. Title 20 is amended by adding sections to read: 6 § 7104. Power of trustee to resign. 7 (a) Court approval.--Any trustee may resign with court 8 approval. 9 (b) Without court approval if authorized by governing 10 instrument.--Any trustee may resign without court approval if 11 authorized to resign by the governing instrument. 12 (c) When individual trustee may resign without court 13 approval and without authorization in governing instrument.-- 14 Unless expressly provided to the contrary in the governing 15 instrument, an individual trustee may resign without court 16 approval and without authorization in the governing instrument 17 if: 18 (1) consented to in writing by all co-trustees, if there 19 are one or more co-trustees; and 20 (2) consented to in writing by all the sui juris 21 beneficiaries currently eligible to receive income and by all 22 the sui juris beneficiaries who would receive, if no powers 23 of appointment were exercised, a distribution of principal if 24 the trust were to terminate immediately prior to the 25 resignation, provided that no such resignation shall be 26 effective unless there is at least one such income 27 beneficiary and at least one such remainderman. 28 This subsection shall not authorize the sole trustee of a trust 29 to resign unless the governing instrument names a successor 30 trustee or provides a method for appointing a successor trustee, 20010S1014B1261 - 11 -
1 and in either case the resignation shall not be effective until 2 the successor trustee accepts in writing his appointment. 3 (d) Liability.--The resignation of a trustee shall not by 4 itself relieve the resigning trustee of liability in connection 5 with the administration of the trust. 6 (e) Definition.--As used in this section, the term "sui 7 juris beneficiary" includes a guardian for an incapacitated 8 beneficiary, an agent acting under a durable power of attorney 9 for an incompetent beneficiary and a court-appointed guardian of 10 a minor's estate or, if none, the minor's parents. 11 § 7105. Filing resignations and appointments. 12 A resignation of a trustee, an appointment of a trustee and 13 an acceptance of an appointment of a trustee may be filed with 14 the clerk of the orphans' court division having jurisdiction 15 over the trust. 16 Section 12. Chapter 81 of Title 20 is repealed. 17 Section 13. Title 20 is amended by adding a chapter to read: 18 CHAPTER 81 19 PRINCIPAL AND INCOME 20 Subchapter 21 A. Preliminary Provisions; Power to Adjust; Power to Convert 22 to Unitrust 23 B. Decedent's Estate or Terminating Income Interest 24 C. Apportionment at Beginning and End of Income Interest 25 D. Allocation of Receipts During Administration of Trust 26 E. Allocation of Disbursements During Administration of 27 Trust 28 F. (Reserved). 29 G. (Reserved). 30 H. Miscellaneous Provisions 20010S1014B1261 - 12 -
1 SUBCHAPTER A 2 PRELIMINARY PROVISIONS; POWER TO ADJUST; 3 POWER TO CONVERT TO UNITRUST 4 Sec. 5 8101. Scope. 6 8102. Definitions. 7 8103. Fiduciary duties; general principles. 8 8104. Trustee's power to adjust. 9 8105. Power to convert to unitrust. 10 8106. Judicial control of discretionary powers. 11 8107. (Reserved). 12 8108. (Reserved). 13 8109. (Reserved). 14 8110. (Reserved). 15 8111. (Reserved). 16 8112. (Reserved). 17 8113. Charitable trusts. 18 § 8101. Scope. 19 This chapter shall be known and may be cited as the 20 Pennsylvania Uniform Principal and Income Act. 21 § 8102. Definitions. 22 The following words and phrases when used in this chapter 23 shall have the meanings given to them in this section unless the 24 context clearly indicates otherwise: 25 "Accounting period." A calendar year, unless another 12- 26 month period is selected by a fiduciary. The term includes a 27 portion of a calendar year or other 12-month period which begins 28 when an income interest begins or ends when an income interest 29 ends. 30 "Beneficiary." Includes: 20010S1014B1261 - 13 -
1 (1) in the case of a decedent's estate, any heir, 2 legatee and devisee; and 3 (2) in the case of a trust, an income beneficiary and a 4 remainder beneficiary. 5 "Fiduciary." A personal representative or a trustee. 6 "Income." Money or property which a fiduciary receives as 7 current return from a principal asset. The term includes a 8 portion of receipts from a sale, exchange or liquidation of a 9 principal asset, to the extent provided in Subchapter D 10 (relating to allocation of receipts during administration of 11 trust). 12 "Income beneficiary." A person to whom or which net income 13 of a trust is or may be payable. 14 "Income interest." The right of an income beneficiary to 15 receive all or part of net income, whether the governing 16 instrument requires it to be distributed or authorizes it to be 17 distributed in the trustee's discretion. 18 "Mandatory income interest." The right of an income 19 beneficiary to receive net income which the governing instrument 20 requires the fiduciary to distribute. 21 "Net income." The: 22 (1) total receipts allocated to income during an 23 accounting period; minus 24 (2) disbursements made from income during the period; 25 plus or minus 26 (3) transfers under this chapter to or from income 27 during the period. 28 "Person." Any individual; corporation; business trust; 29 estate; trust; partnership; limited liability company; 30 association; joint venture; government; governmental 20010S1014B1261 - 14 -
1 subdivision, agency or instrumentality; public corporation; or 2 other legal or commercial entity. 3 "Principal." Property held in trust for distribution to a 4 remainder beneficiary when the trust terminates. 5 "Remainder beneficiary." A person entitled to receive 6 principal when an income interest ends. 7 "Sui juris beneficiary." Includes: 8 (1) a court-appointed guardian of an incapacitated 9 beneficiary; 10 (2) an agent for an incompetent beneficiary; and 11 (3) a court-appointed guardian of a minor beneficiary's 12 estate or, if none, the parents of the minor beneficiary. 13 "Trust." Includes a legal life estate arrangement. 14 "Trustee." Includes an original, additional or successor 15 trustee, whether or not appointed or confirmed by a court. 16 § 8103. Fiduciary duties; general principles. 17 (a) Allocation.--In allocating receipts and disbursements to 18 or between principal and income and with respect to any matter 19 within the scope of this chapter, the following shall apply: 20 (1) A fiduciary shall administer a trust or estate in 21 accordance with the governing instrument, even if there is a 22 different provision in this chapter. 23 (2) A fiduciary may administer a trust or estate by the 24 exercise of a discretionary power of administration regarding 25 a matter within the scope of this chapter given to the 26 fiduciary by the governing instrument, even if the exercise 27 of the power produces a result different from a result 28 required or permitted by this chapter. No inference that the 29 fiduciary has improperly exercised the discretionary power 30 shall arise from the fact that the fiduciary has made an 20010S1014B1261 - 15 -
1 allocation contrary to a provision of this chapter. 2 (3) A fiduciary shall administer a trust or estate in 3 accordance with this chapter if the governing instrument does 4 not contain a different provision or does not give the 5 fiduciary a discretionary power of administration regarding a 6 matter within the scope of this chapter. 7 (4) A fiduciary shall add a receipt or charge a 8 disbursement to principal to the extent that the governing 9 instrument and this chapter do not provide a rule for 10 allocating the receipt or disbursement to or between 11 principal and income. 12 (b) Discretionary power.--In exercising a discretionary 13 power of administration regarding a matter within the scope of 14 this chapter, whether granted by the governing instrument or 15 this chapter, including sections 8104 (relating to trustee's 16 power to adjust) and 8105 (relating to power to convert to 17 unitrust), a fiduciary shall administer a trust or estate 18 impartially based on what is fair and reasonable to all of the 19 beneficiaries, except to the extent that the governing 20 instrument clearly manifests an intention that the fiduciary 21 shall or may favor one or more of the beneficiaries. A 22 determination in accordance with this chapter is presumed to be 23 fair and reasonable to all of the beneficiaries. 24 § 8104. Trustee's power to adjust. 25 (a) Adjustment.--Subject to subsections (c) and (f), a 26 trustee may adjust between principal and income by allocating an 27 amount of income to principal or an amount of principal to 28 income to the extent the trustee considers appropriate if: 29 (1) the governing instrument describes what may or must 30 be distributed to a beneficiary by referring to the trust's 20010S1014B1261 - 16 -
1 income; and 2 (2) the trustee determines, after applying the rules in 3 section 8103(a) (relating to fiduciary duties; general 4 principles), that the trustee is unable to comply with 5 section 8103(b). 6 (b) Considerations.--In deciding whether and to what extent 7 to exercise the power conferred by subsection (a), a trustee may 8 consider, among other things, all of the following: 9 (1) The size of the trust. 10 (2) The nature and estimated duration of the trust. 11 (3) The liquidity and distribution requirements of the 12 trust. 13 (4) The needs for regular distributions and preservation 14 and appreciation of capital. 15 (5) The expected tax consequences of an adjustment. 16 (6) The net amount allocated to income under the other 17 sections of this chapter and the increase or decrease in the 18 value of the principal assets, which the trustee may estimate 19 as to assets for which market values are not readily 20 available. 21 (7) The assets held in the trust; the extent to which 22 they consist of financial assets, interests in closely held 23 enterprises, tangible and intangible personal property or 24 real property; the extent to which an asset is used by a 25 beneficiary; and whether an asset was purchased by the 26 trustee or received from the settlor or testator. 27 (8) To the extent reasonably known to the trustee, the 28 needs of the beneficiaries for present and future 29 distributions authorized or required by the governing 30 instrument. 20010S1014B1261 - 17 -
1 (9) Whether and to what extent the governing instrument 2 gives the trustee the power to invade principal or accumulate 3 income or prohibits the trustee from invading principal or 4 accumulating income, and the extent to which the trustee has 5 exercised a power from time to time to invade principal or 6 accumulate income. 7 (10) The intent of the settlor or testator. 8 (11) The actual and anticipated effect of economic 9 conditions on principal and income and effects of inflation 10 and deflation. 11 (c) Prohibited adjustments.--A trustee may not make an 12 adjustment under this section if any of the following apply: 13 (1) The adjustment would diminish the income interest in 14 a trust which requires all of the income to be paid at least 15 annually to a spouse and for which a Federal estate tax or 16 gift tax marital deduction would be allowed, in whole or in 17 part, if the trustee did not have the power to make the 18 adjustment. 19 (2) The adjustment would reduce the actuarial value of 20 the income interest in a trust to which a person transfers 21 property with the intent to qualify for a Federal gift tax 22 exclusion. 23 (3) The adjustment would change the amount payable to a 24 beneficiary as a fixed annuity or a fixed fraction of the 25 value of the trust assets. 26 (4) The adjustment is from any amount which is 27 permanently set aside for charitable purposes under the 28 governing instrument and for which a Federal estate or gift 29 tax deduction has been taken unless both income and principal 30 are so set aside. 20010S1014B1261 - 18 -
1 (5) If: 2 (i) possessing or exercising the power to make an 3 adjustment would cause an individual to be treated as the 4 owner of all or part of the trust for Federal income tax 5 purposes; and 6 (ii) the individual would not be treated as the 7 owner if the trustee did not possess the power to make an 8 adjustment. 9 (6) If: 10 (i) possessing or exercising the power to make an 11 adjustment would cause all or part of the trust assets to 12 be subject to Federal estate or gift tax with respect to 13 an individual; and 14 (ii) the assets would not be subject to Federal 15 estate or gift tax with respect to the individual if the 16 trustee did not possess the power to make an adjustment. 17 (7) If the trustee is a beneficiary of the trust. 18 (8) If the trust has been converted under section 8105 19 (relating to power to convert to unitrust). 20 (d) Permissible adjustment when otherwise prohibited.--If 21 subsection (c)(5), (6) or (7) applies to a trustee and there is 22 more than one trustee, a cotrustee to whom the provision does 23 not apply may make the adjustment unless the exercise of the 24 power by the remaining trustee or trustees is prohibited by the 25 governing instrument. 26 (e) Release of the power to adjust.-- 27 (1) If paragraph (2) applies, a trustee may release any 28 of the following: 29 (i) The entire power conferred by subsection (a). 30 (ii) The power to adjust from income to principal. 20010S1014B1261 - 19 -
1 (iii) The power to adjust from principal to income. 2 (2) A release under paragraph (1) is permissible if any 3 of the following apply: 4 (i) The trustee is uncertain about whether 5 possessing or exercising the power will cause a result 6 described in subsection (c)(1) through (6). 7 (ii) The trustee determines that possessing or 8 exercising the power will or may deprive the trust of a 9 tax benefit or impose a tax burden not described in 10 subsection (c). 11 (3) The release may be permanent or for a specified 12 period, including a period measured by the life of an 13 individual. 14 (f) Application.--A governing instrument which limits the 15 power of a trustee to make an adjustment between principal and 16 income does not affect the application of this section unless it 17 is clear from the governing instrument that it is intended to 18 deny the trustee the power of adjustment conferred by subsection 19 (a). 20 § 8105. Power to convert to unitrust. 21 (a) Conversion.--Unless expressly prohibited by the 22 governing instrument, a trustee may release the power under 23 section 8104 (relating to trustee's power to adjust) and convert 24 a trust into a unitrust as described in this section if all of 25 the following apply: 26 (1) The trustee determines that the conversion will 27 enable the trustee to better carry out the intent of the 28 settlor or testator and the purposes of the trust. 29 (2) The trustee gives written notice of the trustee's 30 intention to release the power to adjust and to convert the 20010S1014B1261 - 20 -
1 trust into a unitrust and of how the unitrust will operate, 2 including what initial decisions the trustee will make under 3 this section, to all the sui juris beneficiaries who: 4 (i) are currently eligible to receive income from 5 the trust; and 6 (ii) would receive, if no powers of appointment were 7 exercised, a distribution of principal if the trust were 8 to terminate immediately prior to the giving of notice. 9 (3) There is at least one sui juris beneficiary under 10 paragraph (2)(i) and at least one sui juris beneficiary under 11 paragraph (2)(ii). 12 (4) No sui juris beneficiary objects to the conversion 13 to a unitrust in a writing delivered to the trustee within 60 14 days of the mailing of the notice under paragraph (2). 15 (b) Judicially approved conversion.-- 16 (1) The trustee may petition the court to approve the 17 conversion to a unitrust if any of the following apply: 18 (i) A beneficiary timely objects to the conversion 19 to a unitrust. 20 (ii) There are no sui juris beneficiaries under 21 subsection (a)(2)(i). 22 (iii) There are no sui juris beneficiaries under 23 subsection (a)(2)(ii). 24 (2) A beneficiary may request a trustee to convert to a 25 unitrust. If the trustee does not convert, the beneficiary 26 may petition the court to order the conversion. 27 (3) The court shall approve the conversion or direct the 28 requested conversion if the court concludes that the 29 conversion will enable the trustee to better carry out the 30 intent of the settlor or testator and the purposes of the 20010S1014B1261 - 21 -
1 trust. 2 (c) Consideration.--In deciding whether to exercise the 3 power conferred by subsection (a), a trustee may consider, among 4 other things, all of the following: 5 (1) The size of the trust. 6 (2) The nature and estimated duration of the trust. 7 (3) The liquidity and distribution requirements of the 8 trust. 9 (4) The needs for regular distributions and preservation 10 and appreciation of capital. 11 (5) The expected tax consequences of the conversion. 12 (6) The assets held in the trust; the extent to which 13 they consist of financial assets, interests in closely held 14 enterprises, tangible and intangible personal property or 15 real property; and the extent to which an asset is used by a 16 beneficiary. 17 (7) To the extent reasonably known to the trustee, the 18 needs of the beneficiaries for present and future 19 distributions authorized or required by the governing 20 instrument. 21 (8) Whether and to what extent the governing instrument 22 gives the trustee the power to invade principal or accumulate 23 income or prohibits the trustee from invading principal or 24 accumulating income and the extent to which the trustee has 25 exercised a power from time to time to invade principal or 26 accumulate income. 27 (9) The actual and anticipated effect of economic 28 conditions on principal and income and effects of inflation 29 and deflation. 30 (d) Post conversion.--After a trust is converted to a 20010S1014B1261 - 22 -
1 unitrust, all of the following apply: 2 (1) The trustee shall follow an investment policy 3 seeking a total return for the investments held by the trust, 4 whether the return is to be derived: 5 (i) from appreciation of capital; 6 (ii) from earnings and distributions from capital; 7 or 8 (iii) from both. 9 (2) The trustee shall make regular distributions in 10 accordance with the governing instrument construed in 11 accordance with the provisions of this section. 12 (3) The term "income" in the governing instrument shall 13 mean an annual distribution (the unitrust distribution) equal 14 to 4% (the payout percentage) of the net fair market value of 15 the trust's assets, whether such assets would be considered 16 income or principal under other provisions of this chapter, 17 averaged over the lesser of: 18 (i) the three preceding years; or 19 (ii) the period during which the trust has been in 20 existence. 21 (e) Discretion of trustee.--The trustee may in the trustee's 22 discretion from time to time determine all of the following: 23 (1) The effective date of a conversion to a unitrust. 24 (2) The provisions for prorating a unitrust distribution 25 for a short year in which a beneficiary's right to payments 26 commences or ceases. 27 (3) The frequency of unitrust distributions during the 28 year. 29 (4) The effect of other payments from or contributions 30 to the trust on the trust's valuation. 20010S1014B1261 - 23 -
1 (5) Whether to value the trust's assets annually or more 2 frequently. 3 (6) What valuation dates to use. 4 (7) How frequently to value nonliquid assets and whether 5 to estimate their value. 6 (8) Whether to omit from the calculations trust property 7 occupied or possessed by a beneficiary. 8 (9) Any other matters necessary for the proper 9 functioning of the unitrust. 10 (f) Allocation.-- 11 (1) Expenses which would be deducted from income if the 12 trust were not a unitrust may not be deducted from the 13 unitrust distribution. 14 (2) Unless otherwise provided by the governing 15 instrument, the unitrust distribution shall be paid from net 16 income, as such term would be determined if the trust were 17 not a unitrust. To the extent net income is insufficient, the 18 unitrust distribution shall be paid from net realized short- 19 term capital gains. To the extent income and net realized 20 short-term capital gains are insufficient, the unitrust 21 distribution shall be paid from net realized long-term 22 capital gains. To the extent income and net realized short- 23 term and long-term capital gains are insufficient, the 24 unitrust distribution shall be paid from the principal of the 25 trust. 26 (g) Court orders.--The trustee or, if the trustee declines 27 to do so, a beneficiary may petition the court to: 28 (1) Select a payout percentage different than 4%. 29 (2) Provide for a distribution of net income, as would 30 be determined if the trust were not a unitrust, in excess of 20010S1014B1261 - 24 -
1 the unitrust distribution if such distribution is necessary 2 to preserve a tax benefit. 3 (3) Average the valuation of the trust's net assets over 4 a period other than three years. 5 (4) Reconvert from a unitrust. Upon a reconversion, the 6 power to adjust under section 8104 shall be revived. 7 (h) Application.--A conversion to a unitrust does not affect 8 a provision in the governing instrument directing or authorizing 9 the trustee to distribute principal or authorizing a beneficiary 10 to withdraw a portion or all of the principal. 11 (i) Prohibited conversions.--A trustee may not convert a 12 trust into a unitrust in any of the following circumstances: 13 (1) If payment of the unitrust distribution would change 14 the amount payable to a beneficiary as a fixed annuity or a 15 fixed fraction of the value of the trust assets. 16 (2) If the unitrust distribution would be made from any 17 amount which is permanently set aside for charitable purposes 18 under the governing instrument and for which a Federal estate 19 or gift tax deduction has been taken, unless both income and 20 principal are so set aside. 21 (3) If: 22 (i) possessing or exercising the power to convert 23 would cause an individual to be treated as the owner of 24 all or part of the trust for Federal income tax purposes; 25 and 26 (ii) the individual would not be treated as the 27 owner if the trustee did not possess the power to 28 convert. 29 (4) If: 30 (i) possessing or exercising the power to convert 20010S1014B1261 - 25 -
1 would cause all or part of the trust assets to be subject 2 to Federal estate or gift tax with respect to an 3 individual; and 4 (ii) the assets would not be subject to Federal 5 estate or gift tax with respect to the individual if the 6 trustee did not possess the power to convert. 7 (5) If the conversion would result in the disallowance 8 of a Federal estate tax or gift tax marital deduction which 9 would be allowed if the trustee did not have the power to 10 convert. 11 (6) If the trustee is a beneficiary of the trust. 12 (j) Permissible conversion when otherwise prohibited.-- 13 (1) If subsection (i)(3), (4) or (6) applies to a 14 trustee and there is more than one trustee, a cotrustee to 15 whom the provision does not apply may convert the trust, 16 unless the exercise of the power by the remaining trustee or 17 trustees is prohibited by the governing instrument. 18 (2) If subsection (i)(3), (4) or (6) applies to all the 19 trustees, the trustees may petition the court to direct a 20 conversion. 21 (k) Release of the power to convert.-- 22 (1) A trustee may release the power conferred by 23 subsection (a) to convert to a unitrust if any of the 24 following apply: 25 (i) The trustee is uncertain about whether 26 possessing or exercising the power will cause a result 27 described in subsection (i)(3), (4) or (5). 28 (ii) The trustee determines that possessing or 29 exercising the power will or may deprive the trust of a 30 tax benefit or impose a tax burden not described in 20010S1014B1261 - 26 -
1 subsection (i). 2 (2) The release may be permanent or for a specified 3 period, including a period measured by the life of an 4 individual. 5 § 8106. Judicial control of discretionary powers. 6 (a) Standard of review.--A court shall not change a 7 fiduciary's decision to exercise or not to exercise a 8 discretionary power conferred by this chapter unless it 9 determines that the decision was an abuse of the fiduciary's 10 discretion. 11 (b) Remedies.--If a court determines that a fiduciary has 12 abused its discretion regarding a discretionary power conferred 13 by this chapter, the remedy is to restore the income and 14 remainder beneficiaries to the positions they would have 15 occupied if the fiduciary had not abused its discretion, 16 according to the following rules: 17 (1) To the extent that the abuse of discretion has 18 resulted in no distribution to a beneficiary or a 19 distribution which is too small, the court shall require the 20 fiduciary to distribute from the trust to the beneficiary an 21 amount that the court determines will restore the 22 beneficiary, in whole or in part, to the beneficiary's 23 appropriate position. 24 (2) To the extent that the abuse of discretion has 25 resulted in a distribution to a beneficiary which is too 26 large, the court shall restore the beneficiaries, the trust 27 or both, in whole or in part, to their appropriate positions 28 by requiring the fiduciary to withhold an amount from one or 29 more future distributions to the beneficiary who received the 30 distribution that was too large or requiring that beneficiary 20010S1014B1261 - 27 -
1 or that beneficiary's estate to return some or all of the 2 distribution to the trust, notwithstanding a spendthrift or 3 similar provision. 4 (3) If the abuse of discretion concerns the power to 5 convert a trust into a unitrust, the court shall require the 6 trustee either to convert into a unitrust or to reconvert 7 from a unitrust. 8 (4) To the extent that the court is unable, after 9 applying paragraphs (1), (2) and (3), to restore the 10 beneficiaries, the trust or both to the positions they would 11 have occupied if the fiduciary had not abused its discretion, 12 the court may require the fiduciary to pay an appropriate 13 amount from its own funds to one or more of the beneficiaries 14 or the trust or both. 15 § 8107. (Reserved). 16 § 8108. (Reserved). 17 § 8109. (Reserved). 18 § 8110. (Reserved). 19 § 8111. (Reserved). 20 § 8112. (Reserved). 21 § 8113. Charitable trusts. 22 (a) Election.--Notwithstanding the foregoing provisions of 23 this chapter, the trustee of a trust held exclusively for 24 charitable purposes may elect to be governed by this section 25 unless the governing instrument expressly provides that the 26 election provided by this section shall not be available. 27 (b) Eligibility for election.--To make an election under 28 this section, the trustee shall adopt and follow an investment 29 policy seeking a total return for the investments held by the 30 trust, whether the return is to be derived from appreciation of 20010S1014B1261 - 28 -
1 capital or earnings and distributions with respect to capital or 2 both. The policy constituting the election shall be in writing, 3 shall be maintained as part of the permanent records of the 4 trust and shall recite that it constitutes an election to be 5 governed by this section. 6 (c) Effect of election.--If an election is made to be 7 governed by this section, the term "income" shall mean a 8 percentage of the value of the trust. The trustee shall in a 9 writing maintained as part of the permanent records of the trust 10 annually select the percentage and determine that it is 11 consistent with the long-term preservation of the real value of 12 the principal of the trust, but in no event shall the percentage 13 be less than 2% nor more than 7% per year. The term "principal" 14 shall mean all other assets held by the trustee with respect to 15 the trust. 16 (d) Revocation of election.--The trustee may revoke an 17 election to be governed by this section if the revocation is 18 made as part of an alternative investment policy seeking the 19 long-term preservation of the real value of the principal of the 20 trust. The revocation and alternative investment policy shall be 21 in writing and maintained as part of the permanent records of 22 the trust. 23 (e) Value determination.--For purposes of applying this 24 section, the value of the trust shall be the fair market value 25 of the cash and other assets held by the trustee with respect to 26 the trust, whether such assets would be considered "income" or 27 "principal" under the other provisions of this chapter, 28 determined at least annually and averaged over a period of three 29 or more preceding years. However, if the trust has been in 30 existence less than three years, the average shall be determined 20010S1014B1261 - 29 -
1 over the period during which the trust has been in existence. 2 SUBCHAPTER B 3 DECEDENT'S ESTATE OR 4 TERMINATING INCOME INTEREST 5 Sec. 6 8121. Determination and distribution of net income. 7 8122. Distribution to residuary and remainder beneficiaries. 8 § 8121. Determination and distribution of net income. 9 After a decedent dies in the case of an estate, or after an 10 income interest in a trust ends, the following rules apply: 11 (1) A fiduciary of an estate or of a terminating income 12 interest shall determine the amount of net income and net 13 principal receipts received from property specifically given 14 to a beneficiary under paragraph (5) and the provisions 15 applicable to trustees in Subchapters C (relating to 16 apportionment at beginning and end of income interest), D 17 (relating to allocation of receipts during administration of 18 trust) and E (relating to allocation of disbursements during 19 administration of trust). The fiduciary shall distribute the 20 net income and net principal receipts to the beneficiary who 21 is to receive the specific property. 22 (2) A fiduciary shall distribute to a beneficiary who 23 receives a pecuniary amount outright and shall allocate to a 24 pecuniary amount in trust the interest, other income or other 25 amount provided by the governing instrument or section 3543 26 (relating to interest or income on distributive shares) or 27 7187 (relating to interest or income on distributive shares) 28 from net income determined under paragraph (3) or from 29 principal to the extent that net income is insufficient. 30 (3) A fiduciary shall determine the remaining net income 20010S1014B1261 - 30 -
1 of a decedent's estate or a terminating income interest under 2 the provisions applicable to trustees in Subchapters C, D and 3 E and by: 4 (i) including in net income all income from property 5 used to discharge liabilities; and 6 (ii) paying from principal debts, funeral expenses, 7 costs of disposition of remains, the family exemption, 8 fees of personal representatives and their attorneys and 9 accountants, and death taxes and related interest and 10 penalties which are apportioned to the estate or 11 terminating income interest by the governing instrument 12 or applicable law. 13 (4) A fiduciary shall distribute the net income 14 remaining after distributions required by paragraph (2) in 15 the manner described in section 8122 (relating to 16 distribution to residuary and remainder beneficiaries) to all 17 other beneficiaries. 18 (5) A fiduciary may not reduce principal or income 19 receipts from property described in paragraph (1) because of 20 a payment described in section 8151 (relating to minerals, 21 water and other natural resources) or 8152 (relating to 22 timber) to the extent that the governing instrument or 23 applicable law requires the fiduciary to make the payment 24 from assets other than the property or to the extent that the 25 fiduciary recovers or expects to recover the payment from a 26 third party. The net income and principal receipts from the 27 property are determined by: 28 (i) including all of the amounts the fiduciary 29 receives or pays with respect to the property, whether 30 those amounts accrued or became due before, on or after 20010S1014B1261 - 31 -
1 the date of a decedent's death or an income interest's 2 terminating event; and 3 (ii) making a reasonable provision for amounts that 4 the fiduciary believes the estate or terminating income 5 interest may become obligated to pay after the property 6 is distributed. 7 § 8122. Distribution to residuary and remainder beneficiaries. 8 (a) Distribution of net income.--Each beneficiary described 9 in section 8121(4) (relating to determination and distribution 10 of net income) is entitled to receive a portion of the net 11 income equal to the beneficiary's fractional interest in 12 undistributed principal assets, using values as of the 13 distribution date. If a fiduciary makes more than one 14 distribution of assets to beneficiaries to whom this section 15 applies, each beneficiary, including one who does not receive 16 part of the distribution, is entitled, as of each distribution 17 date, to the net income the fiduciary has received after the 18 date of death or terminating event or earlier distribution date 19 but has not distributed as of the current distribution date. 20 (b) Allocation of net income.--In determining a 21 beneficiary's share of net income, the following rules apply: 22 (1) The beneficiary is entitled to receive a portion of 23 the net income equal to the beneficiary's fractional interest 24 in the undistributed principal assets immediately before the 25 distribution date, including assets that later may be sold or 26 applied to meet principal obligations. 27 (2) The beneficiary's fractional interest in the 28 undistributed principal assets must be calculated without 29 regard to property specifically given to a beneficiary and 30 property required to pay pecuniary amounts. 20010S1014B1261 - 32 -
1 (3) The beneficiary's fractional interest in the 2 undistributed principal assets must be calculated on the 3 basis of the aggregate value of those assets as of the 4 distribution date without reducing the value by any unpaid 5 principal obligation. 6 (c) Collected but undistributed net income.--If a fiduciary 7 does not distribute all of the collected but undistributed net 8 income to each person as of a distribution date, the fiduciary 9 shall maintain appropriate records showing the interest of each 10 beneficiary in that net income. 11 (d) Application.--To the extent that the fiduciary considers 12 it appropriate, if this section applies to the income from an 13 asset, the fiduciary may apply the rules in this section to net 14 gain or loss from the disposition of a principal asset realized 15 after the date of death or terminating event or earlier 16 distribution date. 17 (e) Distribution date.--For purposes of this section, the 18 distribution date may be the date as of which the fiduciary 19 calculates the value of the assets if that date is reasonably 20 near the date on which assets are actually distributed. 21 SUBCHAPTER C 22 APPORTIONMENT AT BEGINNING 23 AND END OF INCOME INTEREST 24 Sec. 25 8131. When right to income begins and ends. 26 8132. Apportionment of receipts and disbursements when 27 decedent dies or income interest begins. 28 8133. Apportionment when income interest ends. 29 § 8131. When right to income begins and ends. 30 (a) Accrual of income interest.--An income beneficiary is 20010S1014B1261 - 33 -
1 entitled to net income from the date on which the income 2 interest begins. An income interest begins: 3 (1) on the date specified in the governing instrument; 4 or 5 (2) if no date is specified, on the date an asset 6 becomes subject to a trust or successive income interest. 7 (b) Asset subject to a trust.--An asset becomes subject to a 8 trust: 9 (1) on the date it is transferred to the trust in the 10 case of an asset which is transferred to a trust during the 11 transferor's life; 12 (2) on the date of a testator's death in the case of an 13 asset which becomes subject to a trust by reason of a will, 14 even if there is an intervening period of administration of 15 the testator's estate; or 16 (3) on the date of an individual's death in the case of 17 an asset which is transferred to a fiduciary by a third party 18 because of the individual's death. 19 (c) Asset subject to a successive income interest.--An asset 20 becomes subject to a successive income interest on the day after 21 the preceding income interest ends, as determined under 22 subsection (d), even if there is an intervening period of 23 administration to wind up the preceding income interest. 24 (d) End of income interest.--An income interest ends on: 25 (1) the day before an income beneficiary dies or another 26 terminating event occurs; or 27 (2) the last day of a period during which there is no 28 beneficiary to whom a trustee may distribute income. 29 § 8132. Apportionment of receipts and disbursements when 30 decedent dies or income interest begins. 20010S1014B1261 - 34 -
1 (a) Allocation to principal.--Unless section 8121(1) 2 (relating to determination and distribution of net income) 3 applies, a trustee shall allocate an income receipt or 4 disbursement to principal if its due date occurs before: 5 (1) a decedent dies in the case of an estate; or 6 (2) an income interest begins in the case of a trust or 7 successive income interest. 8 (b) Allocation to income.--A trustee shall allocate an 9 income receipt or disbursement to income if its due date occurs 10 on or after the date on which a decedent dies or an income 11 interest begins and it is a periodic due date. An income receipt 12 or disbursement must be treated as accruing from day to day if 13 its due date is not periodic or it has no due date. The portion 14 of the receipt or disbursement accruing before the date on which 15 a decedent dies or an income interest begins must be allocated 16 to principal and the balance must be allocated to income. 17 (c) Due dates.--An item of income or an obligation is due on 18 the date the payor is required to make a payment. If a payment 19 date is not stated, there is no due date for the purposes of 20 this chapter. Distributions to shareholders or other owners from 21 an entity to which section 8141 (relating to character of 22 receipts) applies are deemed to be due on the date fixed by the 23 entity for determining who is entitled to receive the 24 distribution or, if no date is fixed, on the declaration date 25 for the distribution. A due date is periodic for receipts or 26 disbursements that must be paid at regular intervals under a 27 lease or an obligation to pay interest or if an entity 28 customarily makes distributions at regular intervals. 29 § 8133. Apportionment when income interest ends. 30 (a) End of mandatory income interest.--When a mandatory 20010S1014B1261 - 35 -
1 income interest ends, the trustee shall pay to a mandatory 2 income beneficiary who survives that date, or the estate of a 3 deceased mandatory income beneficiary whose death causes the 4 interest to end, the beneficiary's share of the undistributed 5 income which is not disposed of under the governing instrument 6 unless the beneficiary has an unqualified power to revoke more 7 than 5% of the trust immediately before the income interest 8 ends. In the latter case, the undistributed income from the 9 portion of the trust that may be revoked shall be added to 10 principal. 11 (b) Proration of final payment.--When a trustee's obligation 12 to pay a fixed annuity or a fixed fraction of the value of the 13 trust's assets ends, the trustee shall prorate the final payment 14 if and to the extent required by applicable law to accomplish a 15 purpose of the trust or its settlor or testator relating to 16 income, gift, estate or other tax requirements. 17 (c) Definition.--As used in this section, the term 18 "undistributed income" means net income received before the date 19 on which an income interest ends. The term does not include an 20 item of income or expense which is due or accrued or net income 21 which has been added or is required to be added to principal 22 under the governing instrument. 23 SUBCHAPTER D 24 ALLOCATION OF RECEIPTS DURING 25 ADMINISTRATION OF TRUST 26 Sec. 27 8141. Character of receipts. 28 8142. Distribution from trust or estate. 29 8143. Business and other activities conducted by trustee. 30 8144. Principal receipts. 20010S1014B1261 - 36 -
1 8145. Rental property. 2 8146. Obligation to pay money. 3 8147. Insurance policies and similar contracts. 4 8148. Insubstantial allocations not required. 5 8149. Retirement benefits, individual retirement accounts, 6 deferred compensation, annuities and similar payments. 7 8150. Liquidating asset. 8 8151. Minerals, water and other natural resources. 9 8152. Timber. 10 8153. Property not productive of income. 11 8154. Derivatives and options. 12 8155. Asset-backed securities. 13 § 8141. Character of receipts. 14 (a) Allocation to income.--Except as otherwise provided in 15 this section, a trustee shall allocate to income money received 16 from an entity including reinvested cash dividends. 17 (b) Allocation to principal.--A trustee shall allocate the 18 following receipts from an entity to principal: 19 (1) Property other than money excluding reinvested cash 20 dividends. 21 (2) Money received in one distribution or a series of 22 related distributions in exchange for part or all of a 23 trust's interest in the entity. 24 (3) Money received in total or partial liquidation of 25 the entity. 26 (4) Money received from an entity that is a regulated 27 investment company or a real estate investment trust if the 28 money distributed is a short-term or long-term capital gain 29 dividend for Federal income tax purposes. 30 (c) When received in partial liquidation.--Money is received 20010S1014B1261 - 37 -
1 in partial liquidation: 2 (1) to the extent that the entity, at or near the time 3 of a distribution, indicates that it is a distribution in 4 partial liquidation; or 5 (2) if the total amount of money and property received 6 in a distribution or series of related distributions is 7 greater than 20% of the entity's gross assets, as shown by 8 the entity's year-end financial statements immediately 9 preceding the initial receipt. 10 (d) When not received in partial liquidation.--Money is not 11 received in partial liquidation nor may it be taken into account 12 under subsection (c)(2) to the extent that it does not exceed 13 the amount of income tax that a trustee or beneficiary must pay 14 on taxable income of the entity that distributes the money. 15 (e) Reliance upon a statement.--A trustee may rely upon a 16 statement made by an entity about the source or character of a 17 distribution if the statement is made at or near the time of 18 distribution by the entity's board of directors or other person 19 or group of persons authorized to exercise powers to pay money 20 or transfer property comparable to those of a corporation's 21 board of directors. 22 (f) Definition.--As used in this section, the term "entity" 23 means a corporation, partnership, limited liability company, 24 regulated investment company, real estate investment trust, 25 common trust fund or any other organization, in which a trustee 26 has an interest other than: 27 (1) a trust or estate to which section 8142 (relating to 28 distribution from trust or estate) applies; 29 (2) a business or activity to which section 8143 30 (relating to business and other activities conducted by 20010S1014B1261 - 38 -
1 trustee) applies; 2 (3) a payment to which section 8149 (relating to 3 retirement benefits, individual retirement accounts, deferred 4 compensation, annuities and similar payments) applies; or 5 (4) an asset-backed security to which section 8155 6 (relating to asset-backed securities) applies. 7 § 8142. Distribution from trust or estate. 8 A trustee shall allocate to income an amount received as a 9 distribution of income from a trust or an estate in which the 10 trust has an interest other than a purchased interest and shall 11 allocate to principal an amount received as a distribution of 12 principal from such a trust or estate. If a trustee purchases an 13 interest in a trust that is an investment entity, or a decedent 14 or donor transfers an interest in such a trust to a trustee, 15 section 8141 (relating to character of receipts) or 8155 16 (relating to asset-backed securities) applies to a receipt from 17 the trust. 18 § 8143. Business and other activities conducted by trustee. 19 (a) Separate accounting for business or activity.--If a 20 trustee that conducts a business or other activity determines 21 that it is in the best interest of all the beneficiaries to 22 account separately for the business or activity instead of 23 accounting for it as part of the trust's general accounting 24 records, the trustee may maintain separate accounting records 25 for its transactions, whether or not its assets are segregated 26 from other trust assets. 27 (b) Net receipts.-- 28 (1) A trustee that accounts separately for a business or 29 other activity may determine the extent to which: 30 (i) its net cash receipts must be retained for 20010S1014B1261 - 39 -
1 working capital, the acquisition or replacement of fixed 2 assets and other reasonably foreseeable needs of the 3 business or activity; and 4 (ii) the remaining net cash receipts are accounted 5 for as principal or income in the trust's general 6 accounting records. 7 (2) If a trustee sells assets of the business or other 8 activity, other than in the ordinary course of the business 9 or activity, the trustee shall account for the net amount 10 received as principal in the trust's general accounting 11 records to the extent the trustee determines that the amount 12 received is no longer required in the conduct of the 13 business. 14 (c) Permissible activities for separate accounting.-- 15 Activities for which a trustee may maintain separate accounting 16 records include: 17 (1) Retail, manufacturing, service and other traditional 18 business activities. 19 (2) Farming. 20 (3) Raising and selling livestock and other animals. 21 (4) Management of rental properties. 22 (5) Extraction of minerals and other natural resources. 23 (6) Timber operations. 24 (7) Activities to which section 8154 (relating to 25 derivatives and options) applies. 26 § 8144. Principal receipts. 27 A trustee shall allocate to principal any of the following: 28 (1) To the extent not allocated to income under this 29 chapter, assets received from: 30 (i) a transferor during the transferor's lifetime; 20010S1014B1261 - 40 -
1 (ii) a decedent's estate; 2 (iii) a trust with a terminating income interest; or 3 (iv) a payor under a contract naming the trust or 4 its trustee as beneficiary. 5 (2) Money or other property received from a principal 6 asset's sale, exchange, liquidation or change in form. This 7 paragraph includes realized profit subject to this 8 subchapter. 9 (3) Amounts recovered from third parties to reimburse 10 the trust because of disbursements described in section 11 8162(a)(8) (relating to mandatory disbursements from 12 principal) or for other reasons to the extent not based on 13 the loss of income. 14 (4) Proceeds of property taken by eminent domain. A 15 separate award made for the loss of income with respect to an 16 accounting period during which a current income beneficiary 17 had a mandatory income interest is income. 18 (5) Net income received in an accounting period during 19 which there is no beneficiary to whom a trustee may or must 20 distribute income. 21 (6) Other receipts as provided in sections 8148 22 (relating to insubstantial allocations not required) through 23 8155 (relating to asset-backed securities). 24 § 8145. Rental property. 25 (a) Rent.--To the extent that a trustee accounts for 26 receipts from rental property pursuant to this section, the 27 trustee shall allocate to income an amount received as rent of 28 real or personal property. This subsection includes an amount 29 received for cancellation or renewal of a lease. 30 (b) Deposit.--An amount received as a refundable deposit, 20010S1014B1261 - 41 -
1 including a security deposit or a deposit which is to be applied 2 as rent for future periods: 3 (1) shall be added to principal; 4 (2) shall be held subject to the terms of the lease; and 5 (3) is not available for distribution to a beneficiary 6 until the trustee's contractual obligations have been 7 satisfied with respect to that amount. 8 § 8146. Obligation to pay money. 9 (a) Interest allocated to income.--An amount received as 10 interest, whether determined at a fixed, variable or floating 11 rate, on an obligation to pay money to the trustee, including an 12 amount received as consideration for prepaying principal, shall 13 be allocated to income without any provision for amortization of 14 premium. 15 (b) Allocation of obligations.--A trustee shall allocate to 16 principal an amount received from the sale, redemption or other 17 disposition of an obligation to pay money to the trustee more 18 than one year after it is purchased or acquired by the trustee, 19 including an obligation the purchase price or value of which 20 when it is acquired is less than its value at maturity. If the 21 obligation matures within one year after it is purchased or 22 acquired by the trustee, an amount received in excess of its 23 purchase price or its value when acquired by the trust shall be 24 allocated to income. 25 (c) Application.--This section does not apply to an 26 obligation to which any of the following apply: 27 (1) Section 8149 (relating to retirement benefits, 28 individual retirement accounts, deferred compensation, 29 annuities and similar payments). 30 (2) Section 8150 (relating to liquidating asset). 20010S1014B1261 - 42 -
1 (3) Section 8151 (relating to minerals, water and other 2 natural resources). 3 (4) Section 8152 (relating to timber). 4 (5) Section 8154 (relating to derivatives and options). 5 (6) Section 8155 (relating to asset-backed securities). 6 § 8147. Insurance policies and similar contracts. 7 (a) General rule.-- 8 (1) Except as otherwise provided in subsection (b) or 9 (c), a trustee shall allocate to principal the proceeds of a 10 life insurance policy or other contract in which the trust or 11 its trustee is named as beneficiary. This paragraph includes 12 a contract which insures the trust or its trustee against 13 loss for damage to, destruction of or loss of title to a 14 trust asset. 15 (2) If the premiums on the policy or contract are paid 16 from income, the trustee shall allocate to income dividends 17 on the policy or contract. 18 (3) If the premiums on the policy or contract are paid 19 from principal, the trustee shall allocate to principal 20 dividends on the policy or contract. 21 (b) Allocation of proceeds to income.--Except as provided in 22 subsection (c), a trustee shall allocate to income proceeds of a 23 contract which insures the trustee against any of the following: 24 (1) Loss of occupancy or other use by an income 25 beneficiary. 26 (2) Loss of income. 27 (3) Subject to section 8143 (relating to business and 28 other activities conducted by trustee), loss of profits from 29 a business. 30 (c) Application.--This section does not apply to a contract 20010S1014B1261 - 43 -
1 to which section 8149 (relating to retirement benefits, 2 individual retirement accounts, deferred compensation, annuities 3 and similar payments) applies. 4 § 8148. Insubstantial allocations not required. 5 If a trustee determines that an allocation between principal 6 and income required by section 8149 (relating to retirement 7 benefits, individual retirement accounts, deferred compensation, 8 annuities and similar payments), 8150 (relating to liquidating 9 asset), 8151 (relating to minerals, water and other natural 10 resources), 8152 (relating to timber) or 8155 (relating to 11 asset-backed securities) is insubstantial, the trustee may 12 allocate the entire amount to principal unless one of the 13 circumstances described in section 8104(c) (relating to 14 trustee's power to adjust) applies to the allocation. This power 15 may be exercised by a cotrustee in the circumstances described 16 in section 8104(d) and may be released for the reasons and in 17 the manner described in section 8104(e). An allocation is 18 presumed to be insubstantial if: 19 (1) the amount of the allocation would increase or 20 decrease net income in an accounting period, as determined 21 before the allocation, by less than 5%; or 22 (2) the value of the asset producing the receipt for 23 which the allocation would be made is less than 5% of the 24 total value of the trust's assets at the beginning of the 25 accounting period. 26 § 8149. Retirement benefits, individual retirement accounts, 27 deferred compensation, annuities and similar 28 payments. 29 (a) General rule.-- 30 (1) The trustee shall allocate to income the greater of: 20010S1014B1261 - 44 -
1 (i) the portion of a payment characterized by the 2 payor as interest or a dividend or a remittance in lieu 3 of interest or a dividend; or 4 (ii) the portion of the payment characterized as 5 imputed interest for Federal income tax purposes. 6 (2) The balance of any such payment shall be allocated 7 to principal. 8 (b) Allocation under contract calling for equal 9 installments.-- 10 (1) If no part of a payment under a contract calling for 11 equal installments over a fixed period of time is allocable 12 to income under the provisions of subsection (a), the 13 difference between the trust's acquisition value of the 14 contract and the total expected return shall be deemed to be 15 interest. 16 (2) The trustee shall allocate to income the portion of 17 each payment equivalent to interest on the then unpaid 18 principal balance at the rate specified in the contract or a 19 rate necessary to thus amortize the difference between the 20 expected return and the acquisition value, where that rate is 21 readily ascertainable by the trustee. 22 (c) Allocation when internal net income of fund is readily 23 ascertained.-- 24 (1) If no portion of a payment from a separate fund held 25 exclusively for the benefit of the trust is allocable to 26 income under subsections (a) and (b) but the internal net 27 income of the fund determined as if the fund were a separate 28 trust subject to Subchapters B (relating to decedent's estate 29 or terminating income interest) through E (relating to 30 allocation of disbursements during administration of trust) 20010S1014B1261 - 45 -
1 is readily ascertainable by the trustee, the portion of the 2 payment equal to the then undistributed net income of the 3 fund realized since the trust acquired its interest in the 4 fund shall be deemed to be a distribution of such income and 5 shall be allocated to the trust income account. 6 (2) The balance of any such payment shall be allocated 7 to principal. 8 (d) When not otherwise allocable to income.-- 9 (1) The trustee shall allocate to income 10% of the part 10 of the payment which is required to be made during the 11 accounting period and the balance to principal if: 12 (i) no part of the payment is allocable to income 13 under subsection (a), (b) or (c); and 14 (ii) all or part of the payment is required to be 15 made. 16 (2) The trustee shall allocate the entire payment to 17 principal if: 18 (i) no part of a payment is required to be made; or 19 (ii) the payment received is the entire amount to 20 which the trustee is entitled. 21 (3) For purposes of this subsection, a payment is not 22 required to be made to the extent that it is made because the 23 trustee exercises a right of withdrawal. 24 (e) Allocation to obtain marital deduction.--If, to obtain a 25 Federal estate or gift tax marital deduction for a trust, the 26 trustee must allocate more of a payment to income than provided 27 for by this section, the trustee shall allocate to income the 28 additional amount necessary to obtain the marital deduction. 29 (f) Application.--This section does not apply to payments to 30 which section 8150 (relating to liquidating asset) applies. 20010S1014B1261 - 46 -
1 (g) Definition.--As used in this section, the term "payment" 2 means a payment that a trustee may receive over a fixed period 3 of time or during the life of one or more individuals because of 4 services rendered or property transferred to the payor in 5 exchange for future payments. The term includes all of the 6 following: 7 (1) A payment made in money or property from: 8 (i) the payor's general assets; or 9 (ii) a separate fund created by the payor or 10 another. 11 (2) A payment on or from: 12 (i) an installment contract or note; 13 (ii) a private or commercial annuity; 14 (iii) a deferred compensation agreement; 15 (iv) an employee death benefit; 16 (v) an individual retirement account; or 17 (vi) a pension, profit-sharing, stock or other 18 bonus, or stock-ownership plan. 19 § 8150. Liquidating asset. 20 (a) Allocation.--A trustee shall allocate to income 10% of 21 the receipts from a liquidating asset and the balance to 22 principal. 23 (b) Definition.--As used in this section, the term 24 "liquidating asset" means an asset the value of which will 25 diminish or terminate because the asset is expected to produce 26 receipts for a period of limited duration. The term includes a 27 leasehold, patent, copyright, royalty right and right to receive 28 payments during a period of more than one year under an 29 arrangement which does not provide for the payment of interest 30 on the unpaid balance. The term does not include any of the 20010S1014B1261 - 47 -
1 following: 2 (1) A payment subject to section 8149 (relating to 3 retirement benefits, individual retirement accounts, deferred 4 compensation, annuities and similar payments). 5 (2) Resources subject to section 8151 (relating to 6 minerals, water and other natural resources). 7 (3) Timber subject to section 8152 (relating to timber). 8 (4) An activity subject to section 8154 (relating to 9 derivatives and options). 10 (5) An asset subject to section 8155 (relating to asset- 11 backed securities). 12 (6) An asset for which the trustee establishes a reserve 13 for depreciation under section 8163 (relating to 14 discretionary allocation of disbursements). 15 § 8151. Minerals, water and other natural resources. 16 (a) Allocation for receipts from minerals and other natural 17 resources.--To the extent that a trustee accounts for receipts 18 from an interest in minerals or other natural resources under 19 this section, the trustee shall allocate them as follows: 20 (1) If received as nominal delay rental or nominal 21 annual rent on a lease, a receipt shall be allocated to 22 income. 23 (2) If received from a production payment, a receipt 24 shall be allocated to income if and to the extent that the 25 agreement creating the production payment provides a factor 26 for interest or its equivalent. The balance shall be 27 allocated to principal. 28 (3) If an amount received as a royalty, shut-in-well 29 payment, take-or-pay payment, bonus or delay rental is more 30 than nominal: 20010S1014B1261 - 48 -
1 (i) sixty-six and two-thirds percent shall be 2 allocated to principal; and 3 (ii) the balance shall be allocated to income. 4 (4) If an amount is received from a working interest or 5 any other interest not provided for in paragraph (1), (2) or 6 (3): 7 (i) sixty-six and two-thirds percent of the net 8 amount received shall be allocated to principal; and 9 (ii) the balance shall be allocated to income. 10 (b) Allocation for receipts from water.-- 11 (1) An amount received on account of an interest in 12 renewable water shall be allocated to income. 13 (2) An amount received on account of an interest in 14 nonrenewable water shall be allocated as follows: 15 (i) Sixty-six and two-thirds percent of the amount 16 shall be allocated to principal. 17 (ii) The balance shall be allocated to income. 18 (c) Application.--This chapter applies whether or not a 19 decedent or donor was extracting minerals, water or other 20 natural resources before the interest became subject to the 21 trust. 22 § 8152. Timber. 23 (a) Allocation of net receipts.--To the extent that a 24 trustee accounts for receipts from the sale of timber and 25 related products under this section, the trustee shall allocate 26 the net receipts: 27 (1) To income to the extent that the amount of timber 28 removed from the land does not exceed the rate of growth of 29 the timber during the accounting periods in which a 30 beneficiary has a mandatory income interest. 20010S1014B1261 - 49 -
1 (2) To principal to the extent that: 2 (i) the amount of timber removed from the land 3 exceeds the rate of growth of the timber; or 4 (ii) the net receipts are from the sale of standing 5 timber. 6 (3) To or between income and principal, by determining 7 the amount of timber removed from the land under the lease or 8 contract and applying the rules in paragraphs (1) and (2) if 9 the net receipts are from: 10 (i) the lease of timberland; or 11 (ii) a contract to cut timber from land owned by a 12 trust. 13 (4) To principal to the extent that advance payments, 14 bonuses and other payments are not allocated under paragraph 15 (1), (2) or (3). 16 (b) Determining net receipts.--In determining net receipts 17 to be allocated under subsection (a), a trustee shall deduct and 18 transfer to principal a reasonable amount for depletion. 19 (c) Application.--This chapter applies whether or not a 20 decedent or transferor was harvesting timber from the property 21 before it became subject to the trust. 22 § 8153. Property not productive of income. 23 (a) General rule.--If a Federal estate or gift tax marital 24 deduction is allowed for all or part of a trust whose income is 25 required to be paid to the settlor's or testator's spouse and 26 whose assets consist substantially of property that does not 27 provide the spouse with sufficient income from or use of the 28 trust assets, and if the amounts that the trustee transfers from 29 principal to income under section 8104 (relating to trustee's 30 power to adjust) and that the trustee distributes to the spouse 20010S1014B1261 - 50 -
1 from principal pursuant to the governing instrument are 2 insufficient to provide the spouse with the beneficial enjoyment 3 required to obtain the marital deduction, the spouse may require 4 the trustee to make property productive of income, convert 5 property within a reasonable time, or exercise the power 6 conferred by section 8104(a). The trustee may decide which 7 action or combination of actions to take. 8 (b) Other cases.--In cases not governed by subsection (a), 9 proceeds from the sale or other disposition of an asset are 10 principal without regard to the amount of income the asset 11 produces during any accounting period. 12 § 8154. Derivatives and options. 13 (a) Derivatives.--To the extent that a trustee does not 14 account under section 8143 (relating to business and other 15 activities conducted by trustee) for transactions in 16 derivatives, the trustee shall allocate to principal receipts 17 from and disbursements made in connection with those 18 transactions. 19 (b) Options.--If a trustee grants an option to buy property 20 from the trust, whether or not the trust owns the property when 21 the option is granted, grants an option that permits another 22 person to sell property to the trust, or acquires an option to 23 buy property for the trust or an option to sell an asset owned 24 by the trust, and the trustee or other owner of the asset is 25 required to deliver the asset if the option is exercised, an 26 amount received for granting the option must be allocated to 27 principal. An amount paid to acquire the option must be paid 28 from principal. A gain or loss realized upon the exercise of an 29 option, including an option granted to a settlor or testator of 30 the trust for services rendered, must be allocated to principal. 20010S1014B1261 - 51 -
1 (c) Definition.--As used in this section, "derivative" means 2 a contract or financial instrument or a combination of contracts 3 and financial instruments which gives a trust the right or 4 obligation to participate in some or all changes in the price of 5 a tangible or intangible asset or group of assets, or changes in 6 a rate, an index of prices or rates, or other market indicator 7 for an asset or a group of assets. 8 § 8155. Asset-backed securities. 9 (a) General rule.--If a trust receives a payment from 10 interest or other current return and from other proceeds of the 11 collateral financial assets: 12 (1) The trustee shall allocate to income the portion of 13 the payment which the payor identifies as being from interest 14 or other current return. 15 (2) The trustee shall allocate the balance of the 16 payment to principal. 17 (b) Allocation where liquidating trust's interest in 18 security.-- 19 (1) If a trust receives one or more payments in exchange 20 for the trust's entire interest in an asset-backed security 21 in one accounting period, the trustee shall allocate the 22 payments to principal. 23 (2) If a payment is one of a series of payments which 24 will result in the liquidation of the trust's interest in the 25 security over more than one accounting period, the trustee 26 shall allocate: 27 (i) ten percent of the payment to income; and 28 (ii) the balance to principal. 29 (c) Definition.--As used in this section, the term "asset- 30 backed security" means an asset the value of which is based upon 20010S1014B1261 - 52 -
1 the right it gives the owner to receive distributions from the 2 proceeds of financial assets which provide collateral for the 3 security. The term includes an asset which gives the owner the 4 right to receive from the collateral financial assets only the 5 interest or other current return or only the proceeds other than 6 interest or current return. The term does not include an asset 7 to which section 8141 (relating to character of receipts) or 8 8149 (relating to retirement benefits, individual retirement 9 accounts, deferred compensation, annuities and similar payments) 10 applies. 11 SUBCHAPTER E 12 ALLOCATION OF DISBURSEMENTS DURING 13 ADMINISTRATION OF TRUST 14 Sec. 15 8161. Mandatory disbursements from income. 16 8162. Mandatory disbursements from principal. 17 8163. Discretionary allocation of disbursements. 18 8164. Transfers from income to principal for depreciation. 19 8165. Transfers from income to reimburse principal. 20 8166. Income taxes. 21 8167. Adjustments between principal and income because of 22 taxes. 23 § 8161. Mandatory disbursements from income. 24 A trustee shall make the following disbursements from income: 25 (1) Interest, except interest on death taxes. 26 (2) Ordinary repairs. 27 (3) Real estate and other regularly recurring taxes 28 assessed against principal. 29 (4) Recurring premiums on fire or other insurance 30 covering the loss of a principal asset or the loss of income 20010S1014B1261 - 53 -
1 from, or use of, the asset. 2 § 8162. Mandatory disbursements from principal. 3 (a) Mandatory disbursements.--A trustee shall make the 4 following disbursements from principal: 5 (1) Extraordinary expenses incurred in connection with 6 the administration, management or preservation of trust 7 property and the distribution of income. 8 (2) Extraordinary repairs. 9 (3) Compensation for legal services to the trustee. 10 (4) Expenses in connection with accountings and judicial 11 or other proceedings. This paragraph includes proceedings to 12 construe, modify or reform the trust or to protect the trust 13 or its property. 14 (5) Payments on the principal of a trust debt. 15 (6) Premiums paid on a policy of insurance not described 16 in section 8161(4) (relating to mandatory disbursements from 17 income) of which the trust is the owner and beneficiary. 18 (7) Estate, inheritance and other transfer taxes, 19 including interest and penalties, apportioned to the trust. 20 (8) Disbursements related to environmental matters. This 21 paragraph includes: 22 (i) Reclamation. 23 (ii) Assessing environmental conditions. 24 (iii) Remedying and removing environmental 25 contamination. 26 (iv) Monitoring remedial activities and the release 27 of substances. 28 (v) Preventing future releases of substances. 29 (vi) Collecting amounts from persons liable or 30 potentially liable for the costs of those activities. 20010S1014B1261 - 54 -
1 (vii) Penalties imposed under environmental statutes 2 or regulations and other payments made to comply with 3 those statutes or regulations. 4 (viii) Statutory or common law claims by third 5 parties. 6 (ix) Defending claims based on environmental 7 matters. 8 (b) Mandatory reimbursement.--If a principal asset is 9 encumbered with an obligation which requires income from that 10 asset to be paid directly to the creditor, the trustee shall 11 transfer from principal to income an amount equal to the income 12 paid to the creditor in reduction of the principal balance of 13 the obligation. 14 § 8163. Discretionary allocation of disbursements. 15 Subject to sections 8161 (relating to mandatory disbursements 16 from income) and 8162 (relating to mandatory disbursements from 17 principal), a trustee may, in the trustee's discretion, allocate 18 to income or principal or partly to each ordinary expenses 19 incurred in connection with the administration, management, or 20 preservation of trust property and the distribution of income, 21 including, but not limited to, the compensation of the trustee 22 and of any person providing investment advisory, custodian or 23 income tax return preparation services to the trustee. 24 § 8164. Transfers from income to principal for depreciation. 25 (a) Transfers.--A trustee may transfer to principal a 26 reasonable amount of the net cash receipts from a principal 27 asset that is subject to depreciation. However, a trustee may 28 not transfer any amount for depreciation: 29 (1) of that portion of real property used or available 30 for use by a beneficiary as a residence or of tangible 20010S1014B1261 - 55 -
1 personal property held or made available for the personal use 2 or enjoyment of a beneficiary; 3 (2) during the administration of a decedent's estate; or 4 (3) under this section if the trustee is accounting 5 under section 8143 (relating to business and other activities 6 conducted by trustee) for the business or activity in which 7 the asset is used. 8 (b) Separate fund unnecessary for amount transferred.--An 9 amount transferred to principal need not be held as a separate 10 fund. 11 (c) Definition.--As used in this section, the term 12 "depreciation" means a reduction in value due to wear, tear, 13 decay, corrosion or gradual obsolescence of a fixed asset having 14 a useful life of more than one year. 15 § 8165. Transfers from income to reimburse principal. 16 (a) Permissible reimbursements.--A trustee may transfer an 17 appropriate amount from income to principal in one or more 18 accounting periods to reimburse principal or to provide a 19 reserve for future disbursements, if the trustee makes or 20 expects to make a disbursement from principal which is allocable 21 to income under section 8161 (relating to mandatory 22 disbursements from income) or 8163 (relating to discretionary 23 allocation of disbursements) and which: 24 (1) is paid from principal because it is unusually 25 large; or 26 (2) is made to prepare property for rental, including 27 tenant allowances, leasehold improvements and broker's 28 commissions. 29 (b) Continued transfers.--If the asset whose ownership gives 30 rise to the disbursements becomes subject to a successive income 20010S1014B1261 - 56 -
1 interest after an income interest ends, a trustee may continue 2 to transfer amounts from income to principal as provided in 3 subsection (a). 4 (c) Application.--This section shall not apply to the extent 5 the trustee has been or expects to be reimbursed by a third 6 party. 7 § 8166. Income taxes. 8 (a) Receipts allocated to income.--A tax required to be paid 9 by a trustee based on receipts allocated to income shall be paid 10 from income. 11 (b) Receipts allocated to principal.--A tax required to be 12 paid by a trustee based on receipts allocated to principal shall 13 be paid from principal, even if the tax is called an income tax 14 by the taxing authority. 15 (c) Tax on entity's taxable income.--A tax required to be 16 paid by a trustee on the trust's share of an entity's taxable 17 income shall be paid proportionately: 18 (1) from income to the extent that receipts from the 19 entity are allocated to income; and 20 (2) from principal to the extent that: 21 (i) receipts from the entity are allocated to 22 principal; and 23 (ii) the trust's share of the entity's taxable 24 income exceeds the total receipts described in paragraph 25 (1) and subparagraph (i). 26 (d) Reductions in receipts allocated to principal or 27 income.--For purposes of this section, receipts allocated to 28 principal or income shall be reduced by the amount distributed 29 to a beneficiary from principal or income for which the trust 30 receives a deduction in calculating the tax. 20010S1014B1261 - 57 -
1 § 8167. Adjustments between principal and income because of 2 taxes. 3 A trustee may make adjustments between principal and income 4 to offset the shifting of economic interests or tax benefits 5 between income beneficiaries and remainder beneficiaries which 6 arise from any of the following: 7 (1) An election or decision which the trustee makes 8 regarding tax matters. 9 (2) An income tax or any other tax which is imposed upon 10 the trustee or a beneficiary as a result of a transaction 11 involving the trust or distribution from the trust. 12 (3) The ownership by a trust of an interest in an entity 13 the taxable income of which, whether or not distributed, is 14 includable in the taxable income of the trust or a 15 beneficiary. 16 SUBCHAPTERS F AND G 17 RESERVED 18 SUBCHAPTER H 19 MISCELLANEOUS PROVISIONS 20 Sec. 21 8191. Uniformity of application and construction. 22 § 8191. Uniformity of application and construction. 23 In applying and construing this chapter, consideration shall 24 be given to the need to promote uniformity of the law with 25 respect to its subject matter among states which enact it. 26 Section 14. (a) Except as otherwise expressly provided in 27 the governing instrument, in the addition of 20 Pa.C.S. Ch. 81 28 or in subsection (b), this act shall apply to all of the 29 following: 30 (1) A trust existing on or after the effective date of 20010S1014B1261 - 58 -
1 this act. 2 (2) The estate of a decedent who dies on or after the 3 effective date of this act. 4 (b) This act shall apply as follows: 5 (1) The amendment of 20 Pa.C.S. § 724 shall apply to 6 trusts created before, on or after the effective date of this 7 act. 8 (2) The amendment of 20 Pa.C.S. § 2104 shall apply to 9 intestacies occurring on or after the effective date of this 10 act, even if the trust became irrevocable before the 11 effective date of this act. 12 (3) The amendment of 20 Pa.C.S. § 6205 shall apply to 13 disclaimers made on or after the effective date of this act 14 and shall apply to disclaimers made before the effective date 15 of this act to the extent the distribution thereunder is made 16 after the effective date of this act or, if made prior to the 17 effective date, such distribution was consistent with this 18 act. 19 (4) The addition of 20 Pa.C.S. §§ 7104 and 7105 shall 20 apply to trusts created before, on or after the effective 21 date of this act. 22 Section 15. This act shall take effect in 60 days. F11L20BIL/20010S1014B1261 - 59 -