act-2002-0-50•Pennsylvania Act 2002-50 — PROBATE, ESTATES AND FIDUCIARIES CODE (20 PA.C.S.) - OMNIBUS AMENDMENTS
Pennsylvania Act 2002-50 — PROBATE, ESTATES AND FIDUCIARIES CODE (20 PA.C.S.) - OMNIBUS AMENDMENTS
act-2002-0-502002 Pa. Act 50Law
Act text part 1
PROBATE, ESTATES AND FIDUCIARIES CODE (20 PA.C.S.) - OMNIBUS AMENDMENTS
Act of May 16, 2002, P.L. 330, No. 50 Cl. 20
Session of 2002
No. 2002-50
SB 1014
AN ACT
Amending Title 20 (Decedents, Estates and Fiduciaries) of the
Pennsylvania Consolidated Statutes, further providing for
situs of inter vivos trust, for rules of succession, for
power of decedent, for equitable apportionment of Federal
estate tax, for definitions and for termination of
custodianship; providing for delay in transfer of custodial
property after minor attains age 21 and for individuals
presumed dead from the September 11, 2001, terrorist attack;
further providing for effect of disclaimer; providing for
power of trustee to resign; extensively revising provisions
on principal and income; and making conforming amendments.
The General Assembly of the Commonwealth of Pennsylvania
hereby enacts as follows:
Section 1. Section 724 of Title 20 of the Pennsylvania
Consolidated Statutes is amended to read:
§ 724. Situs of inter vivos trust.
(a) When provided for in trust instrument.--If the trust
instrument expressly provides for the situs of the inter vivos
trust, its situs shall be at the place within or without the
Commonwealth which is in accord with such provision.
(b) Not provided for in trust instrument.--If the trust
instrument does not expressly provide for the situs of the inter
vivos trust, its situs shall be:
(1) Resident settlor.--In the case of an inter vivos
trust whose settlor is domiciled in the Commonwealth:
(i) in the settlor's lifetime, either in the county
of his principal residence or in the county in which any
of the trustees resides or [is located] has a place of
business; and
(ii) after the settlor's death, either in the county
in which letters have been granted to his personal
representative, or in a county in which letters could
have been granted, or in a county which is the principal
place of the trust's administration in which any trustee
resides [or is located] or has a place of business.
(2) Nonresident settlor.--In the case of an inter vivos
trust whose settlor:
(i) is not domiciled in the Commonwealth at the time
when during his lifetime the first application is made to
a court concerning the trust; or
(ii) was not domiciled in the Commonwealth at his
death if the first application to a court concerning the
trust was made thereafter,
in a county which is the principal place of the trust's
administration or in which any trustee resides [or is
located,] or has a place of business and if there is no such
trustee, then in a county where property of the trust is
located.
Section 2. Section 2104 of Title 20 is amended by adding a
paragraph to read:
§ 2104. Rules of succession.
The provisions of this chapter shall be applied to both real
and personal estate in accordance with the following rules:
* * *
(11) Intestacy following valid prior estate.--In the
event of an intestacy occurring at the termination of a valid
prior estate, the identity and shares of the intestate heirs
then entitled to take shall be ascertained as though the
death of the testator, settlor or grantor had occurred at the
time of the termination of the prior estate.
Section 3. Section 3701 of Title 20 is amended to read:
§ 3701. Power of decedent.
A testator, settlor, donor or possessor of any appropriate
power of appointment may direct how the Federal estate tax or
the Federal generation-skipping transfer tax due because of his
death, including interest and penalties, shall be apportioned or
may grant a discretionary power to another so to direct, but:
(1) any direction regarding apportionment of the Federal
generation-skipping transfer tax must expressly refer to that
tax[.]; and
(2) [Any] any direction waiving the right of recovery of
Federal estate tax, provided for under section 2207A of the
Internal Revenue Code of 1986 (Public Law 99-514, 26 U.S.C. §
2207A), on [the] property includable in the [taxable] gross
estate by reason of section 2044 of the Internal Revenue Code
of 1986, must expressly refer to that right.
Any such direction shall take precedence over the provisions of
this chapter insofar as the direction provides for the payment
of the tax or any part thereof from property the disposition of
which can be controlled by the instrument containing the
direction or delegating the power to another.
Section 4. Section 3702(f) and (h) of Title 20 are amended
and the section is amended by adding a subsection to read:
§ 3702. Equitable apportionment of Federal estate tax.
* * *
(f) Additional Federal estate tax.--
(1) Any increase in Federal estate tax caused by the
inclusion under section 2044 of the Internal Revenue Code of
1986 (Public Law 99-514, 26 U.S.C. § 2044) of a qualified
terminable interest trust in the estate of a decedent shall
be apportioned against that trust.
(2) Any increase in Federal estate tax caused by a
taxable event occurring in a qualified domestic trust under
section 2056A of the Internal Revenue Code of 1986 (Public
Law 99-514, 26 U.S.C. § 2056A) shall be apportioned against
that trust notwithstanding the provisions of subsection (b)
or (c).
(3) Any additional Federal estate tax due because a
qualified heir disposes of qualified real property or ceases
to use it for the qualified use shall be apportioned against
the qualified heir notwithstanding the provisions of
subsection (b).
* * *
(h) Interest and penalties.--Interest and penalties shall be
apportioned in the same manner as the principal amount of the
Federal estate tax [unless the court finds it inequitable to do
so by reason of special circumstances in which case the court
may direct a different apportionment of interest and penalties.]
subject to a fiduciary's power to adjust under Chapter 81
(relating to principal and income).
* * *
(j) Gift tax.--Gift tax paid by the decedent and imposed on
a gift by the decedent or his spouse within three years of the
date of his death and included in his gross estate shall be
treated in the same manner as though the amount of such gift tax
had been a preresiduary testamentary gift by the decedent to the
donee of the gift.
Section 5. Section 5164 of Title 20 is amended to read:
§ 5164. Distributions for support and education.
All income received by a guardian of the estate of a minor,
including, subject to the requirements of Federal law relating
thereto, all funds received from the Department of Veterans'
Affairs, Social Security Administration and other periodic
retirement or disability payments under private or government
plans, in the exercise of a reasonable discretion, may be
expended in the care, maintenance and education of the minor
without the necessity of court approval. The court, for cause
shown and with only such notice as it considers appropriate in
the circumstances, may authorize or direct the payment or
application of any or all of the income or principal of the
estate of a minor for the care, maintenance or education of the
minor, his spouse or children, or for the reasonable funeral
expenses of the minor's spouse, child or indigent parent. In
proper cases, the court may order payment of amounts directly to
the ward for his maintenance or for incidental expenses and may
ratify payments made for these purposes. For purposes of this
section, the term "income" means income as determined in
accordance with the rules set forth in Chapter 81 (relating to
principal and income), other than the power to adjust and the
power to convert to a unitrust.
Section 6. The definition of "minor" in section 5301(b) of
Title 20 is amended to read:
§ 5301. Short title of chapter and definitions.
* * *
(b) Definitions.--The following words and phrases when used
in this chapter shall have the meanings given to them in this
subsection unless the context clearly indicates otherwise:
* * *
"Minor." An individual who has not attained 21 years of
age[.], except that, when used with reference to the beneficiary
for whose benefit custodial property is held or is to be held,
an individual who has not attained the age at which the
custodian is required under sections 5320 (relating to
termination of custodianship) and 5321 (relating to delay in
transfer of custodial property after minor attains age 21) to
transfer the custodial property to the beneficiary.
* * *
Section 7. Section 5320 of Title 20 is amended to read:
§ 5320. Termination of custodianship.
The custodian shall transfer in an appropriate manner the
custodial property to the minor or the minor's estate upon the
earlier of:
(1) the minor's attainment of 21 years of age with
respect to custodial property transferred by gift under
section 5304 (relating to transfer by gift or exercise of
power of appointment) [or 5305 (relating to transfer
authorized by will or trust)];
[(2) the minor's attainment of majority under the laws
of this Commonwealth other than this chapter with respect to
custodial property transferred under section 5306 (relating
to other transfer by fiduciary) or 5307 (relating to transfer
by obligor); or
(3) the minor's death.]
(2) the minor's attainment of 21 years of age with
respect to a custodian nominated under section 5303 (relating
to nomination of custodian) or with respect to custodial
property transferred by exercise of power of appointment
under section 5304 or by will or trust under section 5305
(relating to transfer authorized by will or trust), unless
the time of transfer of the custodial property to the minor
is delayed under section 5321 (relating to delay in transfer
of custodial property after minor attains age 21) to a time
after the minor attains 21 years of age;
(3) the time specified in the transfer pursuant to
section 5309 (relating to manner of creating custodial
property and effecting transfer) if the time of transfer of
the custodial property to the minor is delayed under section
5321 to a time after the time the minor attains 21 years of
age;
(4) the minor's attainment of majority under the laws of
this Commonwealth other than this chapter with respect to
custodial property transferred under section 5306 (relating
to other transfer by fiduciary) or 5307 (relating to transfer
by obligor); or
(5) the minor's death.
Section 8. Title 20 is amended by adding a section to read:
§ 5321. Delay in transfer of custodial property after minor
attains age 21.
(a) General rule.--Subject to the requirements and
limitations of this section, the time for transfer to the minor
of custodial property transferred under or pursuant to section
5303 (relating to nomination of custodian), 5304 (relating to
transfer by gift or exercise of power of appointment) or 5305
(relating to transfer authorized by will or trust) may be
delayed until a specified time after the time the minor attains
21 years of age, which time shall be specified in the transfer
pursuant to section 5309 (relating to manner of creating
custodial property and effecting transfer).
(b) How to specify a delayed time for transfer.--To specify
a delayed time for transfer to the minor of the custodial
property, the words "as custodian for (name of minor) until age
(age for delivery of property to minor) under the Pennsylvania
Uniform Transfers to Minors Act" shall be substituted in
substance for the words "as custodian for (name of minor) under
the Pennsylvania Uniform Transfers to Minors Act" in making the
transfer pursuant to section 5309.
(c) Transfer authorized by will or trust; nomination of
custodian.--The time for transfer to the minor of custodial
property transferred under or pursuant to section 5303 or 5305
may be delayed under this section only if the governing will or
trust or nomination provides in substance that the custodianship
is to continue until the time the minor attains a specified age,
which time may not be later than the time the minor attains 25
years of age, and in that case the governing will or trust or
nomination shall determine the time to be specified in the
transfer pursuant to section 5309.
(d) Transfer by exercise of power appointment.--The time for
transfer to the minor of custodial property transferred by the
irrevocable exercise of a power of appointment under section
5304 may be delayed under this section only if the transfer
pursuant to section 5309 provides in substance that the
custodianship is to continue until the time the minor attains a
specified age, which time may not be later than the time the
minor attains 25 years of age.
(e) When section not applicable.--This section shall not
apply to the time for transfer to the minor of custodial
property transferred by irrevocable gift under section 5304.
(f) When transfer does not specify age.--If the transfer
pursuant to section 5309 does not specify any age, the time for
the transfer of the custodial property to the minor under
section 5320 (relating to termination of custodianship) is the
time when the minor attains 21 years of age.
(g) When transfer provides for a longer duration of
custodianship than permitted by this section.--If the transfer
pursuant to section 5309 provides in substance that the duration
of the custodianship is for a time longer than the maximum time
permitted by this section for the duration of a custodianship
created by that type of transfer, the custodianship shall be
deemed to continue only until the time the minor attains the
maximum age permitted by this section for the duration of a
custodianship created by that type of transfer.
Section 9. Section 5536(a) of Title 20 is amended to read:
§ 5536. Distributions of income and principal during
incapacity.
(a) In general.--All income received by a guardian of the
estate of an incapacitated person, including (subject to the
requirements of Federal law relating thereto) all funds received
from the Veterans' Administration, Social Security
Administration and other periodic retirement or disability
payments under private or governmental plans, in the exercise of
a reasonable discretion, may be expended in the care and
maintenance of the incapacitated person, without the necessity
of court approval. The court, for cause shown and with only such
notice as it considers appropriate in the circumstances, may
authorize or direct the payment or application of any or all of
the income or principal of the estate of an incapacitated person
for the care, maintenance or education of the incapacitated
person, his spouse, children or those for whom he was making
such provision before his incapacity, or for the reasonable
funeral expenses of the incapacitated person's spouse, child or
indigent parent. In proper cases, the court may order payment of
amounts directly to the incapacitated person for his maintenance
or for incidental expenses and may ratify payments made for
these purposes. For purposes of this subsection, the term
"income" means income as determined in accordance with the rules
set forth in Chapter 81 (relating to principal and income),
other than the power to adjust and the power to convert to a
unitrust.
* * *
Section 9.1. Section 5601 of Title 20 is amended by adding
subsections to read:
§ 5601. General provisions.
* * *
(e.1) Limitation on applicability in commercial
transaction.--
(1) Subsections (c), (d) and (e) do not apply to a power
or a power of attorney contained in an instrument used in a
commercial transaction which simply authorizes an agency
relationship. This paragraph includes the following:
(i) A power given to or for the benefit of a
creditor in connection with a loan or other credit
transaction.
(ii) A power exclusively granted to facilitate
transfer of stock, bonds and other assets.
(iii) A power contained in the governing document
for a corporation, partnership or limited liability
company or other legal entity by which a director,
partner or member authorizes others to do other things on
behalf of the entity.
(iv) A warrant of attorney conferring authority to
confess judgment.
(2) Powers and powers of attorney exempted by this
subsection need not be dated.
(e.2) Limitation on applicability in health care power of
attorney.--Subsections (c) and (d) do not apply to a power of
attorney which exclusively provides for health care decision
making.
* * *
Section 9.2. Title 20 is amended by adding a section to
read:
§ 5706. Persons presumed dead from September 11, 2001,
terrorist attack.
The requirements of sections 5703 (relating to distribution
of property of absentee) and 5704 (relating to notice to
absentee) shall not apply with respect to a person who is
presumed dead as a result of the terrorist attacks on September
11, 2001. These terrorist attacks constitute specific perils
within the meaning of section 5701(c) (relating to proof of
death) which would justify a court to immediately determine that
the presumed decedent died on September 11, 2001.
Section 10. Section 6205(a) of Title 20 is amended and the
section is amended by adding a subsection to read:
§ 6205. Effect of disclaimer.
(a) In general.--A disclaimer relates back for all purposes
to the date of the death of the decedent or the effective date
of the inter vivos transfer or third-party beneficiary contract
as the case may be. The disclaimer shall [be binding upon the
disclaimant and all persons claiming through or under him.] not
in any way diminish the interest of any person other than the
disclaimant in such person's own right under the instrument
creating the disclaimed interest or under the intestate laws nor
diminish any interest to which such person becomes entitled
under subsection (b) by reason of the disclaimer.
* * *
(d) Rights of creditors of disclaimant.--Nothing in this
section shall determine the effect of a disclaimer upon the
rights of creditors of the disclaimant.
Section 11. Title 20 is amended by adding sections to read:
§ 7104. Power of trustee to resign.
(a) Court approval.--Any trustee may resign with court
approval.
(b) Without court approval if authorized by governing
instrument.--Any trustee may resign without court approval if
authorized to resign by the governing instrument.
(c) When individual trustee may resign without court
approval and without authorization in governing instrument.--
Unless expressly provided to the contrary in the governing
instrument, an individual trustee may resign without court
approval and without authorization in the governing instrument
if:
(1) consented to in writing by all co-trustees, if there
are one or more co-trustees; and
(2) consented to in writing by all the sui juris
beneficiaries currently eligible to receive income and by all
the sui juris beneficiaries who would receive, if no powers
of appointment were exercised, a distribution of principal if
the trust were to terminate immediately prior to the
resignation, provided that no such resignation shall be
effective unless there is at least one such income
beneficiary and at least one such remainderman.
This subsection shall not authorize the sole trustee of a trust
to resign unless the governing instrument names a successor
trustee or provides a method for appointing a successor trustee,
and in either case the resignation shall not be effective until
the successor trustee accepts in writing his appointment.
(d) Liability.--The resignation of a trustee shall not by
itself relieve the resigning trustee of liability in connection
with the administration of the trust.
(e) Definition.--As used in this section, the term "sui
juris beneficiary" includes a guardian for an incapacitated
beneficiary, an agent acting under a durable power of attorney
for an incompetent beneficiary and a court-appointed guardian of
a minor's estate or, if none, the minor's parents.
§ 7105. Filing resignations and appointments.
A resignation of a trustee, an appointment of a trustee and
an acceptance of an appointment of a trustee may be filed with
the clerk of the orphans' court division having jurisdiction
over the trust.
Section 12. Chapter 81 of Title 20 is repealed.
Section 13. Title 20 is amended by adding a chapter to read:
CHAPTER 81
PRINCIPAL AND INCOME
Subchapter
A. Preliminary Provisions; Power to Adjust; Power to Convert
to Unitrust
B. Decedent's Estate or Terminating Income Interest
C. Apportionment at Beginning and End of Income Interest
D. Allocation of Receipts During Administration of Trust
E. Allocation of Disbursements During Administration of
Trust
F. (Reserved)
G. (Reserved)
H. Miscellaneous Provisions
SUBCHAPTER A
PRELIMINARY PROVISIONS; POWER TO ADJUST;
POWER TO CONVERT TO UNITRUST
Sec.
8101. Scope.
8102. Definitions.
8103. Fiduciary duties; general principles.
8104. Trustee's power to adjust.
8105. Power to convert to unitrust.
8106. Judicial control of discretionary powers.
8107. (Reserved).
8108. (Reserved).
8109. (Reserved).
8110. (Reserved).
8111. (Reserved).
8112. (Reserved).
8113. Charitable trusts.
§ 8101. Scope.
This chapter shall be known and may be cited as the
Pennsylvania Uniform Principal and Income Act.
§ 8102. Definitions.
The following words and phrases when used in this chapter
shall have the meanings given to them in this section unless the
context clearly indicates otherwise:
"Accounting period." A calendar year unless another 12-month
period is selected by a fiduciary. The term includes a portion
of a calendar year or other 12-month period which begins when an
income interest begins or ends when an income interest ends.
"Beneficiary." Includes:
(1) in the case of a decedent's estate, any heir,
legatee and devisee; and
(2) in the case of a trust, an income beneficiary and a
remainder beneficiary.
"Fiduciary." A personal representative or a trustee.
"Income." Money or property which a fiduciary receives as
current return from a principal asset. The term includes a
portion of receipts from a sale, exchange or liquidation of a
principal asset to the extent provided in Subchapter D (relating
to allocation of receipts during administration of trust).
"Income beneficiary." A person to whom or which net income
of a trust is or may be payable.
"Income interest." The right of an income beneficiary to
receive all or part of net income, whether the governing
instrument requires it to be distributed or authorizes it to be
distributed in the trustee's discretion.
"Mandatory income interest." The right of an income
beneficiary to receive net income which the governing instrument
requires the fiduciary to distribute.
"Net income." The:
(1) total receipts allocated to income during an
accounting period; minus
(2) disbursements made from income during the period;
plus or minus
(3) transfers under this chapter to or from income
during the period.
"Person." Any individual; corporation; business trust;
estate; trust; partnership; limited liability company;
association; joint venture; government; governmental
subdivision, agency or instrumentality; public corporation; or
other legal or commercial entity.
"Principal." Property held in trust for distribution to a
remainder beneficiary when the trust terminates.
"Remainder beneficiary." A person entitled to receive
principal when an income interest ends.
"Sui juris beneficiary." Includes:
(1) a court-appointed guardian of an incapacitated
beneficiary;
(2) an agent for an incompetent beneficiary; and
(3) a court-appointed guardian of a minor beneficiary's
estate or, if none, the parents of the minor beneficiary.
"Trust." Includes a legal life estate arrangement.
"Trustee." Includes an original, additional or successor
trustee whether or not appointed or confirmed by a court.
§ 8103. Fiduciary duties; general principles.
(a) Allocation.--In allocating receipts and disbursements to
or between principal and income and with respect to any matter
within the scope of this chapter, the following shall apply:
(1) A fiduciary shall administer a trust or estate in
accordance with the governing instrument, even if there is a
different provision in this chapter.
(2) A fiduciary may administer a trust or estate by the
exercise of a discretionary power of administration regarding
a matter within the scope of this chapter given to the
fiduciary by the governing instrument, even if the exercise
of the power produces a result different from a result
required or permitted by this chapter. No inference that the
fiduciary has improperly exercised the discretionary power
shall arise from the fact that the fiduciary has made an
allocation contrary to a provision of this chapter.
(3) A fiduciary shall administer a trust or estate in
accordance with this chapter if the governing instrument does
not contain a different provision or does not give the
fiduciary a discretionary power of administration regarding a
matter within the scope of this chapter.
(4) A fiduciary shall add a receipt or charge a
disbursement to principal to the extent that the governing
instrument and this chapter do not provide a rule for
allocating the receipt or disbursement to or between
principal and income.
(b) Discretionary power.--In exercising a discretionary
power of administration regarding a matter within the scope of
this chapter, whether granted by the governing instrument or
this chapter, including sections 8104 (relating to trustee's
power to adjust) and 8105 (relating to power to convert to
unitrust), a fiduciary shall administer a trust or estate
impartially based on what is fair and reasonable to all of the
beneficiaries, except to the extent that the governing
instrument clearly manifests an intention that the fiduciary
shall or may favor one or more of the beneficiaries. A
determination in accordance with this chapter is presumed to be
fair and reasonable to all of the beneficiaries.
§ 8104. Trustee's power to adjust.
(a) Adjustment.--Subject to subsections (c) and (f), a
trustee may adjust between principal and income by allocating an
amount of income to principal or an amount of principal to
income to the extent the trustee considers appropriate if:
(1) the governing instrument describes what may or must
be distributed to a beneficiary by referring to the trust's
income; and
(2) the trustee determines, after applying the rules in
section 8103(a) (relating to fiduciary duties; general
principles), that the trustee is unable to comply with
section 8103(b).
(b) Considerations.--In deciding whether and to what extent
to exercise the power conferred by subsection (a), a trustee may
consider, among other things, all of the following:
(1) The size of the trust.
(2) The nature and estimated duration of the trust.
(3) The liquidity and distribution requirements of the
trust.
(4) The needs for regular distributions and preservation
and appreciation of capital.
(5) The expected tax consequences of an adjustment.
(6) The net amount allocated to income under the other
sections of this chapter and the increase or decrease in the
value of the principal assets, which the trustee may estimate
as to assets for which market values are not readily
available.
(7) The assets held in the trust; the extent to which
they consist of financial assets, interests in closely held
enterprises, tangible and intangible personal property or
real property; the extent to which an asset is used by a
beneficiary; and whether an asset was purchased by the
trustee or received from the settlor or testator.
(8) To the extent reasonably known to the trustee, the
needs of the beneficiaries for present and future
distributions authorized or required by the governing
instrument.
(9) Whether and to what extent the governing instrument
gives the trustee the power to invade principal or accumulate
income or prohibits the trustee from invading principal or
accumulating income and the extent to which the trustee has
exercised a power from time to time to invade principal or
accumulate income.
(10) The intent of the settlor or testator.
(11) The actual and anticipated effect of economic
conditions on principal and income and effects of inflation
and deflation.
(c) Prohibited adjustments.--A trustee may not make an
adjustment under this section if any of the following apply:
(1) The adjustment would diminish the income interest in
a trust which requires all of the income to be paid at least
annually to a spouse and for which a Federal estate tax or
gift tax marital deduction would be allowed, in whole or in
part, if the trustee did not have the power to make the
adjustment.
(2) The adjustment would reduce the actuarial value of
the income interest in a trust to which a person transfers
property with the intent to qualify for a Federal gift tax
exclusion.
(3) The adjustment would change the amount payable to a
beneficiary as a fixed annuity or a fixed fraction of the
value of the trust assets.
(4) The adjustment is from any amount which is
permanently set aside for charitable purposes under the
governing instrument and for which a Federal estate or gift
tax deduction has been taken unless both income and principal
are so set aside.
(5) If:
(i) possessing or exercising the power to make an
adjustment would cause an individual to be treated as the
owner of all or part of the trust for Federal income tax
purposes; and
(ii) the individual would not be treated as the
owner if the trustee did not possess the power to make an
adjustment.
(6) If:
(i) possessing or exercising the power to make an
adjustment would cause all or part of the trust assets to
be subject to Federal estate or gift tax with respect to
an individual; and
(ii) the assets would not be subject to Federal
estate or gift tax with respect to the individual if the
trustee did not possess the power to make an adjustment.
(7) If the trustee is a beneficiary of the trust.
(8) If the trust has been converted under section 8105
(relating to power to convert to unitrust).
(d) Permissible adjustment when otherwise prohibited.--If
subsection (c)(5), (6) or (7) applies to a trustee and there is
more than one trustee, a co-trustee to whom the provision does
not apply may make the adjustment unless the exercise of the
power by the remaining trustee or trustees is prohibited by the
governing instrument.
(e) Release of the power to adjust.--
(1) If paragraph (2) applies, a trustee may release any
of the following:
(i) The entire power conferred by subsection (a).
(ii) The power to adjust from income to principal.
(iii) The power to adjust from principal to income.
(2) A release under paragraph (1) is permissible if any
of the following apply:
(i) The trustee is uncertain about whether
possessing or exercising the power will cause a result
described in subsection (c)(1) through (6).
(ii) The trustee determines that possessing or
exercising the power will or may deprive the trust of a
tax benefit or impose a tax burden not described in
subsection (c).
(3) The release may be permanent or for a specified
period, including a period measured by the life of an
individual.
(f) Application.--A governing instrument which limits the
power of a trustee to make an adjustment between principal and
income does not affect the application of this section unless it
is clear from the governing instrument that it is intended to
deny the trustee the power of adjustment conferred by subsection
(a).
§ 8105. Power to convert to unitrust.
(a) Conversion.--Unless expressly prohibited by the
governing instrument, a trustee may release the power under
section 8104 (relating to trustee's power to adjust) and convert
a trust into a unitrust as described in this section if all of
the following apply:
(1) The trustee determines that the conversion will
enable the trustee to better carry out the intent of the
settlor or testator and the purposes of the trust.
(2) The trustee gives written notice of the trustee's
intention to release the power to adjust and to convert the
trust into a unitrust and of how the unitrust will operate,
including what initial decisions the trustee will make under
this section, to all the sui juris beneficiaries who:
(i) are currently eligible to receive income from
the trust; and
(ii) would receive, if no powers of appointment were
exercised, a distribution of principal if the trust were
to terminate immediately prior to the giving of notice.
(3) There is at least one sui juris beneficiary under
paragraph (2)(i) and at least one sui juris beneficiary under
paragraph (2)(ii).
(4) No sui juris beneficiary objects to the conversion
to a unitrust in a writing delivered to the trustee within 60
days of the mailing of the notice under paragraph (2).
(b) Judicially approved conversion.--
(1) The trustee may petition the court to approve the
conversion to a unitrust if any of the following apply:
(i) A beneficiary timely objects to the conversion
to a unitrust.
(ii) There are no sui juris beneficiaries under
subsection (a)(2)(i).
(iii) There are no sui juris beneficiaries under
subsection (a)(2)(ii).
(2) A beneficiary may request a trustee to convert to a
unitrust. If the trustee does not convert, the beneficiary
may petition the court to order the conversion.
(3) The court shall approve the conversion or direct the
requested conversion if the court concludes that the
conversion will enable the trustee to better carry out the
intent of the settlor or testator and the purposes of the
trust.
(c) Consideration.--In deciding whether to exercise the
power conferred by subsection (a), a trustee may consider, among
other things, all of the following:
(1) The size of the trust.
(2) The nature and estimated duration of the trust.
(3) The liquidity and distribution requirements of the
trust.
(4) The needs for regular distributions and preservation
and appreciation of capital.
(5) The expected tax consequences of the conversion.
(6) The assets held in the trust; the extent to which
they consist of financial assets, interests in closely held
enterprises, tangible and intangible personal property or
real property; and the extent to which an asset is used by a
beneficiary.
(7) To the extent reasonably known to the trustee, the
needs of the beneficiaries for present and future
distributions authorized or required by the governing
instrument.
(8) Whether and to what extent the governing instrument
gives the trustee the power to invade principal or accumulate
income or prohibits the trustee from invading principal or
accumulating income and the extent to which the trustee has
exercised a power from time to time to invade principal or
accumulate income.
(9) The actual and anticipated effect of economic
conditions on principal and income and effects of inflation
and deflation.
(d) Post conversion.--After a trust is converted to a
unitrust, all of the following apply:
(1) The trustee shall follow an investment policy
seeking a total return for the investments held by the trust,
whether the return is to be derived:
(i) from appreciation of capital;
(ii) from earnings and distributions from capital;
or
(iii) from both.
(2) The trustee shall make regular distributions in
accordance with the governing instrument construed in
accordance with the provisions of this section.
(3) The term "income" in the governing instrument shall
mean an annual distribution (the unitrust distribution) equal
to 4% (the payout percentage) of the net fair market value of
the trust's assets, whether such assets would be considered
income or principal under other provisions of this chapter,
averaged over the lesser of:
(i) the three preceding years; or
(ii) the period during which the trust has been in
existence.
(e) Discretion of trustee.--The trustee, may in the
trustee's discretion from time to time, determine all of the
following:
(1) The effective date of a conversion to a unitrust.
(2) The provisions for prorating a unitrust distribution
for a short year in which a beneficiary's right to payments
commences or ceases.
(3) The frequency of unitrust distributions during the
year.
(4) The effect of other payments from or contributions
to the trust on the trust's valuation.
(5) Whether to value the trust's assets annually or more
frequently.
(6) What valuation dates to use.
(7) How frequently to value nonliquid assets and whether
to estimate their value.
(8) Whether to omit from the calculations trust property
occupied or possessed by a beneficiary.
(9) Any other matters necessary for the proper
functioning of the unitrust.
(f) Allocation.--
(1) Expenses which would be deducted from income if the
trust were not a unitrust may not be deducted from the
unitrust distribution.
(2) Unless otherwise provided by the governing
instrument, the unitrust distribution shall be paid from net
income as such term would be determined if the trust were not
a unitrust. To the extent net income is insufficient, the
unitrust distribution shall be paid from net realized short-
term capital gains. To the extent income and net realized
short-term capital gains are insufficient, the unitrust
distribution shall be paid from net realized long-term
capital gains. To the extent income and net realized short-
term and long-term capital gains are insufficient, the
unitrust distribution shall be paid from the principal of the
trust.
(g) Court orders.--The trustee or, if the trustee declines
to do so, a beneficiary may petition the court to:
(1) Select a payout percentage different than 4%.
(2) Provide for a distribution of net income, as would
be determined if the trust were not a unitrust, in excess of
the unitrust distribution if such distribution is necessary
to preserve a tax benefit.
(3) Average the valuation of the trust's net assets over
a period other than three years.
(4) Reconvert from a unitrust. Upon a reconversion, the
power to adjust under section 8104 shall be revived.
(h) Application.--A conversion to a unitrust does not affect
a provision in the governing instrument directing or authorizing
the trustee to distribute principal or authorizing a beneficiary
to withdraw a portion or all of the principal.
(i) Prohibited conversions.--A trustee may not convert a
trust into a unitrust in any of the following circumstances:
(1) If payment of the unitrust distribution would change
the amount payable to a beneficiary as a fixed annuity or a
fixed fraction of the value of the trust assets.
(2) If the unitrust distribution would be made from any
amount which is permanently set aside for charitable purposes
under the governing instrument and for which a Federal estate
or gift tax deduction has been taken, unless both income and
principal are so set aside.
(3) If:
(i) possessing or exercising the power to convert
would cause an individual to be treated as the owner of
all or part of the trust for Federal income tax purposes;
and
(ii) the individual would not be treated as the
owner if the trustee did not possess the power to
convert.
(4) If:
(i) possessing or exercising the power to convert
would cause all or part of the trust assets to be subject
to Federal estate or gift tax with respect to an
individual; and
(ii) the assets would not be subject to Federal
estate or gift tax with respect to the individual if the
trustee did not possess the power to convert.
(5) If the conversion would result in the disallowance
of a Federal estate tax or gift tax marital deduction which
would be allowed if the trustee did not have the power to
convert.
(6) If the trustee is a beneficiary of the trust.
(j) Permissible conversion when otherwise prohibited.--
(1) If subsection (i)(3), (4) or (6) applies to a
trustee and there is more than one trustee, a co-trustee to
whom the provision does not apply may convert the trust
unless the exercise of the power by the remaining trustee or
trustees is prohibited by the governing instrument.
(2) If subsection (i)(3), (4) or (6) applies to all the
trustees, the trustees may petition the court to direct a
conversion.
(k) Release of the power to convert.--
(1) A trustee may release the power conferred by
subsection (a) to convert to a unitrust if any of the
following apply:
(i) The trustee is uncertain about whether
possessing or exercising the power will cause a result
described in subsection (i)(3), (4) or (5).
(ii) The trustee determines that possessing or
exercising the power will or may deprive the trust of a
tax benefit or impose a tax burden not described in
subsection (i).
(2) The release may be permanent or for a specified
period, including a period measured by the life of an
individual.
§ 8106. Judicial control of discretionary powers.
(a) Standard of review.--A court shall not change a
fiduciary's decision to exercise or not to exercise a
discretionary power conferred by this chapter unless it
determines that the decision was an abuse of the fiduciary's
discretion.
(b) Remedies.--If a court determines that a fiduciary has
abused its discretion regarding a discretionary power conferred
by this chapter, the remedy is to restore the income and
remainder beneficiaries to the positions they would have
occupied if the fiduciary had not abused its discretion,
according to the following rules:
(1) To the extent that the abuse of discretion has
resulted in no distribution to a beneficiary or a
distribution which is too small, the court shall require the
fiduciary to distribute from the trust to the beneficiary an
amount that the court determines will restore the
beneficiary, in whole or in part, to the beneficiary's
appropriate position.
(2) To the extent that the abuse of discretion has
resulted in a distribution to a beneficiary which is too
large, the court shall restore the beneficiaries, the trust
or both, in whole or in part, to their appropriate positions
by requiring the fiduciary to withhold an amount from one or
more future distributions to the beneficiary who received the
distribution that was too large or requiring that beneficiary
or that beneficiary's estate to return some or all of the
distribution to the trust, notwithstanding a spendthrift or
similar provision.
(3) If the abuse of discretion concerns the power to
convert a trust into a unitrust, the court shall require the
trustee either to convert into a unitrust or to reconvert
from a unitrust.
(4) To the extent that the court is unable, after
applying paragraphs (1), (2) and (3), to restore the
beneficiaries, the trust or both to the positions they would
have occupied if the fiduciary had not abused its discretion,
the court may require the fiduciary to pay an appropriate
amount from its own funds to one or more of the beneficiaries
or the trust or both.
§ 8107. (Reserved).
§ 8108. (Reserved).
§ 8109. (Reserved).
§ 8110. (Reserved).
§ 8111. (Reserved).
§ 8112. (Reserved).
§ 8113. Charitable trusts.
(a) Election.--Notwithstanding the foregoing provisions of
this chapter, the trustee of a trust held exclusively for
charitable purposes may elect to be governed by this section
unless the governing instrument expressly provides that the
election provided by this section shall not be available.
(b) Eligibility for election.--To make an election under
this section, the trustee shall adopt and follow an investment
policy seeking a total return for the investments held by the
trust, whether the return is to be derived from appreciation of
capital or earnings and distributions with respect to capital or
both. The policy constituting the election shall be in writing,
shall be maintained as part of the permanent records of the
trust and shall recite that it constitutes an election to be
governed by this section.
(c) Effect of election.--If an election is made to be
governed by this section, the term "income" shall mean a
percentage of the value of the trust. The trustee shall, in a
writing maintained as part of the permanent records of the
trust, annually select the percentage and determine that it is
consistent with the long-term preservation of the real value of
the principal of the trust, but in no event shall the percentage
be less than 2% nor more than 7% per year. The term "principal"
shall mean all other assets held by the trustee with respect to
the trust.
(d) Revocation of election.--The trustee may revoke an
election to be governed by this section if the revocation is
made as part of an alternative investment policy seeking the
long-term preservation of the real value of the principal of the
trust. The revocation and alternative investment policy shall be
in writing and maintained as part of the permanent records of
the trust.
(e) Value determination.--For purposes of applying this
section, the value of the trust shall be the fair market value
of the cash and other assets held by the trustee with respect to
the trust, whether such assets would be considered "income" or
"principal" under the other provisions of this chapter,
determined at least annually and averaged over a period of three
or more preceding years. However, if the trust has been in
existence less than three years, the average shall be determined
over the period during which the trust has been in existence.
SUBCHAPTER B
DECEDENT'S ESTATE OR
TERMINATING INCOME INTEREST
Sec.
8121. Determination and distribution of net income.
8122. Distribution to residuary and remainder beneficiaries.
§ 8121. Determination and distribution of net income.
After a decedent dies in the case of an estate or after an
income interest in a trust ends, the following rules apply:
(1) A fiduciary of an estate or of a terminating income
interest shall determine the amount of net income and net
principal receipts received from property specifically given
to a beneficiary under paragraph (5) and the provisions
applicable to trustees in Subchapters C (relating to
apportionment at beginning and end of income interest), D
(relating to allocation of receipts during administration of
trust) and E (relating to allocation of disbursements during
administration of trust). The fiduciary shall distribute the
net income and net principal receipts to the beneficiary who
is to receive the specific property.
(2) A fiduciary shall distribute to a beneficiary who
receives a pecuniary amount outright and shall allocate to a
pecuniary amount in trust the interest, other income or other
amount provided by the governing instrument or section 3543
(relating to interest or income on distributive shares) or
7187 (relating to interest or income on distributive shares)
from net income determined under paragraph (3) or from
principal to the extent that net income is insufficient.
(3) A fiduciary shall determine the remaining net income
of a decedent's estate or a terminating income interest under
the provisions applicable to trustees in Subchapters C, D and
E and by:
(i) including in net income all income from property
used to discharge liabilities; and
(ii) paying from principal debts, funeral expenses,
costs of disposition of remains, the family exemption,
fees of personal representatives and their attorneys and
accountants, and death taxes and related interest and
penalties which are apportioned to the estate or
terminating income interest by the governing instrument
or applicable law.
(4) A fiduciary shall distribute the net income
remaining after distributions required by paragraph (2) in
the manner described in section 8122 (relating to
distribution to residuary and remainder beneficiaries) to all
other beneficiaries.
(5) A fiduciary may not reduce principal or income
receipts from property described in paragraph (1) because of
a payment described in section 8151 (relating to minerals,
water and other natural resources) or 8152 (relating to
timber) to the extent that the governing instrument or
applicable law requires the fiduciary to make the payment
from assets other than the property or to the extent that the
fiduciary recovers or expects to recover the payment from a
third party. The net income and principal receipts from the
property are determined by:
(i) including all of the amounts the fiduciary
receives or pays with respect to the property, whether
those amounts accrued or became due before, on or after
the date of a decedent's death or an income interest's
terminating event; and
(ii) making a reasonable provision for amounts that
the fiduciary believes the estate or terminating income
interest may become obligated to pay after the property
is distributed.
§ 8122. Distribution to residuary and remainder beneficiaries.
(a) Distribution of net income.--Each beneficiary described
in section 8121(4) (relating to determination and distribution
of net income) is entitled to receive a portion of the net
income equal to the beneficiary's fractional interest in
undistributed principal assets, using values as of the
distribution date. If a fiduciary makes more than one
distribution of assets to beneficiaries to whom this section
applies, each beneficiary, including one who does not receive
part of the distribution, is entitled, as of each distribution
date, to the net income the fiduciary has received after the
date of death or terminating event or earlier distribution date
but has not distributed as of the current distribution date.
(b) Allocation of net income.--In determining a
beneficiary's share of net income, the following rules apply:
(1) The beneficiary is entitled to receive a portion of
the net income equal to the beneficiary's fractional interest
in the undistributed principal assets immediately before the
distribution date, including assets that later may be sold or
applied to meet principal obligations.
(2) The beneficiary's fractional interest in the
undistributed principal assets must be calculated without
regard to property specifically given to a beneficiary and
property required to pay pecuniary amounts.
(3) The beneficiary's fractional interest in the
undistributed principal assets must be calculated on the
basis of the aggregate value of those assets as of the
distribution date without reducing the value by any unpaid
principal obligation.
(c) Collected but undistributed net income.--If a fiduciary
does not distribute all of the collected but undistributed net
income to each person as of a distribution date, the fiduciary
shall maintain appropriate records showing the interest of each
beneficiary in that net income.
(d) Application.--To the extent that the fiduciary considers
it appropriate, if this section applies to the income from an
asset, the fiduciary may apply the rules in this section to net
gain or loss from the disposition of a principal asset realized
after the date of death or terminating event or earlier
distribution date.
(e) Distribution date.--For purposes of this section, the
distribution date may be the date as of which the fiduciary
calculates the value of the assets if that date is reasonably
near the date on which assets are actually distributed.
SUBCHAPTER C
APPORTIONMENT AT BEGINNING
AND END OF INCOME INTEREST
Sec.
8131. When right to income begins and ends.
8132. Apportionment of receipts and disbursements when
decedent dies or income interest begins.
8133. Apportionment when income interest ends.
§ 8131. When right to income begins and ends.
(a) Accrual of income interest.--An income beneficiary is
entitled to net income from the date on which the income
interest begins. An income interest begins:
(1) on the date specified in the governing instrument;
or
(2) if no date is specified, on the date an asset
becomes subject to a trust or successive income interest.
(b) Asset subject to a trust.--An asset becomes subject to a
trust:
(1) on the date it is transferred to the trust in the
case of an asset which is transferred to a trust during the
transferor's life;
(2) on the date of a testator's death in the case of an
asset which becomes subject to a trust by reason of a will,
even if there is an intervening period of administration of
the testator's estate; or
(3) on the date of an individual's death in the case of
an asset which is transferred to a fiduciary by a third party
because of the individual's death.
(c) Asset subject to a successive income interest.--An asset
becomes subject to a successive income interest on the day after
the preceding income interest ends, as determined under
subsection (d), even if there is an intervening period of
administration to wind up the preceding income interest.
(d) End of income interest.--An income interest ends on:
(1) the day before an income beneficiary dies or another
terminating event occurs; or
(2) the last day of a period during which there is no
beneficiary to whom a trustee may distribute income.
§ 8132. Apportionment of receipts and disbursements when
decedent dies or income interest begins.
(a) Allocation to principal.--Unless section 8121(1)
(relating to determination and distribution of net income)
applies, a trustee shall allocate an income receipt or
disbursement to principal if its due date occurs before:
(1) a decedent dies in the case of an estate; or
(2) an income interest begins in the case of a trust or
successive income interest.
(b) Allocation to income.--A trustee shall allocate an
income receipt or disbursement to income if its due date occurs
on or after the date on which a decedent dies or an income
interest begins and it is a periodic due date. An income receipt
or disbursement must be treated as accruing from day to day if
its due date is not periodic or it has no due date. The portion
of the receipt or disbursement accruing before the date on which
a decedent dies or an income interest begins must be allocated
to principal and the balance must be allocated to income.
(c) Due dates.--An item of income or an obligation is due on
the date the payor is required to make a payment. If a payment
date is not stated, there is no due date for the purposes of
this chapter. Distributions to shareholders or other owners from
an entity to which section 8141 (relating to character of
receipts) applies are deemed to be due on the date fixed by the
entity for determining who is entitled to receive the
distribution or, if no date is fixed, on the declaration date
for the distribution. A due date is periodic for receipts or
disbursements that must be paid at regular intervals under a
lease or an obligation to pay interest or if an entity
customarily makes distributions at regular intervals.
§ 8133. Apportionment when income interest ends.
(a) End of mandatory income interest.--When a mandatory
income interest ends, the trustee shall pay to a mandatory
income beneficiary who survives that date, or the estate of a
deceased mandatory income beneficiary whose death causes the
interest to end, the beneficiary's share of the undistributed
income which is not disposed of under the governing instrument
unless the beneficiary has an unqualified power to revoke more
than 5% of the trust immediately before the income interest
ends. In the latter case, the undistributed income from the
portion of the trust that may be revoked shall be added to
principal.
(b) Proration of final payment.--When a trustee's obligation
to pay a fixed annuity or a fixed fraction of the value of the
trust's assets ends, the trustee shall prorate the final payment
if and to the extent required by applicable law to accomplish a
purpose of the trust or its settlor or testator relating to
income, gift, estate or other tax requirements.
(c) Definition.--As used in this section, the term
"undistributed income" means net income received before the date
on which an income interest ends. The term does not include an
item of income or expense which is due or accrued or net income
which has been added or is required to be added to principal
under the governing instrument.
SUBCHAPTER D
ALLOCATION OF RECEIPTS DURING
ADMINISTRATION OF TRUST
Sec.
8141. Character of receipts.
8142. Distribution from trust or estate.
8143. Business and other activities conducted by trustee.
8144. Principal receipts.
8145. Rental property.
8146. Obligation to pay money.
8147. Insurance policies and similar contracts.
8148. Insubstantial allocations not required.
8149. Retirement benefits, individual retirement accounts,
deferred compensation, annuities and similar payments.
8150. Liquidating asset.
8151. Minerals, water and other natural resources.
8152. Timber.
8153. Property not productive of income.
8154. Derivatives and options.
8155. Asset-backed securities.
§ 8141. Character of receipts.
(a) Allocation to income.--Except as otherwise provided in
this section, a trustee shall allocate to income money received
from an entity, including reinvested cash dividends.
(b) Allocation to principal.--A trustee shall allocate the
following receipts from an entity to principal:
(1) Property other than money, excluding reinvested cash
dividends.
(2) Money received in one distribution or a series of
related distributions in exchange for part or all of a
trust's interest in the entity.
(3) Money received in total or partial liquidation of
the entity.
(4) Money received from an entity that is a regulated
investment company or a real estate investment trust if the
money distributed is a short-term or long-term capital gain
dividend for Federal income tax purposes.
(c) When received in partial liquidation.--Money is received
in partial liquidation:
(1) to the extent that the entity, at or near the time
of a distribution, indicates that it is a distribution in
partial liquidation; or
(2) if the total amount of money and property received
in a distribution or series of related distributions is
greater than 20% of the entity's gross assets, as shown by
the entity's year-end financial statements immediately
preceding the initial receipt.
(d) When not received in partial liquidation.--Money is not
received in partial liquidation nor may it be taken into account
under subsection (c)(2) to the extent that it does not exceed
the amount of income tax that a trustee or beneficiary must pay
on taxable income of the entity that distributes the money.
(e) Reliance upon a statement.--A trustee may rely upon a
statement made by an entity about the source or character of a
distribution if the statement is made at or near the time of
distribution by the entity's board of directors or other person
or group of persons authorized to exercise powers to pay money
or transfer property comparable to those of a corporation's
board of directors.
(f) Definition.--As used in this section, the term "entity"
means a corporation, partnership, limited liability company,
regulated investment company, real estate investment trust,
common trust fund or any other organization in which a trustee
has an interest other than:
(1) a trust or estate to which section 8142 (relating to
distribution from trust or estate) applies;
(2) a business or activity to which section 8143
(relating to business and other activities conducted by
trustee) applies;
(3) a payment to which section 8149 (relating to
retirement benefits, individual retirement accounts, deferred
compensation, annuities and similar payments) applies; or
(4) an asset-backed security to which section 8155
(relating to asset-backed securities) applies.
§ 8142. Distribution from trust or estate.
A trustee shall allocate to income an amount received as a
distribution of income from a trust or an estate in which the
trust has an interest other than a purchased interest and shall
allocate to principal an amount received as a distribution of
principal from such a trust or estate. If a trustee purchases an
interest in a trust that is an investment entity or a decedent
or donor transfers an interest in such a trust to a trustee,
section 8141 (relating to character of receipts) or 8155
(relating to asset-backed securities) applies to a receipt from
the trust.
§ 8143. Business and other activities conducted by trustee.
(a) Separate accounting for business or activity.--If a
trustee that conducts a business or other activity determines
that it is in the best interest of all the beneficiaries to
account separately for the business or activity instead of
accounting for it as part of the trust's general accounting
records, the trustee may maintain separate accounting records
for its transactions, whether or not its assets are segregated
from other trust assets.
(b) Net receipts.--
(1) A trustee that accounts separately for a business or
other activity may determine the extent to which:
(i) its net cash receipts must be retained for
working capital, the acquisition or replacement of fixed
assets and other reasonably foreseeable needs of the
business or activity; and
(ii) the remaining net cash receipts are accounted
for as principal or income in the trust's general
accounting records.
(2) If a trustee sells assets of the business or other
activity, other than in the ordinary course of the business
or activity, the trustee shall account for the net amount
received as principal in the trust's general accounting
records to the extent the trustee determines that the amount
received is no longer required in the conduct of the
business.
(c) Permissible activities for separate accounting.--
Activities for which a trustee may maintain separate accounting
records include:
(1) Retail, manufacturing, service and other traditional
business activities.
(2) Farming.
(3) Raising and selling livestock and other animals.
(4) Management of rental properties.
(5) Extraction of minerals and other natural resources.
(6) Timber operations.
(7) Activities to which section 8154 (relating to
derivatives and options) applies.
§ 8144. Principal receipts.
A trustee shall allocate to principal any of the following:
(1) To the extent not allocated to income under this
chapter, assets received from:
(i) a transferor during the transferor's lifetime;
(ii) a decedent's estate;
(iii) a trust with a terminating income interest; or
(iv) a payor under a contract naming the trust or
its trustee as beneficiary.
(2) Money or other property received from a principal
asset's sale, exchange, liquidation or change in form. This
paragraph includes realized profit subject to this
subchapter.
(3) Amounts recovered from third parties to reimburse
the trust because of disbursements described in section
8162(a)(8) (relating to mandatory disbursements from
principal) or for other reasons to the extent not based on
the loss of income.
(4) Proceeds of property taken by eminent domain. A
separate award made for the loss of income with respect to an
accounting period during which a current income beneficiary
had a mandatory income interest is income.
(5) Net income received in an accounting period during
which there is no beneficiary to whom a trustee may or must
distribute income.
(6) Other receipts as provided in sections 8148
(relating to insubstantial allocations not required) through
8155 (relating to asset-backed securities).
§ 8145. Rental property.
(a) Rent.--To the extent that a trustee accounts for
receipts from rental property pursuant to this section, the
trustee shall allocate to income an amount received as rent of
real or personal property. This subsection includes an amount
received for cancellation or renewal of a lease.
(b) Deposit.--An amount received as a refundable deposit,
including a security deposit or a deposit which is to be applied
as rent for future periods:
(1) shall be added to principal;
(2) shall be held subject to the terms of the lease; and
(3) is not available for distribution to a beneficiary
until the trustee's contractual obligations have been
satisfied with respect to that amount.
§ 8146. Obligation to pay money.
(a) Interest allocated to income.--An amount received as
interest, whether determined at a fixed, variable or floating
rate, on an obligation to pay money to the trustee, including an
amount received as consideration for prepaying principal, shall
be allocated to income without any provision for amortization of
premium.
(b) Allocation of obligations.--A trustee shall allocate to
principal an amount received from the sale, redemption or other
disposition of an obligation to pay money to the trustee more
than one year after it is purchased or acquired by the trustee,
including an obligation the purchase price or value of which
when it is acquired is less than its value at maturity. If the
obligation matures within one year after it is purchased or
acquired by the trustee, an amount received in excess of its
purchase price or its value when acquired by the trust shall be
allocated to income.
(c) Application.--This section does not apply to an
obligation to which any of the following apply:
(1) Section 8149 (relating to retirement benefits,
individual retirement accounts, deferred compensation,
annuities and similar payments).
(2) Section 8150 (relating to liquidating asset).
(3) Section 8151 (relating to minerals, water and other
natural resources).
(4) Section 8152 (relating to timber).
(5) Section 8154 (relating to derivatives and options).
(6) Section 8155 (relating to asset-backed securities).
§ 8147. Insurance policies and similar contracts.
(a) General rule.--
(1) Except as otherwise provided in subsection (b) or
(c), a trustee shall allocate to principal the proceeds of a
life insurance policy or other contract in which the trust or
its trustee is named as beneficiary. This paragraph includes
a contract which insures the trust or its trustee against
loss for damage to, destruction of or loss of title to a
trust asset.
(2) If the premiums on the policy or contract are paid
from income, the trustee shall allocate to income dividends
on the policy or contract.
(3) If the premiums on the policy or contract are paid
from principal, the trustee shall allocate to principal
dividends on the policy or contract.
(b) Allocation of proceeds to income.--Except as provided in
subsection (c), a trustee shall allocate to income proceeds of a
contract which insures the trustee against any of the following:
(1) Loss of occupancy or other use by an income
beneficiary.
(2) Loss of income.
(3) Subject to section 8143 (relating to business and
other activities conducted by trustee), loss of profits from
a business.
(c) Application.--This section does not apply to a contract
to which section 8149 (relating to retirement benefits,
individual retirement accounts, deferred compensation, annuities
and similar payments) applies.
§ 8148. Insubstantial allocations not required.
If a trustee determines that an allocation between principal
and income required by section 8149 (relating to retirement
benefits, individual retirement accounts, deferred compensation,
annuities and similar payments), 8150 (relating to liquidating
asset), 8151 (relating to minerals, water and other natural
resources), 8152 (relating to timber) or 8155 (relating to
asset-backed securities) is insubstantial, the trustee may
allocate the entire amount to principal unless one of the
circumstances described in section 8104(c) (relating to
trustee's power to adjust) applies to the allocation. This power
may be exercised by a co-trustee in the circumstances described
in section 8104(d) and may be released for the reasons and in
the manner described in section 8104(e). An allocation is
presumed to be insubstantial if:
(1) the amount of the allocation would increase or
decrease net income in an accounting period, as determined
before the allocation, by less than 5%; or
(2) the value of the asset producing the receipt for
which the allocation would be made is less than 5% of the
total value of the trust's assets at the beginning of the
accounting period.
§ 8149. Retirement benefits, individual retirement accounts,
deferred compensation, annuities and similar
payments.
(a) General rule.--
(1) The trustee shall allocate to income the greater of:
(i) the portion of a payment characterized by the
payor as interest or a dividend or a remittance in lieu
of interest or a dividend; or
(ii) the portion of the payment characterized as
imputed interest for Federal income tax purposes.
(2) The balance of any such payment shall be allocated
to principal.
(b) Allocation under contract calling for equal
installments.--
(1) If no part of a payment under a contract calling for
equal installments over a fixed period of time is allocable
to income under the provisions of subsection (a), the
difference between the trust's acquisition value of the
contract and the total expected return shall be deemed to be
interest.
(2) The trustee shall allocate to income the portion of
each payment equivalent to interest on the then unpaid
principal balance at the rate specified in the contract or a
rate necessary to thus amortize the difference between the
expected return and the acquisition value, where that rate is
readily ascertainable by the trustee.
(c) Allocation when internal net income of fund is readily
ascertained.--
(1) If no portion of a payment from a separate fund held
exclusively for the benefit of the trust is allocable to
income under subsections (a) and (b) but the internal net
income of the fund determined as if the fund were a separate
trust subject to Subchapters B (relating to decedent's estate
or terminating income interest) through E (relating to
allocation of disbursements during administration of trust)
is readily ascertainable by the trustee, the portion of the
payment equal to the then undistributed net income of the
fund realized since the trust acquired its interest in the
fund shall be deemed to be a distribution of such income and
shall be allocated to the trust income account.
(2) The balance of any such payment shall be allocated
to principal.
(d) When not otherwise allocable to income.--
(1) The trustee shall allocate to income 10% of the part
of the payment which is required to be made during the
accounting period and the balance to principal if:
(i) no part of the payment is allocable to income
under subsection (a), (b) or (c); and
(ii) all or part of the payment is required to be
made.
(2) The trustee shall allocate the entire payment to
principal if:
(i) no part of a payment is required to be made; or
(ii) the payment received is the entire amount to
which the trustee is entitled.
(3) For purposes of this subsection, a payment is not
required to be made to the extent that it is made because the
trustee exercises a right of withdrawal.
(e) Allocation to obtain marital deduction.--If, to obtain a
Federal estate or gift tax marital deduction for a trust, the
trustee must allocate more of a payment to income than provided
for by this section, the trustee shall allocate to income the
additional amount necessary to obtain the marital deduction.
(f) Application.--This section does not apply to payments to
which section 8150 (relating to liquidating asset) applies.
(g) Definition.--As used in this section, the term "payment"
means a payment that a trustee may receive over a fixed period
of time or during the life of one or more individuals because of
services rendered or property transferred to the payor in
exchange for future payments. The term includes all of the
following:
(1) A payment made in money or property from:
(i) the payor's general assets; or
(ii) a separate fund created by the payor or
another.
(2) A payment on or from:
(i) an installment contract or note;
(ii) a private or commercial annuity;
(iii) a deferred compensation agreement;
(iv) an employee death benefit;
(v) an individual retirement account; or
(vi) a pension, profit-sharing, stock or other
bonus, or stock-ownership plan.
§ 8150. Liquidating asset.
(a) Allocation.--A trustee shall allocate to income 10% of
the receipts from a liquidating asset and the balance to
principal.
(b) Definition.--As used in this section, the term
"liquidating asset" means an asset the value of which will
diminish or terminate because the asset is expected to produce
receipts for a period of limited duration. The term includes a
leasehold, patent, copyright, royalty right and right to receive
payments during a period of more than one year under an
arrangement which does not provide for the payment of interest
on the unpaid balance. The term does not include any of the
following:
(1) A payment subject to section 8149 (relating to
retirement benefits, individual retirement accounts, deferred
compensation, annuities and similar payments).
(2) Resources subject to section 8151 (relating to
minerals, water and other natural resources).
(3) Timber subject to section 8152 (relating to timber).
(4) An activity subject to section 8154 (relating to
derivatives and options).
(5) An asset subject to section 8155 (relating to asset-
backed securities).
(6) An asset for which the trustee establishes a reserve
for depreciation under section 8163 (relating to
discretionary allocation of disbursements).
§ 8151. Minerals, water and other natural resources.
(a) Allocation for receipts from minerals and other natural
resources.--To the extent that a trustee accounts for receipts
from an interest in minerals or other natural resources under
this section, the trustee shall allocate them as follows:
(1) If received as nominal delay rental or nominal
annual rent on a lease, a receipt shall be allocated to
income.
(2) If received from a production payment, a receipt
shall be allocated to income if and to the extent that the
agreement creating the production payment provides a factor
for interest or its equivalent. The balance shall be
allocated to principal.
(3) If an amount received as a royalty, shut-in-well
payment, take-or-pay payment, bonus or delay rental is more
than nominal:
(i) sixty-six and two-thirds percent shall be
allocated to principal; and
(ii) the balance shall be allocated to income.
(4) If an amount is received from a working interest or
any other interest not provided for in paragraph (1), (2) or
(3):
(i) sixty-six and two-thirds percent of the net
amount received shall be allocated to principal; and
(ii) the balance shall be allocated to income.
(b) Allocation for receipts from water.--
(1) An amount received on account of an interest in
renewable water shall be allocated to income.
(2) An amount received on account of an interest in
nonrenewable water shall be allocated as follows:
(i) Sixty-six and two-thirds percent of the amount
shall be allocated to principal.
(ii) The balance shall be allocated to income.
(c) Application.--This chapter applies whether or not a
decedent or donor was extracting minerals, water or other
natural resources before the interest became subject to the
trust.
§ 8152. Timber.
(a) Allocation of net receipts.--To the extent that a
trustee accounts for receipts from the sale of timber and
related products under this section, the trustee shall allocate
the net receipts:
(1) To income to the extent that the amount of timber
removed from the land does not exceed the rate of growth of
the timber during the accounting periods in which a
beneficiary has a mandatory income interest.
(2) To principal to the extent that:
(i) the amount of timber removed from the land
exceeds the rate of growth of the timber; or
(ii) the net receipts are from the sale of standing
timber.
(3) To or between income and principal, by determining
the amount of timber removed from the land under the lease or
contract and applying the rules in paragraphs (1) and (2) if
the net receipts are from:
(i) the lease of timberland; or
(ii) a contract to cut timber from land owned by a
trust.
(4) To principal to the extent that advance payments,
bonuses and other payments are not allocated under paragraph
(1), (2) or (3).
(b) Determining net receipts.--In determining net receipts
to be allocated under subsection (a), a trustee shall deduct and
transfer to principal a reasonable amount for depletion.
(c) Application.--This chapter applies whether or not a
decedent or transferor was harvesting timber from the property
before it became subject to the trust.
§ 8153. Property not productive of income.
(a) General rule.--If a Federal estate or gift tax marital
deduction is allowed for all or part of a trust whose income is
required to be paid to the settlor's or testator's spouse and
whose assets consist substantially of property that does not
provide the spouse with sufficient income from or use of the
trust assets, and if the amounts that the trustee transfers from
principal to income under section 8104 (relating to trustee's
power to adjust) and that the trustee distributes to the spouse
from principal pursuant to the governing instrument are
insufficient to provide the spouse with the beneficial enjoyment
required to obtain the marital deduction, the spouse may require
the trustee to make property productive of income, convert
property within a reasonable time or exercise the power
conferred by section 8104(a). The trustee may decide which
action or combination of actions to take.
(b) Other cases.--In cases not governed by subsection (a),
proceeds from the sale or other disposition of an asset are
principal without regard to the amount of income the asset
produces during any accounting period.
§ 8154. Derivatives and options.
(a) Derivatives.--To the extent that a trustee does not
account under section 8143 (relating to business and other
activities conducted by trustee) for transactions in
derivatives, the trustee shall allocate to principal receipts
from and disbursements made in connection with those
transactions.
(b) Options.--If a trustee grants an option to buy property
from the trust, whether or not the trust owns the property when
the option is granted, grants an option that permits another
person to sell property to the trust or acquires an option to
buy property for the trust or an option to sell an asset owned
by the trust, and the trustee or other owner of the asset is
required to deliver the asset if the option is exercised, an
amount received for granting the option must be allocated to
principal. An amount paid to acquire the option must be paid
from principal. A gain or loss realized upon the exercise of an
option, including an option granted to a settlor or testator of
the trust for services rendered, must be allocated to principal.
(c) Definition.--As used in this section, "derivative" means
a contract or financial instrument or a combination of contracts
and financial instruments which gives a trust the right or
obligation to participate in some or all changes in the price of
a tangible or intangible asset or group of assets, or changes in
a rate, an index of prices or rates, or other market indicator
for an asset or a group of assets.
§ 8155. Asset-backed securities.
(a) General rule.--If a trust receives a payment from
interest or other current return and from other proceeds of the
collateral financial assets:
(1) The trustee shall allocate to income the portion of
the payment which the payor identifies as being from interest
or other current return.
(2) The trustee shall allocate the balance of the
payment to principal.
(b) Allocation where liquidating trust's interest in
security.--
(1) If a trust receives one or more payments in exchange
for the trust's entire interest in an asset-backed security
in one accounting period, the trustee shall allocate the
payments to principal.
(2) If a payment is one of a series of payments which
will result in the liquidation of the trust's interest in the
security over more than one accounting period, the trustee
shall allocate:
(i) ten percent of the payment to income; and
(ii) the balance to principal.
(c) Definition.--As used in this section, the term "asset-
backed security" means an asset the value of which is based upon
the right it gives the owner to receive distributions from the
proceeds of financial assets which provide collateral for the
security. The term includes an asset which gives the owner the
right to receive from the collateral financial assets only the
interest or other current return or only the proceeds other than
interest or current return. The term does not include an asset
to which section 8141 (relating to character of receipts) or
8149 (relating to retirement benefits, individual retirement
accounts, deferred compensation, annuities and similar payments)
applies.
SUBCHAPTER E
ALLOCATION OF DISBURSEMENTS DURING
ADMINISTRATION OF TRUST
Sec.
8161. Mandatory disbursements from income.
8162. Mandatory disbursements from principal.
8163. Discretionary allocation of disbursements.
8164. Transfers from income to principal for depreciation.
8165. Transfers from income to reimburse principal.
8166. Income taxes.
8167. Adjustments between principal and income because of
taxes.
§ 8161. Mandatory disbursements from income.
A trustee shall make the following disbursements from income:
(1) Interest, except interest on death taxes.
(2) Ordinary repairs.
(3) Real estate and other regularly recurring taxes
assessed against principal.
(4) Recurring premiums on fire or other insurance
covering the loss of a principal asset or the loss of income
from or use of the asset.
§ 8162. Mandatory disbursements from principal.
(a) Mandatory disbursements.--A trustee shall make the
following disbursements from principal:
(1) Extraordinary expenses incurred in connection with
the administration, management or preservation of trust
property and the distribution of income.
(2) Extraordinary repairs.
(3) Compensation for legal services to the trustee.
(4) Expenses in connection with accountings and judicial
or other proceedings. This paragraph includes proceedings to
construe, modify or reform the trust or to protect the trust
or its property.
(5) Payments on the principal of a trust debt.
(6) Premiums paid on a policy of insurance not described
in section 8161(4) (relating to mandatory disbursements from
income) of which the trust is the owner and beneficiary.
(7) Estate, inheritance and other transfer taxes,
including interest and penalties, apportioned to the trust.
(8) Disbursements related to environmental matters. This
paragraph includes:
(i) Reclamation.
(ii) Assessing 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 those activities.
(vii) Penalties imposed under environmental statutes
or regulations and other payments made to comply with
those statutes or regulations.
(viii) Statutory or common law claims by third
parties.
(ix) Defending claims based on environmental
matters.
(b) Mandatory reimbursement.--If a principal asset is
encumbered with an obligation which requires income from that
asset to be paid directly to the creditor, the trustee shall
transfer from principal to income an amount equal to the income
paid to the creditor in reduction of the principal balance of
the obligation.
§ 8163. Discretionary allocation of disbursements.
Subject to sections 8161 (relating to mandatory disbursements
from income) and 8162 (relating to mandatory disbursements from
principal), a trustee may, in the trustee's discretion, allocate
to income or principal or partly to each ordinary expenses
incurred in connection with the administration, management or
preservation of trust property and the distribution of income,
including, but not limited to, the compensation of the trustee
and of any person providing investment advisory, custodian or
income tax return preparation services to the trustee.
§ 8164. Transfers from income to principal for depreciation.
(a) Transfers.--A trustee may transfer to principal a
reasonable amount of the net cash receipts from a principal
asset that is subject to depreciation. However, a trustee may
not transfer any amount for depreciation:
(1) of that portion of real property used or available
for use by a beneficiary as a residence or of tangible
personal property held or made available for the personal use
or enjoyment of a beneficiary;
(2) during the administration of a decedent's estate; or
(3) under this section if the trustee is accounting
under section 8143 (relating to business and other activities
conducted by trustee) for the business or activity in which
the asset is used.
(b) Separate fund unnecessary for amount transferred.--An
amount transferred to principal need not be held as a separate
fund.
(c) Definition.--As used in this section, the term
"depreciation" means a reduction in value due to wear, tear,
decay, corrosion or gradual obsolescence of a fixed asset having
a useful life of more than one year.
§ 8165. Transfers from income to reimburse principal.
(a) Permissible reimbursements.--A trustee may transfer an
appropriate amount from income to principal in one or more
accounting periods to reimburse principal or to provide a
reserve for future disbursements if the trustee makes or expects
to make a disbursement from principal which is allocable to
income under section 8161 (relating to mandatory disbursements
from income) or 8163 (relating to discretionary allocation of
disbursements) and which:
(1) is paid from principal because it is unusually
large; or
(2) is made to prepare property for rental, including
tenant allowances, leasehold improvements and broker's
commissions.
(b) Continued transfers.--If the asset whose ownership gives
rise to the disbursements becomes subject to a successive income
interest after an income interest ends, a trustee may continue
to transfer amounts from income to principal as provided in
subsection (a).
(c) Application.--This section shall not apply to the extent
the trustee has been or expects to be reimbursed by a third
party.
§ 8166. Income taxes.
(a) Receipts allocated to income.--A tax required to be paid
by a trustee based on receipts allocated to income shall be paid
Act text part 2
from income.
(b) Receipts allocated to principal.--A tax required to be
paid by a trustee 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) Tax on entity's taxable income.--A tax required to be
paid by a trustee on the trust's share of an entity's taxable
income shall be paid proportionately:
(1) from income to the extent that receipts from the
entity are allocated to income; and
(2) from principal to the extent that:
(i) receipts from the entity are allocated to
principal; and
(ii) the trust's share of the entity's taxable
income exceeds the total receipts described in paragraph
(1) and subparagraph (i).
(d) Reductions in receipts allocated to principal or
income.--For purposes of this section, receipts allocated to
principal or income shall be reduced by the amount distributed
to a beneficiary from principal or income for which the trust
receives a deduction in calculating the tax.
§ 8167. Adjustments between principal and income because of
taxes.
A trustee may make adjustments between principal and income
to offset the shifting of economic interests or tax benefits
between income beneficiaries and remainder beneficiaries which
arise from any of the following:
(1) An election or decision which the trustee makes
regarding tax matters.
(2) An income tax or any other tax which is imposed upon
the trustee or a beneficiary as a result of a transaction
involving the trust or distribution from the trust.
(3) The ownership by a trust of an interest in an entity
the taxable income of which, whether or not distributed, is
includable in the taxable income of the trust or a
beneficiary.
SUBCHAPTERS F AND G
(Reserved)
SUBCHAPTER H
MISCELLANEOUS PROVISIONS
Sec.
8191. Uniformity of application and construction.
§ 8191. Uniformity of application and construction.
In applying and construing this chapter, consideration shall
be given to the need to promote uniformity of the law with
respect to its subject matter among states which enact it.
Section 14. (a) Except as otherwise expressly provided in
the governing instrument, in the addition of 20 Pa.C.S. Ch. 81
or in subsection (b), this act shall apply to all of the
following:
(1) A trust existing on or after the effective date of
this act.
(2) The estate of a decedent who dies on or after the
effective date of this act.
(b) This act shall apply as follows:
(1) The amendment of 20 Pa.C.S. § 724 shall apply to
trusts created before, on or after the effective date of this
act.
(2) The amendment of 20 Pa.C.S. § 2104 shall apply to
intestacies occurring on or after the effective date of this
act, even if the trust became irrevocable before the
effective date of this act.
(3) The amendment of 20 Pa.C.S. § 6205 shall apply to
disclaimers made on or after the effective date of this act
and shall apply to disclaimers made before the effective date
of this act to the extent the distribution thereunder is made
after the effective date of this act or, if made prior to the
effective date, such distribution was consistent with this
act.
(4) The addition of 20 Pa.C.S. §§ 7104 and 7105 shall
apply to trusts created before, on or after the effective
date of this act.
Section 15. This act shall take effect as follows:
(1) The addition of 20 Pa.C.S. § 5601(e.1) and (e.2)
shall take effect April 12, 2000.
(2) The following provisions shall take effect
immediately:
(i) The addition of 20 Pa.C.S. § 5706.
(ii) This section.
(3) The remainder of this act shall take effect in 60
days.
APPROVED--The 16th day of May, A. D. 2002.
MARK S. SCHWEIKER
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