Article
1. General Provisions and Definitions
16320.
This section shall be known, and may be cited, as the Uniform Fiduciary Income and Principal Act.16321.
The following definitions apply for purposes of this chapter:(a) “Accounting period” means a calendar year, unless a fiduciary selects another period of 12 calendar months or approximately 12 calendar months. The term includes a part of a calendar year or another period of 12 calendar months or approximately 12 calendar months that begins when an income interest begins or ends when an income interest ends.
(b) “Asset-backed security” means a security that is serviced primarily by the money flows of a discrete pool of fixed or revolving receivables or other financial assets that by their terms convert into money within a finite time. The term includes rights or other assets that ensure the servicing
or timely distribution of proceeds to the holder of the asset-backed security. The term does not include an asset to which Section 16340, 16348, or 16353 applies.
(c) “Beneficiary” includes the following:
(1) For a trust:
(A) A current beneficiary, including a current income beneficiary and a beneficiary that may receive only principal.
(B) A remainder beneficiary.
(C) Any other successor beneficiary.
(2) For an estate, an heir, legatee, and devisee.
(3) For a life estate or term interest, a person that holds a life estate, term interest, or remainder or other
interest following a life estate or term interest.
(d) “Court” means the court in this state having jurisdiction relating to a trust, estate, or life estate or other term interest described in subdivision (b) of Section 16322.
(e) “Current income beneficiary” means a beneficiary to which a fiduciary may distribute net income, whether or not the fiduciary also may distribute principal to the beneficiary.
(f) “Distribution” means a payment or transfer by a fiduciary to a beneficiary in the beneficiary’s capacity as a beneficiary, made under the terms of the trust, without consideration other than the beneficiary’s right to receive the payment or transfer under the terms of the trust. “Distribute,” “distributed,” and “distributee” have corresponding meanings.
(g) “Estate” means a decedent’s estate, and includes the property of the decedent as the estate is originally constituted and the property of the estate as it exists at any time during administration.
(h) “Fiduciary” includes a trustee, personal representative, life tenant, holder of a term interest, and person acting under a delegation from a fiduciary. “Fiduciary” includes a person that holds property for a successor beneficiary whose interest may be affected by an allocation of receipts and expenditures between income and principal. If there are two or more cofiduciaries, the term includes all cofiduciaries acting under the terms of the trust and applicable law.
(i) “Income” means money or other property a fiduciary receives as current return from principal. The term includes a part of receipts from a sale, exchange, or liquidation of a principal asset, to the
extent provided in Article 4 (commencing with Section 16340).
(j) “Income interest” means the right of a current income beneficiary to receive all or part of net income, whether the terms of the trust require the net income to be distributed or authorize the net income to be distributed in the fiduciary’s discretion. The term includes the right of a current beneficiary to use property held by a fiduciary.
(k) “Independent person” means a person that is not:
(1) For a trust, any of the following:
(A) A beneficiary that is a distributee or permissible distributee of trust income or principal or would be a distributee or permissible distributee of trust income or principal if either the trust or the interests of the distributees or permissible distributees
of trust income or principal were terminated, assuming no power of appointment is exercised.
(B) A settlor of the trust.
(C) An individual whose legal obligation to support a beneficiary may be satisfied by a distribution from the trust.
(2) For an estate, a beneficiary.
(3) A spouse, parent, brother, sister, or issue of an individual described in paragraph (1) or (2).
(4) A corporation, partnership, limited liability company, or other entity in which persons described in paragraphs (1) to (3), inclusive, in the aggregate, have voting control.
(5) An employee of a person described in paragraphs (1) to (4), inclusive.
(l) “Mandatory income interest” means the right of a current income beneficiary to receive net income that the terms of the trust require the fiduciary to distribute.
(m) “Net income” means the total allocations during an accounting period to income under the terms of a trust and this chapter minus the disbursements during the period, other than distributions, allocated to income under the terms of the trust and this chapter. To the extent the trust is a unitrust under Article 3 (commencing with Section 16330), the term means the unitrust amount determined under that article. The term includes an adjustment from principal to income under Section 16327. The term does not include an adjustment from income to principal under Section 16327.
(n) “Person” means an individual, estate, trust, business or nonprofit
entity, public corporation, government or governmental subdivision, agency, or instrumentality, or other legal entity.
(o) “Personal representative” means an executor, administrator, successor personal representative, special administrator, or person that performs substantially the same function with respect to an estate under the law governing the person’s status.
(p) “Principal” means property held in trust for distribution to, production of income for, or use by a current or successor beneficiary.
(q) “Record” means information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form.
(r) “Settlor” means a person, including a testator, that creates or contributes property to a
trust. If more than one person creates or contributes property to a trust, the term includes each person, to the extent of the trust property attributable to that person’s contribution, except to the extent another person has the power to revoke or withdraw that portion.
(s) “Special tax benefit” means any of the following:
(1) Exclusion of a transfer to a trust from gifts described in Section 2503(b) of the Internal Revenue Code of 1986, as amended (26 U.S.C. Sec. 2503(b), as amended) because of the qualification of an income interest in the trust as a present interest in property.
(2) Status as a qualified subchapter S-trust described in Section 1361(d)(3) of the Internal Revenue Code of 1986, as amended (26 U.S.C. Sec. 1361(d)(3), as amended), at a time the trust holds stock of an S-corporation described in
Section 1361(a)(1) of the Internal Revenue Code of 1986, as amended (26 U.S.C. Sec. 1361(a)(1), as amended).
(3) An estate or gift tax marital deduction for a transfer to a trust under Section 2056 or 2523 of the Internal Revenue Code of 1986, as amended (26 U.S.C. Sec. 2056 or 2523, as amended), which depends or depended, in whole or in part, on the right of the settlor’s spouse to receive the net income of the trust.
(4) Exemption in whole or in part of a trust from the federal generation-skipping transfer tax imposed by Section 2601 of the Internal Revenue Code of 1986, as amended (26 U.S.C. Sec. 2601, as amended) because the trust was irrevocable on September 25, 1985, if there is a possibility of any of the following:
(A) A taxable distribution, as defined in Section 2612(b) of the Internal Revenue Code of 1986,
as amended (26 U.S.C. Sec. 2612(b), as amended), could be made from the trust.
(B) A taxable termination, as defined in Section 2612(a) of the Internal Revenue Code of 1986, as amended, (26 U.S.C. Sec. 2612(a), as amended), could occur with respect to the trust.
(C) An inclusion ratio, as defined in Section 2642(a) of the Internal Revenue Code of 1986, as amended (26 U.S.C. Sec. 2642(a), as amended), of the trust that is less than one, if there is any possibility of any of the following:
(i) A taxable distribution, as defined in Section 2612(b) of the Internal Revenue Code of 1986, as amended (26 U.S.C. Sec. 2612(b), as amended), could be made from the trust.
(ii) A taxable termination, as defined in Section 2612(a) of the Internal Revenue Code of 1986,
as amended (26 U.S.C. Sec. 2612(a), as amended), could occur with respect to the trust.
(t) “Successive interest” means the interest of a successor beneficiary.
(u) “Successor beneficiary” means a person entitled to receive income or principal or to use property when an income interest or other current interest ends.
(v) “Terms of a trust” means any of the following:
(1) (A) For a trust, the written trust instrument of an irrevocable trust or those provisions of a written trust instrument in effect at the settlor’s death that describe or affect that portion of a trust that has become irrevocable at the death of the settlor.
(B) “Terms of a trust” includes, but is not
limited to, signatures, amendments, disclaimers, and any directions or instructions to the trustee that affect the disposition of the trust.
(C) “Terms of a trust” does not include documents that were intended to affect disposition only while the trust was revocable. If a trust has been completely restated, “terms of a trust” does not include trust instruments or amendments that are superseded by the last restatement before the settlor’s death, but it does include amendments executed after the restatement. “Terms of a trust” also includes any document irrevocably exercising a power of appointment over the trust or over any portion of the trust that has become irrevocable.
(2) For an estate, a will.
(3) For a life estate or term interest, the corresponding manifestation of the rights of the beneficiaries.
(w) (1) “Trust” includes both of the following:
(A) An express trust, private or charitable, with additions to the trust, wherever and however created.
(B) A trust created or determined by judgment or decree under which the trust is to be administered in the manner of an express trust.
(2) “Trust” does not include any of the following:
(A) A constructive trust.
(B) A resulting trust, conservatorship, guardianship, multiparty account, custodial arrangement for a minor, business trust, voting trust, security arrangement, liquidation trust, or trust for the primary purpose of paying debts, dividends, interest,
salaries, wages, profits, pensions, retirement benefits, or employee benefits of any kind.
(C) An arrangement under which a person is a nominee, escrowee, or agent for another.
(x) “Trustee” means a person, other than a personal representative, that owns or holds property for the benefit of a beneficiary. The term includes an original, additional, or successor trustee, whether or not appointed or confirmed by a court.
(y) “Will” means a testamentary instrument recognized by applicable law that makes a legally effective disposition of an individual’s property, effective at the individual’s death. “Will” includes a codicil or other amendment to a testamentary instrument.
16322.
Except as otherwise provided in the terms of a trust or this chapter, this chapter applies to the following:(a) A trust or an estate.
(b) A life estate or other term interest in which the interest of one or more persons will be succeeded by the interest of one or more other persons.
16323.
Except as otherwise provided in the terms of a trust or this chapter, this chapter applies when this state is the principal place of administration of a trust or estate or the situs of property that is not held in a trust or estate and is subject to a life estate or other term interest described in subdivision (b) of Section 16322. By accepting the trusteeship of a trust having its principal place of administration in this state or by moving the principal place of administration of a trust to this state, the trustee submits to the application of this chapter to any matter within the scope of this chapter involving the trust.
Article
2. Fiduciary Duties and Judicial Review
16325.
(a) In making an allocation or determination or exercising discretion under this chapter, all of the following apply:(1) A fiduciary shall act in good faith, based on what is fair and reasonable to all beneficiaries.
(2) A fiduciary shall administer a trust or decedent’s estate in accordance with the trust or the will, even if there is a different provision in this chapter.
(3) A fiduciary may administer a trust or decedent’s estate by the exercise of a discretionary power of administration given to the fiduciary by the trust or the will, even if the exercise of the power produces a result different from a result
required or permitted by this chapter, and no inference that the fiduciary has improperly exercised the discretion arises from the fact that the fiduciary has made an allocation contrary to a provision of this chapter.
(4) A fiduciary shall administer a trust or decedent’s estate in accordance with this chapter if the trust or the will does not contain a different provision or does not give the fiduciary a discretionary power of administration.
(b) A fiduciary’s allocation, determination, or exercise of discretion under this chapter is presumed to be fair and reasonable to all beneficiaries. A fiduciary may exercise a discretionary power of administration given to the fiduciary by the terms of the trust, and an exercise of the power that produces a result different from a result required or permitted by this chapter does not create an inference that the fiduciary abused the
fiduciary’s discretion.
(c) A fiduciary shall do both of the following:
(1) Add a receipt to principal, to the extent neither the terms of the trust nor this chapter allocates the receipt between income and principal.
(2) Charge a disbursement to principal, to the extent neither the terms of the trust nor this chapter allocates the disbursement between income and principal.
(d) A fiduciary may exercise the power to adjust under Section 16327, convert an income trust to a unitrust under paragraph (1) of subdivision (a) of Section 16332, change the percentage or method used to calculate a unitrust amount under paragraph (2) of subdivision (a) of Section 16332, or convert a unitrust to an income trust under paragraph (3) of subdivision (a) of Section
16332, if the fiduciary determines the exercise of the power will assist the fiduciary to administer the trust or estate impartially.
(e) Factors the fiduciary shall consider in making the determination under subdivision (d) include all of the following:
(1) The terms of the trust.
(2) The nature, distribution standards, and expected duration of the trust.
(3) The effect of the allocation rules, including specific adjustments between income and principal, under Article 4 (commencing with Section 16340) to Article 7 (commencing with Section 16375), inclusive.
(4) The desirability of liquidity and regularity of income.
(5) The
desirability of the preservation and appreciation of principal.
(6) The extent to which an asset is used or may be used by a beneficiary.
(7) The increase or decrease in the value of principal assets, reasonably determined by the fiduciary.
(8) Whether and to what extent the terms of the trust give the fiduciary power to accumulate income or invade principal or prohibit the fiduciary from accumulating income or invading principal.
(9) The extent to which the fiduciary has accumulated income or invaded principal in preceding accounting periods.
(10) The effect of current and reasonably expected economic conditions.
(11) The
reasonably expected tax consequences of the exercise of the power.
16326.
(a) For purposes of this section, “fiduciary decision” means any of the following:(1) A fiduciary’s allocation between income and principal or another determination regarding income and principal required or authorized by the terms of the trust or this chapter.
(2) The fiduciary’s exercise or nonexercise of a discretionary power regarding income and principal granted by the terms of the trust or this chapter, including the power to adjust under Section 16327, convert an income trust to a unitrust under paragraph (1) of subdivision (a) of Section 16332, change the percentage or method used to calculate a unitrust amount under paragraph (2) of subdivision (a) of Section 16332, or
convert a unitrust to an income trust under paragraph (3) of subdivision (a) of Section 16332.
(3) The fiduciary’s implementation of a decision described in paragraph (1) or (2).
(b) The court may not order a fiduciary to change a fiduciary decision unless the court determines that the fiduciary decision was an abuse of the fiduciary’s discretion.
(c) If the court determines that a fiduciary decision was an abuse of the fiduciary’s discretion, the court may order a remedy authorized by law. To place the beneficiaries in the positions the beneficiaries would have occupied if there had not been an abuse of the fiduciary’s discretion, the court may order any of the following:
(1) The fiduciary to exercise or refrain from exercising the power to adjust
under Section 16327.
(2) The fiduciary to exercise or refrain from exercising the power to convert an income trust to a unitrust under paragraph (1) of subdivision (a) of Section 16332, change the percentage or method used to calculate a unitrust amount under paragraph (2) of subdivision (a) of Section 16332, or convert a unitrust to an income trust under paragraph (3) of subdivision (a) of Section 16332.
(3) The fiduciary to distribute an amount to a beneficiary.
(4) A beneficiary to return some or all of a distribution.
(5) The fiduciary to withhold an amount from one or more future distributions to a beneficiary.
(6) Upon a petition by a fiduciary for instruction, the court may
determine whether a proposed fiduciary decision will result in an abuse of the fiduciary’s discretion. If the petition describes the proposed decision, contains sufficient information to inform the beneficiary of the reasons for making the proposed decision and the facts on which the fiduciary relies, and explains how the beneficiary will be affected by the proposed decision, a beneficiary that opposes the proposed decision has the burden to establish that it will result in an abuse of the fiduciary’s discretion.
16327.
(a) Except as otherwise provided in the terms of a trust or this section, a fiduciary, in a record, without court approval, may adjust between income and principal if the fiduciary determines the exercise of the power to adjust will assist the fiduciary in administering the trust or estate impartially.(b) This section does not create a duty to exercise or consider the power to adjust under subdivision (a) or to inform a beneficiary about the applicability of this section.
(c) A fiduciary that in good faith exercises or fails to exercise the power to adjust under subdivision (a) is not liable to a person affected by the exercise or failure to exercise.
(d) In deciding whether and to what extent to exercise the power to adjust under subdivision (a), a fiduciary shall consider all factors the fiduciary considers relevant, including relevant factors in subdivision (e) of Section 16325 and the application of subdivision (i) of Section 16340 and Sections 16347 and 16352.
(e) A fiduciary may not exercise the power under subdivision (a) to make an adjustment or under Section 16347 to make a determination that an allocation is insubstantial under any of the following circumstances:
(1) The adjustment or determination would reduce the amount payable to a current income beneficiary from a trust that qualifies for a special tax benefit, except to the extent the adjustment is made to provide for a reasonable apportionment of the total return of the trust between the current
income beneficiary and successor beneficiaries.
(2) The adjustment or determination would change the amount payable to a beneficiary, as a fixed annuity or a fixed fraction of the value of the trust assets, under the terms of the trust.
(3) The adjustment or determination would reduce an amount that is permanently set aside for a charitable purpose under the terms of the trust, unless both income and principal are set aside for the charitable purpose.
(4) Possessing or exercising the power would cause a person to be treated as the owner of all or part of the trust for federal income tax purposes.
(5) Possessing or exercising the power would cause all or part of the value of the trust assets to be included in the gross estate of an individual for federal
estate tax purposes.
(6) Possessing or exercising the power would cause an individual to be treated as making a gift for federal gift tax purposes.
(7) The fiduciary is not an independent person.
(8) The trust is irrevocable and provides for income to be paid to the settlor and possessing or exercising the power would cause the adjusted principal or income to be considered an available resource or available income under a public benefit program.
(9) The trust is a unitrust under Article 3.
(f) If paragraph (4), (5), (6), or (7) of subdivision (e) applies to a fiduciary:
(1) A cofiduciary to which paragraph (4), (5), (6), or
(7) of subdivision (e) does not apply may exercise the power to adjust, unless the exercise of the power by the remaining cofiduciary or cofiduciaries is not permitted by the terms of the trust or law other than this chapter.
(2) If there is no cofiduciary to which paragraph (4), (5), (6), or (7) of subdivision (e) does not apply, the fiduciary may appoint a cofiduciary to which paragraph (4), (5), (6), or (7) of subdivision (e) does not apply, which may be a special fiduciary with limited powers, and the appointed cofiduciary may exercise the power to adjust under subdivision (a), unless the appointment of a cofiduciary or the exercise of the power by a cofiduciary is not permitted by the terms of the trust or law other than this chapter.
(g) A fiduciary may release or delegate to a cofiduciary the power to adjust under subdivision (a) if the fiduciary determines that the
fiduciary’s possession or exercise of the power will or may do either of the following:
(1) Cause a result described in paragraphs (1) to (6), inclusive, or (8) of subdivision (e).
(2) Deprive the trust of a tax benefit or impose a tax burden not described in paragraphs (1) to (6), inclusive, of subdivision (e).
(h) A fiduciary’s release or delegation to a cofiduciary under subdivision (g) of the power to adjust pursuant to subdivision (a):
(1) Shall be in a record.
(2) Applies to the entire power, unless the release or delegation provides a limitation, which may be a limitation to the power to make any of the following adjustments:
(A) From income to principal.
(B) From principal to income.
(C) For specified property.
(D) In specified circumstances.
(3) For a delegation, may be modified by a redelegation under this subdivision by the cofiduciary to which the delegation is made.
(4) Subject to paragraph (3), is permanent, unless the release or delegation provides a specified period, including a period measured by the life of an individual or the lives of more than one individual.
(i) Terms of a trust that deny or limit the power to adjust between income and principal do not affect the application
of this section, unless the terms of the trust expressly deny or limit the power to adjust under subdivision (a).
(j) The exercise of the power to adjust under subdivision (a) in any accounting period may apply to the current period, the immediately preceding period, and one or more subsequent periods.
(k) A description of the exercise of the power to adjust under subdivision (a) shall be either of the following:
(1) Included in a report, if any, sent to beneficiaries.
(2) Communicated at least annually to all beneficiaries that receive or are entitled to receive income from the trust or would be entitled to receive a distribution of principal if the trust were terminated at the time the notice is sent, assuming no power of appointment is
exercised.
16330.
The following definitions apply for purposes of this article:(a) “Applicable value” means the amount of the net fair market value of a trust taken into account under Section 16336.
(b) “Express unitrust” means a trust for which, under the terms of the trust without regard to this article, income or net income shall or may be calculated as a unitrust amount.
(c) “Income trust” means a trust that is not a unitrust.
(d) “Net fair market value of a trust” means the fair market value of the assets of the trust, less the noncontingent liabilities of the trust.
(e) “Unitrust” means a trust for which net income is a unitrust amount. The term includes an express unitrust.
(f) “Unitrust amount” means an amount computed by multiplying a determined value of a trust by a determined percentage. For a unitrust administered under a unitrust plan, the term means the applicable value, multiplied by the unitrust rate.
(g) “Unitrust plan” means a plan described in Sections 16334 to 16338, inclusive, and adopted pursuant to Section 16332.
(h) “Unitrust rate” means the rate used to compute the unitrust amount under subdivision (f) for a unitrust administered under a unitrust plan.
16331.
(a) Except as otherwise provided in subdivision (b), this article applies to both of the following:(1) An income trust, unless the terms of the trust expressly prohibit use of this article by a specific reference to this article or an explicit expression of intent that net income not be calculated as a unitrust amount.
(2) An express unitrust, except to the extent the terms of the trust explicitly do any of the following:
(A) Prohibit use of this article by a specific reference to this article.
(B) Prohibit conversion to an income trust.
(C) Limit changes to the method of calculating the unitrust amount.
(b) This article does not apply to a trust described in Section 170(f)(2)(B), 642(c)(5), 664(d), 2702(a)(3)(A)(ii) or (iii), or 2702(b) of the Internal Revenue Code of 1986 (26 U.S.C. Secs. 170(f)(2)(B), 642(c)(5), 664(d), 2702(a)(3)(A)(ii) or (iii), or 2702(b)).
(c) An income trust to which this article applies under paragraph (1) of subdivision (a) may be converted to a unitrust under this article regardless of the terms of the trust concerning distributions. Conversion to a unitrust under this article does not affect other terms of the trust concerning distributions of income or principal.
(d) This article applies to an estate only to the extent a trust is a beneficiary of the estate.
To the extent of the trust’s interest in the estate, the estate may be administered as a unitrust, the administration of the estate as a unitrust may be discontinued, or the percentage or method used to calculate the unitrust amount may be changed, in the same manner as for a trust under this article.
(e) This article does not create a duty to take or consider action under this article or to inform a beneficiary about the applicability of this article.
(f) A fiduciary that in good faith takes or fails to take an action under this article is not liable to a person affected by the action or inaction.
16332.
(a) A fiduciary, without court approval, by complying with subdivisions (b) and (f), may do any of the following:(1) Convert an income trust to a unitrust if the fiduciary creates in a record a unitrust plan for the trust providing for both of the following:
(A) That in administering the trust, the net income of the trust will be a unitrust amount rather than net income determined without regard to this article.
(B) The percentage and method used to calculate the unitrust amount.
(2) Change the percentage or method used to calculate a unitrust amount
for a unitrust if the fiduciary implements in a record a unitrust plan or an amendment or replacement of a unitrust plan providing changes in the percentage or method used to calculate the unitrust amount.
(3) Convert a unitrust to an income trust if the fiduciary implements in a record a determination that, in administering the trust, the net income of the trust will be net income determined without regard to this article rather than a unitrust amount.
(b) A fiduciary may take an action under subdivision (a) if all of the following conditions are met:
(1) The fiduciary determines that the action will assist the fiduciary to administer a trust impartially.
(2) The fiduciary sends a notice in a record, in the manner required by Section 16333, describing
and proposing to take the action.
(3) No beneficiary objects to the proposed action in a writing delivered to the trustee within the period prescribed by subdivision (d) of Section 16502.
(c) If a fiduciary receives, on or before the date stated in the notice under Section 16333, an objection in a record to a proposed action, the fiduciary or a beneficiary may request the court to have the proposed action taken as proposed, taken with modifications, or prevented. A person described in subdivision (a) of Section 16333 may oppose the proposed action in the proceeding under this subdivision, whether or not the person previously consented or objected.
(d) If, after sending a notice under paragraph (2) of subdivision (b), a fiduciary decides not to take the action proposed in the notice, the fiduciary shall notify in a
record each person described in subdivision (a) of Section 16333 of the decision not to take the action and the reasons for the decision.
(e) If a beneficiary requests in a record that a fiduciary take an action described in subdivision (a) and the fiduciary declines to act or does not act within 90 days after receiving the request, the beneficiary may request the court to direct the fiduciary to take the action requested.
(f) In deciding whether and how to take an action authorized by subdivision (a), or whether and how to respond to a request by a beneficiary under subdivision (e), a fiduciary shall consider all factors relevant to the trust and the beneficiaries, including relevant factors in subdivision (e) of Section 16325.
(g) A fiduciary may release or delegate the power to convert an income trust to a
unitrust under paragraph (1) of subdivision (a), change the percentage or method used to calculate a unitrust amount under paragraph (2) of subdivision (a), or convert a unitrust to an income trust under paragraph (3) of subdivision (a), for a reason described in subdivision (g) of Section 16327 and in the manner described in subdivision (h) of Section 16327.
16333.
A notice required by paragraph (2) of subdivision (b) of Section 16332 shall be sent as required by Chapter 5 (commencing with Section 16500), including notice to a beneficiary who is a minor and to the minor’s guardian, if any, and shall include all of the following:(a) The action proposed under paragraph (2) of subdivision (b) of Section 16332.
(b) For a conversion of an income trust to a unitrust, a copy of the unitrust plan adopted under paragraph (1) of subdivision (a) of Section 16332.
(c) For a change in the percentage or method used to calculate the unitrust amount, a copy of the unitrust plan or amendment or replacement of the
unitrust plan adopted under paragraph (2) of subdivision (a) of Section 16332.
(d) A statement that the person to which the notice is sent may object to the proposed action by stating in a record the basis for the objection and sending or delivering the record to the fiduciary.
(e) The date by which an objection under subdivision (d) shall be received by the fiduciary, which shall be at least 30 days after the date the notice is sent.
(f) The date on which the action is proposed to be taken and the date on which the action is proposed to take effect.
(g) The name and contact information of the fiduciary.
(h) The name and contact information of a person who may be contacted for additional
information.
16334.
(a) In administering a unitrust under this article, a fiduciary shall follow a unitrust plan adopted under paragraph (1) or (2) of subdivision (a) of Section 16332, or amended or replaced under paragraph (2) of subdivision (a) of Section 16332.(b) A unitrust plan shall provide all of the following:
(1) The unitrust rate or the method for determining the unitrust rate under Section 16335.
(2) The method for determining the applicable value under Section 16336.
(3) The rules described in Sections 16335 to 16338, inclusive, that apply in the
administration of the unitrust, whether the rules are either of the following:
(A) Mandatory, as provided in subdivision (a) of Section 16336 or subdivision (a) of Section 16337.
(B) Optional, as provided in Section 16335, subdivision (b) of Section 16336, subdivision (b) of Section 16337, and subdivision (a) of Section 16338, to the extent the fiduciary elects to adopt those rules.
16335.
(a) A unitrust rate may not be less than 3 percent, or greater than 5 percent, unless the unitrust plan has been approved by court order. If the unitrust plan has been approved by court order, any unitrust rate may be used. Except as otherwise provided in this subdivision and in paragraph (1) of subdivision (b) of Section 16338, a unitrust rate may be either of the following:(1) A fixed unitrust interest rate.
(2) A unitrust rate that is determined for each period, using either of the following:
(A) A market index or other published data.
(B) A
mathematical blend of market indices or other published data over a stated number of preceding periods.
(b) Except as otherwise provided in subdivision (a) of Section 16335 and paragraph (1) of subdivision (b) of Section 16338, a unitrust plan may provide any of the following:
(1) A limit on how high the unitrust rate determined under paragraph (2) of subdivision (a) may rise.
(2) A limit on how low the unitrust rate determined under paragraph (2) of subdivision (a) may fall.
(3) A limit on how much the unitrust rate determined under paragraph (2) of subdivision (a) may increase over the unitrust rate for the preceding period or a mathematical blend of unitrust rates over a stated number of preceding periods.
(4) A limit on how much the unitrust rate determined under paragraph (2) of subdivision (a) may decrease below the unitrust rate for the preceding period or a mathematical blend of unitrust rates over a stated number of preceding periods.
(5) A mathematical blend of any of the unitrust rates determined under paragraph (2) of subdivision (a) and paragraphs (1) to (4), inclusive, of this subdivision.
16336.
(a) A unitrust plan shall provide the method for determining the fair market value of an asset for the purpose of determining the unitrust amount, including both of the following:(1) The frequency of valuing the asset, which need not require a valuation in every period.
(2) The date for valuing the asset in each period in which the asset is valued.
(b) Except as otherwise provided in paragraph (2) of subdivision (b) of Section 16338, a unitrust plan may provide methods for determining the amount of the net fair market value of the trust to take into account in determining the applicable value, including all of the
following:
(1) Obtaining an appraisal of an asset for which fair market value is not readily ascertainable.
(2) Exclusion of specific assets or groups or types of assets.
(3) Exceptions or modifications of the treatment of specific assets or groups or types of assets.
(4) Identification and treatment of money or property held for distribution.
(5) Use of either of the following:
(A) An average of fair market values over a stated number of preceding periods.
(B) Another mathematical blend of fair market values over a stated number of preceding periods.
(6) A limit on how much the applicable value of all assets, groups of assets, or individual assets may increase over either of the following:
(A) The corresponding applicable value for the preceding period.
(B) A mathematical blend of applicable values over a stated number of preceding periods.
(7) A limit on how much the applicable value of all assets, groups of assets, or individual assets may decrease below:
(A) The corresponding applicable value for the preceding period.
(B) A mathematical blend of applicable values over a stated number of preceding periods.
(8) The treatment of accrued income and other features of an asset that affect value.
(9) Determining the liabilities of the trust, including treatment of liabilities to conform to the treatment of assets under paragraphs (1) to (8), inclusive.
16337.
(a) A unitrust plan shall provide the period used under Sections 16335 and 16336. Except as otherwise provided in paragraph (3) of subdivision (b) of Section 16338, the period may be any of the following:(1) A calendar year.
(2) A 12-month period other than a calendar year.
(3) A calendar quarter.
(4) A three-month period other than a calendar quarter.
(5) Another period.
(b) Except as otherwise provided in Section 16338,
a unitrust plan may provide standards for any of the following:
(1) Using fewer preceding periods under subparagraph (B) of paragraph (2) of subdivision (a) of, or paragraph (3) or (4) of subdivision (b) of, Section 16335 if any of the following circumstances exists:
(A) The trust was not in existence in a preceding period.
(B) Market indices or other published data are not available for a preceding period.
(2) Using fewer preceding periods under subparagraph (A) or (B) of paragraph (5) of, subparagraph (B) of paragraph (6) of, or subparagraph (B) of paragraph (7) of subdivision (b) of, Section 16366, under either of the following circumstances:
(A) The trust was not in existence in a
preceding period.
(B) Fair market values are not available for a preceding period.
(3) Prorating the unitrust amount on a daily basis for a part of a period in which the trust or the administration of the trust as a unitrust or the interest of any beneficiary commences or terminates.
16338.
(a) A unitrust plan may include any of the following:(1) Provide methods and standards for all of the following:
(A) Determining the timing of distributions.
(B) Making distributions in money or in kind or partly in money and partly in kind.
(C) Correcting an underpayment or overpayment to a beneficiary based on the unitrust amount if there is an error in calculating the unitrust amount.
(2) Specify sources and the order of sources, including categories of income for federal income tax
purposes, from which distributions of a unitrust amount are paid.
(3) Provide other standards and rules the fiduciary determines serve the interests of the beneficiaries.
(b) If a trust qualifies for a special tax benefit or a fiduciary is not an independent person:
(1) The unitrust rate established under Section 16335 may not be less than 3 percent or more than 5 percent.
(2) The only provisions of Section 16336 that apply are subdivision (a) and paragraphs (1), (4), and (9) of, and subparagraph (A) of paragraph (5) of, subdivision (b) of that section.
(3) The only period that may be used under Section 16337 is a calendar year under paragraph (1) of subdivision (a) of Section 16337.
(4) The only other provisions of Section 16337 that apply are subparagraph (A) of paragraph (2) of, and paragraph (3) of, subdivision (b) of that section.
Article
4. Allocation of Receipts
16340.
(a) The following definitions apply for purposes of this section:(1) “Capital distribution” means an entity distribution of money that is either of the following:
(A) A return of capital.
(B) A distribution in total or partial liquidation of the entity.
(2) “Entity” means a corporation, partnership, limited liability company, regulated investment company, real estate investment trust, common trust fund, or any other organization or arrangement in which a person owns or holds an interest, whether or not the entity is a taxpayer for federal income tax
purposes. “Entity” does not include any of the following:
(A) A trust or estate to which Section 16341 applies.
(B) A business or other activity to which Section 16342 applies that is not conducted by an entity described in subparagraph (A).
(C) An asset-backed security.
(D) An instrument or arrangement to which Section 16355 applies.
(3) “Entity distribution” means a payment or transfer by an entity made to a person in the person’s capacity as an owner or holder of an interest in the entity.
(b) For purposes of this section, an attribute or action of an entity includes an attribute or action of any other entity in which the
entity owns or holds an interest, including an interest owned or held indirectly through another entity.
(c) Except as otherwise provided in paragraphs (2) to (4), inclusive, of subdivision (d), a fiduciary shall allocate money received in an entity distribution to income.
(d) A fiduciary shall allocate to principal all of the following:
(1) Property received in an entity distribution that is not money.
(2) Money received in an entity distribution in an exchange for part or all of the fiduciary’s interest in the entity, to the extent the entity distribution reduces the fiduciary’s interest in the entity relative to the interests of other persons that own or hold interests in the entity.
(3) Money received in an entity distribution that the fiduciary determines or estimates is a capital distribution.
(4) Money received in an entity distribution from an entity that is a regulated investment company or real estate investment trust if the money received is a capital gain dividend for federal income tax purposes.
(5) Money received in an entity distribution that is treated, for federal income purposes, comparably to the treatment described in paragraph (4).
(e) A fiduciary may determine or estimate that money received in an entity distribution is a capital distribution in any of the following ways:
(1) By relying without inquiry or investigation on a characterization of the entity distribution provided by or on behalf of the
entity, except under either of the following circumstances:
(A) The fiduciary determines, on the basis of information known to the fiduciary, that the characterization is or may be incorrect.
(B) The fiduciary owns or holds more than 50 percent of the voting interest in the entity.
(2) By determining or estimating, on the basis of information known to the fiduciary or provided to the fiduciary by or on behalf of the entity, that the total amount of money and property received by the fiduciary in the entity distribution or a series of related entity distributions is, or will be, greater than 20 percent of the fair market value of the fiduciary’s interest in the entity.
(3) If neither paragraph (1) nor (2) applies, by considering the factors in
subdivision (f) and the information known to the fiduciary or provided to the fiduciary by, or on behalf of, the entity.
(f) In making a determination or estimate under paragraph (3) of subdivision (e), a fiduciary may consider the following:
(1) A characterization of an entity distribution provided by or on behalf of the entity.
(2) The amount of money or property received in either of the following:
(A) The entity distribution.
(B) What the fiduciary determines is, or will be, a series of related entity distributions.
(3) The amount described in paragraph (2) compared to the amount the fiduciary determines or estimates is,
during the current or preceding accounting periods, either of the following:
(A) The entity’s operating income.
(B) The proceeds of the entity’s sale or other disposition of any of the following:
(i) All or part of the business or other activity conducted by the entity.
(ii) One or more business assets that are not sold to customers in the ordinary course of the business or other activity conducted by the entity.
(iii) One or more assets other than business assets, unless the entity’s primary activity is to invest in assets to realize gain on the disposition of all or some of the assets.
(C) If the entity’s primary activity
is to invest in assets to realize gain on the disposition of all or some of the assets, the gain realized on the disposition.
(D) The entity’s regular, periodic entity distributions.
(E) The amount of money the entity has accumulated.
(F) The amount of money the entity has borrowed.
(G) The amount of money the entity has received from the sources described in Sections 16346, 16349, 16350, and 16351.
(H) The amount of money the entity has received from a source not otherwise described in this paragraph.
(4) Any other factor the fiduciary determines is relevant.
(g) If, after applying subdivisions (c) to (f), inclusive, a fiduciary determines that a part of an entity distribution is a capital distribution but is in doubt about the amount of the entity distribution that is a capital distribution, the fiduciary shall allocate to principal the amount of the entity distribution that is in doubt.
(h) If a fiduciary receives additional information about the application of this section to an entity distribution before the fiduciary has paid part or all of the entity distribution to a beneficiary, the fiduciary may consider the additional information before making the payment to the beneficiary and may change a decision to make the payment to the beneficiary.
(i) If a fiduciary receives additional information about the application of this section to an entity distribution after the fiduciary has paid part or all of the entity
distribution to a beneficiary, the fiduciary has no duty to change or recover the payment to the beneficiary but may consider that information in determining whether to exercise the power to adjust under Section 16327.
16341.
A fiduciary shall allocate to income an amount received as a distribution of income, including a unitrust distribution under Article 3 (commencing with Section 16330), from a trust or estate in which the fiduciary has an interest, other than an interest the fiduciary purchased in a trust that is an investment entity, and shall allocate to principal an amount received as a distribution of principal from the trust or estate. If a fiduciary purchases, or receives from a settlor, an interest in a trust that is an investment entity, Section 16340, 16354, or 16355 applies to a receipt from the trust.16342.
(a) This section applies to a business or other activity conducted by a fiduciary if the fiduciary determines that it is in the interests of the beneficiaries to account separately for the business or other activity instead of doing either of the following:(1) Accounting for the business or other activity as part of the fiduciary’s general accounting records.
(2) Conducting the business or other activity through an entity described in subparagraph (A) of paragraph (2) of subdivision (a) of Section 16340.
(b) A fiduciary may account separately under this section for the transactions of a business or other activity,
whether or not assets of the business or other activity are segregated from other assets held by the fiduciary.
(c) A fiduciary that accounts separately under this section for a business or other activity:
(1) May determine the extent to which the net money receipts of the business or other activity shall be retained for any of the following purposes:
(A) Working capital.
(B) The acquisition or replacement of fixed assets.
(C) Other reasonably foreseeable needs of the business or other activity.
(2) May determine the extent to which the remaining net money receipts are accounted for as principal or income in the fiduciary’s
general accounting records for the trust.
(3) May make a determination under paragraph (1) separately and differently from the fiduciary’s decisions concerning distributions of income or principal.
(4) Shall account for the net amount received from the sale of an asset of the business or other activity, other than a sale in the ordinary course of the business or other activity, as principal in the fiduciary’s general accounting records for the trust, to the extent the fiduciary determines that the net amount received is no longer required in the conduct of the business or other activity.
(d) Activities for which a fiduciary may account separately under this section include all of the following:
(1) Retail, manufacturing, service, and other traditional
business activities.
(2) Farming.
(3) Raising and selling livestock and other animals.
(4) Managing rental properties.
(5) Extracting minerals, water, and other natural resources.
(6) Growing and cutting timber.
(7) An activity to which Section 16353, 16354, or 16355 applies.
(8) Any other business conducted by the fiduciary.
16343.
A fiduciary shall allocate to principal any of the following:(a) To the extent not allocated to income under this chapter, an asset received from any of the following:
(1) An individual, during the individual’s lifetime.
(2) An estate.
(3) A trust, on termination of an income interest.
(4) A payor under a contract naming the fiduciary as beneficiary.
(b) Except as otherwise provided in this article, money or other property received from the
sale, exchange, liquidation, or change in form of a principal asset.
(c) An amount recovered from a third party to reimburse the fiduciary because of a disbursement described in subdivision (a) of Section 16361, or for another reason to the extent not based on loss of income.
(d) Proceeds of property taken by eminent domain, except that proceeds awarded for loss of income in an accounting period are income if a current income beneficiary had a mandatory income interest during the period.
(e) Net income received in an accounting period during which there is no beneficiary to which a fiduciary may or shall distribute income.
(f) Other receipts as provided in Article 3 (commencing with Section 16330).
16344.
To the extent a fiduciary does not account for the management of rental property as a business under Section 16342, the fiduciary shall allocate to income an amount received as rent of real or personal property, including an amount received for cancellation or renewal of a lease. Both of the following apply to an amount received as a refundable deposit, including a security deposit or a deposit that is to be applied as rent for future periods:(1) The amount shall be added to principal and held subject to the terms of the lease, except as otherwise provided by law other than this chapter.
(2) The amount is not allocated to income or available for distribution to a beneficiary until the fiduciary’s
contractual obligations have been satisfied with respect to that amount.
16345.
(a) This section does not apply to an obligation to which Section 16348, 16349, 16350, 16351, 16353, 16354, or 16355 applies.(b) A fiduciary shall allocate to income, without provision for amortization of premium, an amount received as interest on an obligation to pay money to the fiduciary, including an amount received as consideration for prepaying principal.
(c) A fiduciary shall allocate to principal an amount received from the sale, redemption, or other disposition of an obligation to pay money to the fiduciary. A fiduciary shall allocate to income the increment in value of a bond or other obligation for the payment of money bearing no stated interest but payable or
redeemable, at maturity or another future time, in an amount that exceeds the amount in consideration of which it was issued.
16346.
(a) This section does not apply to a contract to which Section 16348 applies.(b) Except as otherwise provided in subdivision (c), a fiduciary shall allocate to principal the proceeds of a life insurance policy or other contract received by the fiduciary as beneficiary, including a contract that insures against damage to, destruction of, or loss of title to an asset. The fiduciary shall allocate dividends on an insurance policy to income to the extent premiums on the policy are paid from income and to principal to the extent premiums on the policy are paid from principal.
(c) A fiduciary shall allocate to income proceeds of a contract that insures the fiduciary against loss of
any of the following:
(1) Occupancy or other use by a current income beneficiary.
(2) Income.
(3) Subject to Section 16342, profits from a business.
16347.
(a) If a fiduciary determines that an allocation between income and principal required by Section 16348, 16349, 16350, 16351, or 16354 is insubstantial, the fiduciary may allocate the entire amount to principal, unless subdivision (e) of Section 16327 applies to the allocation.(b) A fiduciary may presume an allocation is insubstantial under subdivision (a) if both of the following conditions are met:
(1) The amount of the allocation would increase or decrease net income in an accounting period, as determined before the allocation, by less than 10 percent.
(2) The asset producing the receipt to be allocated has a
fair market value of less than 10 percent of the total fair market value of the assets owned or held by the fiduciary at the beginning of the accounting period.
(c) The power to make a determination under subdivision (a) may be either of the following:
(1) Exercised by a cofiduciary in the manner described in subdivision (f) of Section 16327.
(2) Released or delegated for a reason described in subdivision (g) of Section 16327, and in the manner described in subdivision (h) of Section 16327.
(d) This section does not impose a duty on the trustee to make an allocation under this section, and the trustee is not liable for failure to make an allocation under this section.
16348.
(a) The following definitions apply for purposes of this section:(1) “Internal income of a separate fund” means the amount determined under subdivision (b).
(2) “Marital trust” means a trust that meets all the following criteria:
(A) The settlor’s surviving spouse is the only current income beneficiary and is entitled to a distribution of all the current net income of the trust.
(B) The trust qualifies for a marital deduction with respect to the settlor’s estate under Section 2056 of the Internal Revenue Code of 1986 (26 U.S.C. Sec. 2056) because of
either of the following:
(i) An election to qualify for a marital deduction under Section 2056(b)(7) of the Internal Revenue Code of 1986 (26 U.S.C. Sec. 2056(b)(7)) has been made.
(ii) The trust qualifies for a marital deduction under Section 2056(b)(5) of the Internal Revenue Code of 1986 (26 U.S.C. Sec. 2056(b)(5)).
(3) “Payment” means an amount a fiduciary may receive over a fixed number of years or during the life of one or more individuals because of services rendered or property transferred to the payor in exchange for future amounts the fiduciary may receive. The term includes an amount received in money or property from the payor’s general assets or from a separate fund created by the payor.
(4) “Separate fund” includes a private or commercial
annuity, an individual retirement account, and a pension, profit-sharing, stock bonus, or stock ownership plan.
(b) For each accounting period, the following rules apply to a separate fund:
(1) The fiduciary shall determine the internal income of the separate fund as if the separate fund were a trust subject to this chapter.
(2) If the fiduciary cannot determine the internal income of the separate fund under paragraph (1), the internal income of the separate fund is deemed to equal 4 percent of the value of the separate fund, according to the most recent statement of value preceding the beginning of the accounting period.
(3) If the fiduciary cannot determine the value of the separate fund under paragraph (2), the value of the separate fund is deemed to
equal the present value of the expected future payments, as determined under Section 7520 of the Internal Revenue Code of 1986 (26 U.S.C. Sec. 7520) for the month preceding the beginning of the accounting period for which the computation is made.
(c) A fiduciary shall allocate a payment received from a separate fund during an accounting period to income, to the extent of the internal income of the separate fund during the period, and the balance to principal.
(d) The fiduciary of a marital trust shall do all of the following:
(1) Withdraw from a separate fund the amount the current income beneficiary of the trust requests the fiduciary to withdraw, not greater than the amount by which the internal income of the separate fund during the accounting period exceeds the amount the fiduciary otherwise receives from the
separate fund during the period.
(2) Transfer from principal to income the amount the current income beneficiary requests the fiduciary to transfer, not greater than the amount by which the internal income of the separate fund during the period exceeds the amount the fiduciary receives from the separate fund during the period after the application of paragraph (1).
(3) Distribute all of the following to the current income beneficiary as income:
(A) The amount of the internal income of the separate fund received or withdrawn during the period.
(B) The amount transferred from principal to income under paragraph (2).
(e) For a trust, other than a marital trust, of which one or more current
income beneficiaries are entitled to a distribution of all the current net income, the fiduciary shall transfer from principal to income the amount by which the internal income of a separate fund during the accounting period exceeds the amount the fiduciary receives from the separate fund during the period.
16349.
(a) For purposes of this section, “liquidating asset” means an asset whose value will diminish or terminate because the asset is expected to produce receipts for a limited time. The term includes a leasehold, patent, copyright, royalty right, and right to receive payments during a period of more than one year under an arrangement that does not provide for the payment of interest on the unpaid balance.(b) This section does not apply to a receipt subject to Section 16340, 16348, 16350, 16351, 16353, 16354, 16355, or 16362.
(c) A fiduciary shall make allocations in the following manner:
(1) To income:
(A) A receipt produced by a liquidating asset, to the extent the receipt does not exceed 4 percent of the value of the asset.
(B) If the fiduciary cannot determine the value of the asset, 10 percent of the receipt.
(2) To principal, the balance of the receipt.
16350.
(a) To the extent a fiduciary does not account for a receipt from an interest in minerals, water, or other natural resources as a business under Section 16432, the fiduciary shall allocate the receipt in the following manner:(1) To income, to the extent received:
(A) As delay rental or annual rent on a lease.
(B) As a factor for interest or the equivalent of interest under an agreement creating a production payment.
(C) On account of an interest in renewable water.
(2) To principal, if
received from a production payment, to the extent subparagraph (B) of paragraph (1) does not apply.
(3) Between income and principal in a reasonable manner, to the extent received:
(A) On account of an interest in nonrenewable water.
(B) As a royalty, shut-in-well payment, take-or-pay payment, or bonus.
(C) From a working interest or any other interest not provided for in subparagraph (A) or (B), or paragraph (1) or (2).
(b) This section applies to an interest owned or held by a fiduciary whether or not a settlor was extracting minerals, water, or other natural resources before the fiduciary owned or held the interest.
(c) An
allocation of a receipt under paragraph (3) of subdivision (a) is presumed to be reasonable if the amount allocated to principal is equal to the amount allowed by the Internal Revenue Code of 1986, as amended (Title 26 of the United States Code, as amended), as a deduction for depletion of the interest.
(d) If a fiduciary owns or holds an interest in minerals, water, or other natural resources before the effective date of this chapter, the fiduciary may allocate receipts from the interest as provided in this section or in the manner used by the fiduciary before the effective date of this chapter. If the fiduciary acquires an interest in minerals, water, or other natural resources on or after the effective date of this chapter, the fiduciary shall allocate receipts from the interest as provided in this section.
16351.
(a) To the extent a fiduciary does not account for receipts from the sale of timber and related products as a business under Section 16342, the fiduciary shall allocate the net receipts:(1) To income, to the extent the amount of timber cut from the land does not exceed the rate of growth of the timber.
(2) To principal, to the extent the amount of timber cut from the land exceeds the rate of growth of the timber or the net receipts are from the sale of standing timber.
(3) Between income and principal, if the net receipts are from the lease of land used for growing and cutting timber or from a contract to cut
timber from land, by determining the amount of timber cut from the land under the lease or contract and applying the rules in paragraphs (1) and (2).
(4) To principal, to the extent advance payments, bonuses, and other payments are not allocated under paragraph (1), (2), or (3).
(b) In determining net receipts to be allocated under subdivision (a), a fiduciary shall deduct and transfer to principal a reasonable amount for depletion.
(c) This section applies to land owned or held by a fiduciary whether or not a settlor was cutting timber from the land before the fiduciary owned or held the property.
(d) If a fiduciary owns or holds an interest in land used for growing and cutting timber before the effective date of this chapter, the fiduciary may
allocate net receipts from the sale of timber and related products as provided in this section or in the manner used by the fiduciary before the effective date of this chapter. If the fiduciary acquires an interest in land used for growing and cutting timber on or after the effective date of this chapter, the fiduciary shall allocate net receipts from the sale of timber and related products as provided in this section.
16352.
(a) If a trust received property for which a gift or estate tax marital deduction was allowed and the settlor’s spouse holds a mandatory income interest in the trust, the spouse may require the trustee, to the extent the trust assets otherwise do not provide the spouse with sufficient income from or use of the trust assets to qualify for the deduction, to do any of the following:(1) Make property productive of income.
(2) Convert property to property productive of income within a reasonable time.
(3) Exercise the power to adjust under Section 16327.
(b) The trustee may decide which action or combination of actions in subdivision (a) to take.
16353.
(a) For purposes of this section, “derivative” means a contract, instrument, other arrangement, or combination of contracts, instruments, or other arrangements, the value, rights, and obligations of which are, in whole or in part, dependent on or derived from an underlying tangible or intangible asset, group of tangible or intangible assets, index, or occurrence of an event. The term includes stocks, fixed-income securities, and financial instruments and arrangements based on indices, commodities, interest rates, weather-related events, and credit default events.(b) To the extent a fiduciary does not account for a transaction in derivatives as a business under Section 16342, the fiduciary shall allocate 10 percent of receipts from the
transaction and 10 percent of disbursements made in connection with the transaction to income and the balance to principal.
(c) Subdivision (d) applies under the following circumstances:
(1) If a fiduciary does any of the following:
(A) Grants an option to buy property from a trust, whether or not the trust owns the property when the option is granted.
(B) Grants an option that permits another person to sell property to the trust.
(C) Acquires an option to buy property for the trust or an option to sell an asset owned by the trust.
(2) The fiduciary or other owner of the asset is required to deliver the asset if the option is
exercised.
(d) If this subdivision applies, the fiduciary shall allocate 10 percent to income and the balance to principal of the following amounts:
(1) An amount received for granting the option.
(2) An amount paid to acquire the option.
(3) Gain or loss realized on the exercise, exchange, settlement, offset, closing, or expiration of the option.
16354.
(a) Except as otherwise provided in subdivision (b), a fiduciary shall allocate to income a receipt from or related to an asset-backed security, to the extent the payor identifies the payment as being from interest or other current return, and to principal the balance of the receipt.(b) If a fiduciary receives one or more payments in exchange for part or all of the fiduciary’s interest in an asset-backed security, including a liquidation or redemption of the fiduciary’s interest in the security, the fiduciary shall allocate to income 10 percent of receipts from the transaction and 10 percent of disbursements made in connection with the transaction, and to principal the balance of the receipts and disbursements.
16355.
A fiduciary shall allocate receipts from, or related to, a financial instrument or arrangement not otherwise addressed by this chapter. The allocation shall be consistent with the principles of Sections 16353 and 16354.
Article
5. Allocation of Disbursements
16360.
Subject to Section 16363, and except as otherwise provided in paragraph (2) or (3) of subdivision (c) of Section 16370, a fiduciary shall disburse from income all of the following:(a) One-half of both of the following:
(1) The regular compensation of the fiduciary and any person providing investment advisory, custodial, or other services to the fiduciary, to the extent income is sufficient.
(2) An expense for an accounting, judicial, or nonjudicial proceeding, or other matter that involves both income and successive interests, to the extent income is sufficient.
(b) The
balance of the disbursements described in paragraph (1) of subdivision (a), to the extent a fiduciary that is an independent person determines that making those disbursements from income would be in the interests of the beneficiaries.
(c) Another ordinary expense incurred in connection with administration, management, or preservation of property and distribution of income, including interest, an ordinary repair, regularly recurring tax assessed against principal, and an expense of an accounting, judicial or nonjudicial proceeding, or other matter that involves primarily an income interest, to the extent income is sufficient.
(d) A premium on insurance covering loss of a principal asset or income from or use of the asset.
16361.
(a) Subject to Section 16364, and except as otherwise provided in paragraph (2) of subdivision (c) of Section 16370, a fiduciary shall disburse from principal all of the following:(1) The balance of the disbursements described in paragraph (1) of subdivision (a) of, and subdivision (c) of, Section 16360, after application of subdivision (b) of Section 16360.
(2) The fiduciary’s compensation calculated on principal as a fee for acceptance, distribution, or termination.
(3) A payment of an expense to prepare for or execute a sale or other disposition of property.
(4) A payment on the principal of a trust debt.
(5) A payment of an expense of an accounting, judicial or nonjudicial proceeding, or other matter that involves primarily principal, including a proceeding to construe the terms of the trust or protect property.
(6) A payment of a premium for insurance, including title insurance, not described in subdivision (d) of Section 16360, of which the fiduciary is the owner and beneficiary.
(7) A payment of an estate or inheritance tax or other tax imposed because of the death of a decedent, including penalties, apportioned to the trust.
(8) The following payments:
(A) A payment related to environmental matters, including:
(i) Reclamation.
(ii) Assessment of environmental conditions.
(iii) Remedying and removing environmental contamination.
(iv) Monitoring remedial activities and the release of substances.
(v) Preventing future releases of substances.
(vi) Collecting amounts from persons liable or potentially liable for the costs of activities described in clauses (i) to (v), inclusive.
(vii) Penalties imposed under environmental laws or regulations.
(viii) Other actions to comply with environmental laws or
regulations.
(ix) Statutory or common law claims by third parties.
(x) Defending claims based on environmental matters.
(B) A payment for a premium for insurance for matters described in subparagraph (A).
(9) Payments representing extraordinary repairs or expenses incurred in making a capital improvement to trust property, including special assessments.
(b) If a principal asset is encumbered with an obligation that requires income from the asset to be paid directly to a creditor, the fiduciary shall transfer from principal to income an amount equal to the income paid to the creditor in reduction of the principal balance of the obligation.
16362.
(a) For purposes of this section, “depreciation” means a reduction in value due to wear, tear, decay, corrosion, or gradual obsolescence of a tangible asset having a useful life of more than one year.(b) A fiduciary may transfer to principal a reasonable amount of the net money receipts from a principal asset that is subject to depreciation, but may not transfer any amount for depreciation:
(1) Of the part of real property used or available for use by a beneficiary as a residence.
(2) Of tangible personal property held or made available for the personal use or enjoyment of a beneficiary.
(3) Under this section, to the extent the fiduciary accounts under either of the following:
(A) Section 16349, for the asset.
(B) Section 16342, for the business or other activity in which the asset is used.
(c) An amount transferred to principal under this section need not be separately held.
16363.
(a) If a fiduciary makes or expects to make an income disbursement described in subdivision (b), the fiduciary may transfer an appropriate amount from principal to income in one or more accounting periods to reimburse income.(b) To the extent the fiduciary has not been, and does not expect to be, reimbursed by a third party, income disbursements to which subdivision (a) applies include all of the following:
(1) An amount chargeable to principal, but paid from income because principal is illiquid.
(2) A disbursement made to prepare property for sale, including improvements and commissions.
(3) A disbursement described in Section 16360.
(c) If an asset whose ownership gives rise to an income disbursement becomes subject to a successive interest after an income interest ends, the fiduciary may continue to make transfers under subdivision (a).
16364.
(a) If a fiduciary makes or expects to make a principal disbursement described in subdivision (b), the fiduciary may transfer an appropriate amount from income to principal in one or more accounting periods to reimburse principal or provide a reserve for future principal disbursements.(b) To the extent a fiduciary has not been, and does not expect to be, reimbursed by a third party, principal disbursements to which subdivision (a) applies include all of the following:
(1) An amount chargeable to income but paid from principal because income is not sufficient.
(2) The cost of an improvement to principal, whether a
change to an existing asset or the construction of a new asset, including a special assessment.
(3) A disbursement made to prepare property for rental, including tenant allowances, leasehold improvements, and commissions.
(4) A periodic payment on an obligation secured by a principal asset, to the extent the amount transferred from income to principal for depreciation is less than the periodic payment.
(5) A disbursement described in subdivision (a) of Section 16361.
(c) If an asset whose ownership gives rise to a principal disbursement becomes subject to a successive interest after an income interest ends, the fiduciary may continue to make transfers under subdivision (a).
16365.
(a) A tax required to be paid by a fiduciary that is based on receipts allocated to income shall be paid from income.(b) A tax required to be paid by a fiduciary that is based on receipts allocated to principal shall be paid from principal, even if the tax is called an income tax by the taxing authority.
(c) Subject to subdivision (d) and Sections 16363, 16364, and 16366, a tax required to be paid by a fiduciary on a share of an entity’s taxable income in an accounting period shall be paid from the following:
(1) Income and principal, proportionately to the allocation between income and principal of receipts from
the entity in the period.
(2) Principal, to the extent the tax exceeds the receipts from the entity in the period.
(d) After applying subdivisions (a) to (c), inclusive, a fiduciary shall adjust income or principal receipts, to the extent the taxes the fiduciary pays are reduced because of a deduction for a payment made to a beneficiary.
16366.
(a) A fiduciary may make an adjustment between income and principal to offset the shifting of economic interests or tax benefits between current income beneficiaries and successor beneficiaries that arises from any of the following:(1) An election or decision the fiduciary makes regarding a tax matter, other than a decision to claim an income tax deduction to which subdivision (b) applies.
(2) An income tax or other tax imposed on the fiduciary or a beneficiary as a result of a transaction involving the fiduciary or a distribution by the fiduciary.
(3) Ownership by the fiduciary of an interest in an entity, a part
of whose taxable income, whether or not distributed, is includable in the taxable income of the fiduciary or a beneficiary.
(b) If the amount of an estate tax marital or charitable deduction is reduced because a fiduciary deducts an amount paid from principal for income tax purposes instead of deducting it for estate tax purposes and, as a result, estate taxes paid from principal are increased and income taxes paid by the fiduciary or a beneficiary are decreased, the fiduciary shall charge each beneficiary that benefits from the decrease in income tax to reimburse the principal from which the increase in estate tax is paid. The total reimbursement shall equal the increase in the estate tax, to the extent the principal used to pay the increase would have qualified for a marital or charitable deduction but for the payment. The share of the reimbursement for each fiduciary or beneficiary whose income taxes are reduced shall be the same as its
share of the total decrease in income tax.
(c) A fiduciary that charges a beneficiary under subdivision (b) may offset the charge by obtaining payment from the beneficiary, withholding an amount from future distributions to the beneficiary, or adopting another method or combination of methods.
16367.
Unless otherwise provided by the governing instrument, determined by the trustee, or ordered by the court, distributions to beneficiaries shall be considered paid in the following order from the following sources:(a) From net taxable income other than capital gains.
(b) From net realized short-term capital gains.
(c) From net realized long-term capital gains.
(d) From tax-exempt and other income.
(e) From principal of the trust.
Article
6. Death of Individual or Termination of Income Interest
16370.
(a) This section applies when either of the following occurs:(1) The death of an individual results in the creation of an estate or trust.
(2) An income interest in a trust terminates, whether the trust continues or is distributed.
(b) A fiduciary of an estate or trust with an income interest that terminates shall determine, under subdivision (g) and Article 4 (commencing with Section 16340), Article 5 (commencing with Section 16360), and Article 7 (commencing with Section 16375), the amount of net income and net principal receipts received from property specifically given to a beneficiary. The fiduciary shall
distribute the net income and net principal receipts to the beneficiary that is to receive the specific property.
(c) A fiduciary shall determine the income and net income of an estate or income interest in a trust that terminates, other than the amount of net income determined under subdivision (b), under Article 4 (commencing with Section 16340), Article 5 (commencing with Section 16360), and Article 7 (commencing with Section 16375), and by doing the following:
(1) Including in net income all income from property used or sold to discharge liabilities.
(2) Paying, from income or principal, in the fiduciary’s discretion, fees of attorneys, accountants, and fiduciaries, court costs and other expenses of administration, and interest on estate and inheritance taxes and other taxes imposed because of the decedent’s
death, but the fiduciary may pay the expenses from income of property passing to a trust for which the fiduciary claims a federal estate tax marital or charitable deduction, only to the extent that either of the following conditions is met:
(A) The payment of the expenses from income will not cause the reduction or loss of the deduction.
(B) The fiduciary makes an adjustment under subdivision (b) of Section 16366.
(3) Paying from principal other disbursements made or incurred in connection with the settlement of the estate or the winding up of an income interest that terminates, including both of the following:
(A) To the extent authorized by the decedent’s will, the terms of the trust, or applicable law, debts, funeral expenses, disposition of remains,
family allowances, estate and inheritance taxes, and other taxes imposed because of the decedent’s death.
(B) Related penalties that are apportioned by the decedent’s will, the terms of the trust, or applicable law, to the estate or income interest that terminates.
(d) A specific gift distributable under a trust shall carry with it the same benefits and burdens as a specific devise under a will, as set forth in Chapter 8 (commencing with Section 12000) of Part 10 of Division 7.
(e) A general pecuniary gift, an annuity, or a gift of maintenance distributable under a trust carries with it income and bears interest in the same manner as a general pecuniary devise, an annuity, or a gift of maintenance under a will, as set forth in Chapter 8 (commencing with Section 12000) of Part 10 of Division 7.
(f) A fiduciary shall distribute net income remaining after payments required by subdivisions (d) and (e) in the manner described in Section 16371 to all other beneficiaries, including a beneficiary that receives a pecuniary amount in trust, even if the beneficiary holds an unqualified power to withdraw assets from the trust or other presently exercisable general power of appointment over the trust.
(g) A fiduciary may not reduce principal or income receipts from property described in subdivision (b) because of a payment described in Section 16360 or 16361 to the extent the decedent’s will, the terms of the trust, or applicable law requires the fiduciary to make the payment from assets other than the property or to the extent the fiduciary recovers or expects to recover the payment from a third party. The net income and principal receipts from the property shall be determined by
including the amount the fiduciary receives or pays regarding the property, whether the amount accrued or became due before, on, or after the date of the decedent’s death or an income interest’s terminating event, and making a reasonable provision for an amount the estate or income interest may become obligated to pay after the property is distributed.
16371.
(a) Except to the extent that Article 3 (commencing with Section 16330) applies for a beneficiary that is a trust, each beneficiary described in subdivision (f) of Section 16370 is entitled to receive a share of the net income equal to the beneficiary’s fractional interest in undistributed principal assets, using values as of the distribution date. If a fiduciary makes more than one distribution of assets to beneficiaries to which this section applies, each beneficiary, including a beneficiary that does not receive part of the distribution, is entitled, as of each distribution date, to a share of the net income the fiduciary received after the decedent’s death, an income interest’s other terminating event, or the preceding distribution by the fiduciary.(b) In determining a beneficiary’s share of net income under subdivision (a), the following rules apply:
(1) The beneficiary is entitled to receive a share of the net income equal to the beneficiary’s fractional interest in the undistributed principal assets immediately before the distribution date.
(2) The beneficiary’s fractional interest under paragraph (1) shall be calculated on the aggregate value of the assets as of the distribution date without reducing the value by any unpaid principal obligation, and without regard to either of the following:
(A) Property specifically given to a beneficiary under the decedent’s will or the terms of the trust.
(B) Property required to pay pecuniary amounts not in trust.
(3) The distribution date under paragraph (1) may be the date as of which the fiduciary calculates the value of the assets, if that date is reasonably near the date on which the assets are distributed.
(c) To the extent a fiduciary does not distribute under this section all the collected but undistributed net income to each beneficiary as of a distribution date, the fiduciary shall maintain records showing the interest of each beneficiary in the net income.
(d) If this section applies to income from an asset, a fiduciary may apply the rules in this section to net gain or loss realized from the disposition of the asset after the decedent’s death, an income interest’s terminating event, or the preceding distribution by the fiduciary.