Text: HF00583 Text: HF00585 Text: HF00500 - HF00599 Text: HF Index Bills and Amendments: General Index Bill History: General Index
PAG LIN 20 HOUSE FILE 584 30 50 AN ACT 70 RELATING TO THE UNIFORM PRINCIPAL AND INCOME ACT AND PROVIDING 80 FOR ITS APPLICABILITY. 90 100 BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF IOWA: 110 130 CHAPTER 637 140 UNIFORM PRINCIPAL AND INCOME ACT 150 SUBCHAPTER 1 160 DEFINITIONS AND FIDUCIARY DUTIES 180 Section 1. NEW SECTION. 637.101 SHORT TITLE. 190 This Act may be cited as the "Uniform Principal and Income 200 Act". 210 Sec. 2. NEW SECTION. 637.102 DEFINITIONS. 220 As used in this chapter: 230 1. "Accounting period" means a calendar year, unless 240 another twelve-month period is selected by a fiduciary. The 250 term includes a portion of a calendar year or other twelve- 260 month period that begins when an income interest begins or 270 ends when an income interest ends. 280 2. "Beneficiary" includes, in the case of a decedent's 290 estate, an heir, legatee, and devisee, and, in the case of a 300 trust, an income beneficiary and a remainder beneficiary. 310 3. "Fiduciary" means a personal representative or a 320 trustee. The term includes an executor, administrator, 330 successor personal representative, special administrator, and 340 a person performing substantially the same function. 350 4. "Income" means money or property a fiduciary receives 360 as the current return from a principal asset. The term 370 includes a portion of the receipts from a sale, exchange, or 380 liquidation of a principal asset, to the extent provided in 390 subchapter 4. 400 5. "Income beneficiary" means a person to whom a trust's 410 net income is or may be payable. 420 6. "Income interest" means an income beneficiary's right 430 to receive all or part of the net income, whether the terms of 440 the trust require it to be distributed or authorize it to be 450 distributed in the trustee's discretion. 460 7. "Mandatory income interest" means an income 470 beneficiary's right to receive net income that the terms of 480 the trust require the fiduciary to distribute. 490 8. "Net income" means the total receipts allocated to 500 income during an accounting period minus the disbursements 510 made from income during the period. In this definition, 520 receipts and disbursements include items transferred to or 530 from income during the period under this chapter. 540 9. "Person" means an individual, corporation, business 550 trust, estate, trust, partnership, limited liability company, 560 association, joint venture, or any other legal or commercial 570 entity. The term does not include a government or 580 governmental subdivision, agency, or instrumentality. 590 10. "Principal" means property held in trust for 600 distribution to a remainder beneficiary when the trust 610 terminates. 620 11. "Remainder beneficiary" means a person, including 630 another trust, entitled to receive principal when an income 640 interest ends. 650 12. "Terms of a trust" means the manifestation of the 660 intent of a settlor or decedent with respect to the trust, 670 expressed in a manner that admits of its proof in a judicial 680 proceeding, whether by written or spoken words or by conduct. 690 13. "Trustee" includes an original, additional, or 700 successor trustee, whether or not appointed or confirmed by a 710 court. 720 Sec. 3. NEW SECTION. 637.103 FIDUCIARY DUTIES GENERAL 730 PRINCIPLES. 740 1. In allocating receipts and disbursements to or between 750 principal and income, and in any matter within the scope of 760 subchapters 2 and 3, a fiduciary shall do all of the 770 following: 780 a. Administer a trust or estate in accordance with the 790 terms of the trust or the will, even if there is a different 800 provision in this chapter. 810 b. Administer a trust or estate by the exercise of a 820 discretionary power of administration given the fiduciary by 830 the terms of the trust or the will, although the fiduciary may 840 exercise that power in a manner different from a provision of 850 this chapter. 860 c. Administer a trust or estate in accordance with this 870 chapter if the terms of the trust or the will do not contain a 880 different provision or do not give the fiduciary a 890 discretionary power of administration. 900 d. Add a receipt or charge a disbursement to principal to 910 the extent that the terms of the trust and this chapter do not 920 provide a rule for allocating the receipt or disbursement to 930 or between principal and income. 940 2. In exercising a discretionary power of administration 950 regarding a matter within the scope of this chapter, whether 960 granted by the terms of a trust, a will, or this chapter, a 970 fiduciary shall administer a trust or estate impartially, 980 based on what is fair and reasonable to all of the 990 beneficiaries, unless the terms of the trust or the will 1000 clearly manifest an intention that the fiduciary shall or may 1010 favor one or more of the beneficiaries. A determination in 1020 accordance with this chapter is presumed to be fair and 1030 reasonable to all of the beneficiaries. 1050 SUBCHAPTER 2 1060 DECEDENT'S ESTATE OR TERMINATING INCOME INTEREST 1080 Sec. 4. NEW SECTION. 637.201 DETERMINATION AND 1090 DISTRIBUTION OF NET INCOME. 1100 After a decedent dies, in the case of an estate, or after 1110 an income interest in a trust ends, the following rules apply: 1120 1. A fiduciary of an estate or a terminating income 1130 interest shall determine the amount of net income and net 1140 principal receipts received from property specifically given 1150 to a beneficiary under the rules in subchapters 3 through 5 1160 that apply to trustees, and under the rules in subsection 5. 1170 The fiduciary shall distribute the net income and net 1180 principal receipts to the beneficiary who is to receive the 1190 specific property. 1200 2. A fiduciary shall determine the remaining net income of 1210 a decedent's estate or a terminating income interest under the 1220 rules in subchapters 3 through 5 that apply to trustees, and 1230 by doing the following: 1240 a. Including in net income all income from property used 1250 to discharge liabilities. 1260 b. Paying from income or principal, in the fiduciary's 1270 discretion, fees of attorneys, accountants, and fiduciaries; 1280 court costs and other expenses of administration; and interest 1290 on death taxes, but the fiduciary may pay those expenses from 1300 income of property passing to a trust for which the fiduciary 1310 claims an estate tax marital or charitable deduction only to 1320 the extent that the payment of those expenses from income will 1330 not cause the loss of the deduction. 1340 c. Paying from principal all other disbursements made or 1350 incurred in connection with the settlement of a decedent's 1360 estate or the winding up of a terminating income interest, 1370 including debts, funeral expenses, disposition of remains, 1380 family allowances, and death taxes and related penalties that 1390 are apportioned to the estate or terminating income interest 1400 by the will, the terms of the trust, or applicable law. 1410 3. A fiduciary shall distribute to a beneficiary who 1420 receives a pecuniary amount outright the amount, if any, 1430 provided by the will, the terms of the trust, or applicable 1440 law, from net income determined under subsection 2 or from 1450 principal to the extent the net income is insufficient. If a 1460 beneficiary is to receive a pecuniary amount outright from a 1470 trust after an income interest ends and no amount is provided 1480 for by the terms of the trust or applicable law, the fiduciary 1490 shall distribute the amount to which the beneficiary would be 1500 entitled under applicable law if the pecuniary amount were 1510 required to be paid under a will. 1520 4. A fiduciary shall distribute the net income remaining 1530 after distributions required by subsection 3 in the manner 1540 described in section 637.202 to all other beneficiaries, 1550 including a beneficiary who receives a pecuniary amount in 1560 trust, even if the beneficiary holds an unqualified power to 1570 withdraw assets from the trust or other presently exercisable 1580 general power of appointment over the trust. 1590 5. A fiduciary shall not reduce principal or income 1600 receipts from property described in subsection 1 because of a 1610 payment described in section 637.501 or 637.502 to the extent 1620 that the will, the terms of the trust, or applicable law 1630 requires the fiduciary to make the payment from assets other 1640 than the property or to the extent that the fiduciary recovers 1650 or expects to recover the payment from a third party. The 1660 property's net income and principal receipts are determined by 1670 including all of the amounts the fiduciary receives or pays 1680 with respect to the property, whether those amounts accrued or 1690 became due before, on, or after the date of a decedent's death 1700 or an income interest's terminating event, and by making a 1710 reasonable provision for amounts that the fiduciary believes 1720 the estate or terminating income interest may become obligated 1730 to pay after the property is distributed. 1740 Sec. 5. NEW SECTION. 637.202 DISTRIBUTION TO RESIDUARY 1750 AND REMAINDER BENEFICIARIES. 1760 1. Each beneficiary described in section 637.201, 1770 subsection 4, is entitled to receive a portion of the net 1780 income equal to the beneficiary's fractional interest in 1790 undistributed principal assets, using values as of the 1800 distribution date. If a fiduciary makes more than one 1810 distribution of assets to beneficiaries to whom this section 1820 applies, each beneficiary, including one who does not receive 1830 part of the distribution, is entitled, as of each distribution 1840 date, to the net income the fiduciary has received after the 1850 date of death or terminating event or earlier distribution 1860 date but has not distributed as of the current distribution 1870 date. 1880 2. In determining a beneficiary's share of net income, the 1890 following rules apply: 1900 a. The beneficiary is entitled to receive a portion of the 1910 net income equal to the beneficiary's fractional interest in 1920 the undistributed principal assets immediately before the 1930 distribution date, including assets that later may be sold to 1940 meet principal obligations. 1950 b. The beneficiary's fractional interest in the 1960 undistributed principal assets must be calculated without 1970 regard to property specifically given to a beneficiary and 1980 property required to be pay pecuniary amounts not in trust. 1990 c. The beneficiary's fractional interest in the 2000 undistributed principal assets must be calculated on the basis 2010 of the aggregate value of those assets as of the distribution 2020 date without reducing the value by any unpaid principal 2030 obligation. 2040 d. The distribution date for purposes of this section may 2050 be the date as of which the fiduciary calculates the value of 2060 the assets if that date is reasonably near the date on which 2070 assets are actually distributed. 2080 3. The rules in this section apply to net gain or loss 2090 realized after the date of death or terminating event or 2100 earlier distribution date from the disposition of a principal 2110 asset if this section applies to the income from the asset. 2120 4. If a fiduciary does not distribute all of the collected 2130 but undistributed net income or gain to each person as of a 2140 distribution date, the fiduciary shall maintain appropriate 2150 records showing the interest of each beneficiary in that net 2160 income or gain. 2180 SUBCHAPTER 3 2190 APPORTIONMENT AT BEGINNING AND END OF INCOME INTEREST 2210 Sec. 6. NEW SECTION. 637.301 WHEN RIGHT TO INCOME BEGINS 2220 AND ENDS. 2230 1. An income beneficiary is entitled to net income from 2240 the date on which the income interest begins. An income 2250 interest begins on the date specified in the terms of the 2260 trust or, if no date is specified, on the date an asset 2270 becomes subject to a trust or successive income interest. 2280 2. An asset becomes subject to a trust at the first 2290 occurrence of one of the following events: 2300 a. On the date it is transferred to the trust in the case 2310 of an asset that is transferred to a trust during the 2320 transferor's life. 2330 b. On the date of a testator's death in the case of an 2340 asset that becomes subject to a trust by reason of a will, 2350 even if there is an intervening period of administration of 2360 the testator's estate. 2370 c. On the date of an individual's death in the case of an 2380 asset that is transferred to a fiduciary by a third party 2390 because of the individual's death. 2400 3. An asset becomes subject to a successive income 2410 interest on the day after the preceding income interest ends, 2420 as determined under subsection 4, even if there is an 2430 intervening period of administration to wind up the preceding 2440 income interest. 2450 4. An income interest ends on the day before an income 2460 beneficiary dies or another terminating event occurs. For 2470 purposes of this chapter, an income interest also ends on the 2480 last day of a period during which there is no beneficiary to 2490 whom a trustee may distribute income. 2500 Sec. 7. NEW SECTION. 637.302 APPORTIONMENT OF RECEIPTS 2510 AND DISBURSEMENTS WHEN DECEDENT DIES OR INCOME INTEREST 2520 BEGINS. 2530 1. An income receipt or disbursement other than one to 2540 which section 637.201, subsection 1, applies must be allocated 2550 to principal if its due date occurs before a decedent dies in 2560 the case of an estate, or before an income interest begins in 2570 the case of a trust or successive income interest. 2580 2. An income receipt or disbursement must be allocated to 2590 income if its due date occurs on or after the date on which a 2600 decedent dies or an income interest begins and it is a 2610 periodic due date. An income receipt or disbursement must be 2620 treated as accruing from day to day if its due date is not 2630 periodic or it has no due date. The portion of the receipt or 2640 disbursement accruing before the date on which a decedent dies 2650 or an income interest begins must be allocated to principal 2660 and the balance must be allocated to income. 2670 3. An item of income or an obligation is due on the date 2680 on which the payor is required to make a payment. If there is 2690 no stated payment date, there is no due date for the purposes 2700 of this chapter. Distributions to shareholders or other 2710 owners from an entity to which section 637.401 applies are 2720 deemed to be due on the date fixed by the entity for 2730 determining who is entitled to receive the distribution or, if 2740 no date is fixed, on the declaration date for the 2750 distribution. A due date is periodic for receipts or 2760 disbursements that must be paid at regular intervals under a 2770 lease or an obligation to pay interest or if an entity 2780 customarily makes distributions at regular intervals. 2790 Sec. 8. NEW SECTION. 637.303 APPORTIONMENT WHEN INCOME 2800 INTEREST ENDS. 2810 1. For purposes of this section, "undistributed income" 2820 means net income received before the date on which an income 2830 interest ends. The term does not include an item of income or 2840 expense that is due or accrued or net income that has been 2850 added or is required to be added to principal pursuant to the 2860 terms of the trust. 2870 2. When a mandatory income interest ends, the trustee 2880 shall pay to a mandatory income beneficiary who survives that 2890 date, or the estate of a deceased mandatory income beneficiary 2900 whose death causes the interest to end, the beneficiary's 2910 share of the undistributed income that is not disposed of 2920 pursuant to the terms of the trust unless the beneficiary has 2930 an unqualified power to revoke more than five percent of the 2940 trust immediately before the income interest ends. In the 2950 latter case, the undistributed income from the portion of the 2960 trust that may be revoked must be added to principal. 2970 3. When a trustee's obligation to pay a fixed annuity or a 2980 fixed fraction of the value of the trust's assets ends, the 2990 trustee shall prorate the final payment if and to the extent 3000 required by applicable law to accomplish a purpose of the 3010 trust or its settlor relating to income, gift, estate, or 3020 other tax requirements. 3040 SUBCHAPTER 4 3050 ADMINISTRATION OF TRUST 3060 Part 1 3070 RECEIPTS FROM ENTITIES 3090 Sec. 9. NEW SECTION. 637.401 CHARACTER OF RECEIPTS. 3100 1. For purposes of this section, "entity" means a 3110 corporation, partnership, joint venture, limited liability 3120 company, regulated investment company, real estate investment 3130 trust, common trust fund, and any other organization in which 3140 a trustee has an interest other than a trust or estate to 3150 which section 637.402 applies or a business or activity to 3160 which section 637.403 applies. 3170 2. Except as otherwise provided in this section, cash 3180 received by a trustee from an entity must be allocated to 3190 income. 3200 3. Receipts from an entity which must be allocated to 3210 principal include the following items: 3220 a. Property other than cash, except as otherwise provided 3230 in paragraph "d". 3240 b. Cash or property received in one distribution or a 3250 series of related distributions in exchange for part or all of 3260 a trust's interest in the entity. 3270 c. Cash or property received in total or partial 3280 liquidation of the entity. 3290 d. Cash or property received from an entity that is a 3300 regulated investment company or a real estate investment trust 3310 if the distribution is a capital gain dividend for federal 3320 income tax purposes. 3330 4. Cash or property is received in partial liquidation 3340 according to one of the following principles: 3350 a. To the extent that the entity, at or near the time of a 3360 distribution, indicates that it is a distribution in partial 3370 liquidation. 3380 b. If the total amount received in a distribution or 3390 series of related distributions is greater than twenty percent 3400 of the entity's gross assets, as shown by the entity's year- 3410 end financial statements immediately preceding the initial 3420 receipt. 3430 5. Cash shall not be received in partial liquidation, nor 3440 shall it be taken into account under subsection 4, paragraph 3450 "b", to the extent that it does not exceed the amount of 3460 income tax that a trustee or beneficiary must pay on taxable 3470 income of the entity that distributes the cash. 3480 6. A trustee may rely upon a statement made by an entity 3490 about the source or character of a distribution if the 3500 statement is made at or near the time of distribution by the 3510 entity's board of directors or other person or group of 3520 persons authorized to exercise powers to pay money or transfer 3530 property comparable to those of a corporation's board of 3540 directors. 3550 Sec. 10. NEW SECTION. 637.402 DISTRIBUTION FROM TRUST OR 3560 ESTATE. 3570 1. Subject to the terms of a recipient trust, an amount 3580 received as a distribution of income from a trust or an estate 3590 in which the trust has an interest other than a purchased 3600 interest shall be allocated to income. 3610 2. An amount received as a distribution of principal from 3620 such a trust or estate shall be allocated to principal. 3630 3. If a trustee purchases an interest in a trust that is 3640 an investment entity, or a decedent or donor transfers an 3650 interest in such a trust to a trustee, section 637.401 applies 3660 to a receipt from the trust. 3670 Sec. 11. NEW SECTION. 637.403 BUSINESS AND OTHER 3680 ACTIVITIES CONDUCTED BY TRUSTEE. 3690 1. If a trustee who conducts a business or other activity 3700 determines that it is in the best interest of all the 3710 beneficiaries to account separately for the business or 3720 activity instead of accounting for it as part of the trust's 3730 general accounting records, the trustee may maintain separate 3740 accounting records for its transactions, whether or not its 3750 assets are segregated from other trust assets. 3760 2. A trustee who accounts separately for a business or 3770 other activity shall determine the extent to which its net 3780 cash receipts must be retained for working capital, the 3790 acquisition or replacement of fixed assets, and other 3800 reasonably foreseeable needs of the business or activity, and 3810 the extent to which the remaining net cash receipts are 3820 accounted for as principal or income in the trust's general 3830 accounting records. If a trustee sells assets of the business 3840 or other activity, other than in the ordinary course of the 3850 business or activity, the trustee shall account for the net 3860 amount received as principal in the trust's general accounting 3870 records to the extent the trustee determines that the amount 3880 received is no longer required in the conduct of the business. 3890 3. The trustee may maintain separate accounting records 3900 for any of the following activities: 3910 a. Retail, manufacturing, service, and other traditional 3920 business activities. 3930 b. Farming. 3940 c. Raising and selling livestock and other animals. 3950 d. Management of rental properties. 3960 e. Extraction of minerals and other natural resources. 3970 f. Timber operations. 3980 g. Activities to which section 637.426 applies. 4000 Part 2 4010 RECEIPTS NOT NORMALLY APPORTIONED 4030 Sec. 12. NEW SECTION. 637.410 PRINCIPAL RECEIPTS. 4040 The following items must be allocated to principal: 4050 1. To the extent not allocated to income under this 4060 chapter, assets received from any of the following sources: 4070 a. A transferor during the transferor's lifetime. 4080 b. A decedent's estate. 4090 c. A trust with a terminating income interest. 4100 d. A payor pursuant to a contract naming the trust or its 4110 trustee as beneficiary. 4120 2. Cash or other property received from the sale, 4130 exchange, liquidation, or change in form of a principal asset, 4140 including realized profit, subject to this subchapter. 4150 3. Amounts recovered from third parties to reimburse the 4160 trust because of disbursements described in section 637.502, 4170 subsection 1, paragraph "g", or for other reasons to the 4180 extent not based on the loss of income. 4190 4. Proceeds of property taken by eminent domain, but a 4200 separate award made for the loss of income with respect to an 4210 accounting period during which a current income beneficiary 4220 had a mandatory income interest is income. 4230 5. Net income received in a period during which there is 4240 no beneficiary to whom a trustee may or must distribute 4250 income. 4260 6. Other receipts, as provided in part 3. 4270 Sec. 13. NEW SECTION. 637.411 RENTAL PROPERTY. 4280 1. An amount received as rent of real or personal 4290 property, including an amount received for cancellation or 4300 renewal of a lease, must be allocated to income. 4310 2. An amount received as a refundable deposit, including a 4320 security deposit or a deposit that is to be applied as rent 4330 for future periods, must be added to principal and held 4340 subject to the terms of the lease and is not available for 4350 distribution to a beneficiary until the trustee's contractual 4360 obligations have been satisfied with respect to that amount. 4370 Sec. 14. NEW SECTION. 637.412 OBLIGATION TO PAY MONEY. 4380 1. An amount received as interest, whether determined at a 4390 fixed, variable, or floating rate, on an obligation to pay 4400 money to the trustee, including an amount received as 4410 consideration for prepaying principal, must be allocated to 4420 income without any provision for amortization of premium. 4430 2. An amount received from the sale, redemption, or other 4440 disposition of an obligation to pay money to the trustee more 4450 than one year after it is purchased or acquired by the 4460 trustee, including an obligation whose purchase price or value 4470 when it is acquired is less than its value at maturity, must 4480 be allocated to principal. If the obligation matures within 4490 one year after it is purchased or acquired by the trustee, an 4500 amount received in excess of its purchase price or its value 4510 when acquired by the trust must be allocated to income. 4520 3. This section does not apply to obligations to which 4530 sections 637.421 through 637.424, 637.426, and 637.427 apply. 4540 Sec. 15. NEW SECTION. 637.413 INSURANCE POLICIES AND 4550 SIMILAR CONTRACTS. 4560 1. Proceeds from a life insurance policy whose beneficiary 4570 is the trust or its trustee or a policy that insures the trust 4580 or its trustee against loss for the damage or destruction of, 4590 or loss of title to, a principal asset must be allocated to 4600 principal. Dividends received from an insurance policy and 4610 the proceeds of any other contract in which the trust or its 4620 trustee is named as beneficiary must also be allocated to 4630 principal. 4640 2. Insurance proceeds must be allocated to income if they 4650 are from a policy that insures the trustee against the loss of 4660 occupancy or other use by an income beneficiary, the loss of 4670 income, or, subject to section 637.403, the loss of profits 4680 from a business. 4690 3. This section does not apply to a contract to which 4700 section 637.421 applies. 4720 Part 3 4730 RECEIPTS NORMALLY APPORTIONED 4750 Sec. 16. NEW SECTION. 637.420 INSUBSTANTIAL ALLOCATIONS 4760 NOT REQUIRED. 4770 1. If a trustee determines that an allocation between 4780 principal and income required by sections 637.421 through 4790 637.424 or section 637.427 is insubstantial, the trustee may 4800 allocate the entire receipt to principal. 4810 2. An allocation is presumed to be insubstantial if either 4820 of the following would be true if an allocation was made: 4830 a. The amount of the allocation would increase or decrease 4840 an accounting period's net income, as determined before the 4850 allocation, by less than ten percent. 4860 b. The value of the asset producing the receipt for which 4870 the allocation would be made is less than ten percent of the 4880 total value of the trust's assets at the beginning of the 4890 accounting period. 4900 Sec. 17. NEW SECTION. 637.421 DEFERRED COMPENSATION, 4910 ANNUITIES, AND SIMILAR PAYMENTS. 4920 1. This section applies to payments that a trustee may 4930 receive over a fixed number of years or during the life of one 4940 or more individuals because of services rendered or property 4950 transferred to the payor in exchange for future payments. The 4960 payments include those made in cash or property from the 4970 payor's general assets or from a separate fund created by the 4980 payor, including a private or commercial annuity, an 4990 individual retirement account, and a pension, profit sharing, 5000 stock bonus, or stock ownership plan. This section does not 5010 apply to payments to which section 637.422 applies. 5020 2. To the extent that a payment is characterized as 5030 interest or a dividend or a payment made in lieu of interest 5040 or a dividend, it must be allocated to income. The balance of 5050 the payment and any other payment received in the same 5060 accounting period that is not characterized as interest, a 5070 dividend, or an equivalent payment must be allocated to 5080 principal. 5090 3. If no part of a payment is characterized as interest, a 5100 dividend, or an equivalent payment, and all or part of the 5110 payment is required to be made, a trustee shall allocate to 5120 income ten percent of the part that is required to be made 5130 during the accounting period and the balance to principal. If 5140 no part of a payment is required to be made or the payment 5150 received is the entire amount to which the trustee is 5160 entitled, the entire payment must be allocated to principal. 5170 4. If, to obtain an estate tax marital deduction for a 5180 trust, a trustee must allocate more of a payment to income 5190 than provided for by this section, the trustee shall allocate 5200 to income the additional amount necessary to obtain the 5210 marital deduction. 5220 Sec. 18. NEW SECTION. 637.422 LIQUIDATING ASSET. 5230 1. In this section, "liquidating asset" means an asset 5240 whose value will diminish or terminate because the asset is 5250 expected to produce receipts for a period of limited duration. 5260 The term includes leaseholds, patents, trademarks, copyrights, 5270 royalty rights, and rights to receive payments during a period 5280 of more than one year under an arrangement that does not 5290 provide for the payment of interest on the unpaid balance. 5300 The term does not include deferred compensation that is 5310 subject to section 637.421, natural resources that are subject 5320 to section 637.423, timber that is subject to section 637.424, 5330 an activity that is subject to section 637.426, or any asset 5340 for which the trustee establishes a reserve for depreciation 5350 under section 637.503. 5360 2. A trustee shall allocate to income ten percent of the 5370 receipts from a liquidating asset and the balance to 5380 principal. 5390 Sec. 19. NEW SECTION. 637.423 MINERALS, WATER, AND OTHER 5400 NATURAL RESOURCES. 5410 1. Receipts from an interest in minerals or other natural 5420 resources must be allocated according to the type of payment, 5430 as follows: 5440 a. If received as nominal delay rental or annual rent on a 5450 lease, a receipt must be allocated to income. 5460 b. If received from a production payment, a receipt must 5470 be allocated to income to the extent that the agreement 5480 creating the production payment provides a factor for interest 5490 or its equivalent. The balance must be allocated to 5500 principal. 5510 c. If an amount received as a royalty, bonus, or delay 5520 rental is more than nominal, ninety percent must be allocated 5530 to principal and the balance to income. 5540 d. If an amount is received from a working interest or any 5550 other interest not provided for in paragraph "a", "b", or "c", 5560 ninety percent of the net amount received must be allocated to 5570 principal and the balance to income. 5580 2. An amount received on account of an interest in water 5590 that is renewable must be allocated to income. If the water 5600 is not renewable, ninety percent of the amount must be 5610 allocated to principal and the balance to income. 5620 3. This chapter applies without regard to whether a 5630 decedent or donor was extracting minerals, water, or other 5640 natural resources before the interest became subject to the 5650 trust. 5660 4. If a trust owns an interest in minerals, water, or 5670 other natural resources on or before July 1, 1999, the trustee 5680 may allocate receipts from the interest as provided in this 5690 section or in the manner used by the trustee before July 1, 5700 1999. If the trust acquires an interest in minerals, water, 5710 or other natural resources after July 1, 1999, the trustee 5720 shall allocate receipts from the interest as provided in this 5730 section. 5740 Sec. 20. NEW SECTION. 637.424 TIMBER. 5750 1. A trustee may account for net receipts from the sale of 5760 timber and related products under subsection 2 or section 5770 637.403 or, if the trustee determines that net receipts are 5780 insubstantial, may allocate the net receipts to principal. 5790 The presumptions in section 637.420 apply in determining 5800 whether net receipts are insubstantial. If a trust owns more 5810 than one block of timberland, the trustee may use different 5820 methods to account for net receipts from different blocks. 5830 2. If a trustee does not account under section 637.403 for 5840 net receipts from the sale of timber and related products or 5850 allocate the net receipts to principal because they are 5860 insubstantial, the trustee shall allocate the net receipts 5870 according to one of the following rules: 5880 a. Allocate the net receipts to income to the extent that 5890 the amount of timber removed from the land does not exceed the 5900 rate of growth of the block as a whole during the accounting 5910 periods in which a beneficiary has a mandatory income 5920 interest. 5930 b. Allocate the net receipts to principal to the extent 5940 that the amount of timber removed from the land exceeds the 5950 block's rate of growth or the net receipts are from the sale 5960 of standing timber. 5970 c. Allocate the net receipts to or between income and 5980 principal if the net receipts are from the lease of timberland 5990 or from a contract to cut timber from land owned by a trust, 6000 by determining the amount of timber removed from the land 6010 under the lease or contract and applying the rules in 6020 paragraphs "a" and "b". 6030 d. Allocate the net receipts to principal to the extent 6040 that advance payments, bonuses, and other payments are not 6050 allocated pursuant to paragraph "a", "b", or "c". 6060 3. In determining the net receipts from the sale of 6070 timber, a trustee shall deduct and transfer to principal a 6080 reasonable amount for depletion. 6090 4. This chapter applies regardless of whether a decedent 6100 or transferor was harvesting timber from the property before 6110 it became subject to the trust. 6120 5. If a trust owns an interest in timberland on or before 6130 July 1, 1999, the trustee may allocate net receipts from the 6140 sale of timber and related products as provided in this 6150 section or in the manner used by the trustee before July 1, 6160 1999. If the trust acquires an interest in timberland after 6170 July 1, l999, the trustee shall allocate net receipts from the 6180 sale of timber and related products as provided in this 6190 section. 6200 Sec. 21. NEW SECTION. 637.425 PROPERTY NOT PRODUCTIVE OF 6210 INCOME. 6220 1. If a marital deduction is allowed for all or part of a 6230 trust whose assets consist substantially of property that does 6240 not provide the surviving spouse with sufficient income from 6250 or use of the trust assets, the spouse may require the trustee 6260 to make property productive of income or convert property 6270 within a reasonable time. The trustee may decide which action 6280 or combination of actions to take. 6290 2. In all other cases, proceeds from the sale or other 6300 disposition of an asset are principal without regard to the 6310 amount of income the asset produces during any accounting 6320 period. 6330 Sec. 22. NEW SECTION. 637.426 DERIVATIVES AND OPTIONS. 6340 1. For purposes of this section, "derivative" means a 6350 contract or financial instrument or a combination of contracts 6360 and financial instruments which gives a trust the right or 6370 obligation to participate in some or all changes in the price 6380 of a tangible or intangible asset or group of assets, or 6390 changes in a rate, an index of prices or rates, or other 6400 market indicator for an asset or a group of assets. 6410 2. To the extent that a trustee does not account under 6420 section 637.403 for transactions in derivatives, receipts from 6430 and disbursements made in connection with those transactions 6440 must be allocated to principal. 6450 3. If a trustee grants an option to buy property from the 6460 trust, whether or not the trust owns the property when the 6470 option is granted, grants an option that permits another 6480 person to sell property to the trust, or acquires an option to 6490 buy property for the trust or an option to sell an asset owned 6500 by the trust, and the trustee or other owner of the asset is 6510 required to deliver the asset if the option is exercised, an 6520 amount received for granting the option must be allocated to 6530 principal, and an amount paid to acquire the option must be 6540 paid from principal. A gain or loss realized upon the 6550 exercise of an option, including an option granted to a 6560 settlor of the trust for services rendered, must be allocated 6570 to principal. 6580 Sec. 23. NEW SECTION. 637.427 ASSET-BACKED SECURITIES. 6590 1. For purposes of this section, "asset-backed security" 6600 means an asset whose value is based upon the right it gives 6610 the owner to receive distributions from the proceeds of 6620 financial assets that provide collateral for the security. 6630 The term includes an asset that gives the owner the right to 6640 receive only the interest or other current return from the 6650 collateral financial assets or only the proceeds from the 6660 capital investment in the collateral financial assets. It 6670 does not include an asset to which section 637.401 or 637.421 6680 applies. 6690 2. If a trust receives a payment from the interest or 6700 other current return and the capital investment of the 6710 collateral financial assets, the trustee shall allocate to 6720 income the portion of a payment that the payor identifies as 6730 being from the interest or other current return, and shall 6740 allocate the balance of the payment to principal. 6750 3. If a trust receives one or more payments in exchange 6760 for the trust's entire interest in an asset-backed security in 6770 one accounting period, the trustee shall allocate the payments 6780 to principal. If a payment is one of a series of payments 6790 that will result in the liquidation of the trust's interest in 6800 the security over more than one accounting period, the trustee 6810 shall allocate ten percent of the payment to income and the 6820 balance to principal. 6840 SUBCHAPTER 5 6850 ALLOCATION OF DISBURSEMENTS DURING 6860 ADMINISTRATION OF TRUST 6880 Sec. 24. NEW SECTION. 637.501 DISBURSEMENTS FROM INCOME. 6890 A trustee shall make disbursements from income, to the 6900 extent that they are not disbursements to which section 6910 637.201, subsection 2, paragraph "b" or "c", applies, 6920 according to the following: 6930 1. One-half of the regular compensation of the trustee and 6940 of any person providing investment advisory or custodial 6950 services to the trustee. 6960 2. One-half of all expenses for accountings, judicial 6970 proceedings, or other matters that involve both the income and 6980 remainder interests. 6990 3. All of the other ordinary expenses incurred in 7000 connection with the administration, management, or 7010 preservation of trust property and the distribution of income, 7020 including interest, ordinary repairs, regularly recurring 7030 taxes assessed against principal, and expenses of a proceeding 7040 or other matter that concerns primarily the income interest. 7050 4. Recurring premiums on insurance covering the loss of a 7060 principal asset or the loss of income from or use of the 7070 asset. 7080 Sec. 25. NEW SECTION. 637.502 DISBURSEMENTS FROM 7090 PRINCIPAL. 7100 1. A trustee shall make disbursements from principal 7110 according to the following: 7120 a. The remaining one-half of the disbursements described 7130 in section 637.501, subsections 1 and 2. 7140 b. All of the trustee's compensation calculated on 7150 principal as an acceptance, distribution, or termination fee, 7160 and disbursements made to prepare property for sale. 7170 c. Payments on the principal of a trust debt. 7180 d. Expenses of a proceeding that concerns primarily 7190 principal, including a proceeding to construe the trust or to 7200 protect the trust or its property. 7210 e. Insurance premiums paid on a policy not described in 7220 section 637.501, subsection 4, of which the trust is the owner 7230 and beneficiary. 7240 f. Estate, inheritance, and other transfer taxes, 7250 including penalties, apportioned to the trust. 7260 g. Disbursements related to environmental matters, 7270 including reclamation, assessing environmental conditions, 7280 remedying and removing environmental contamination, monitoring 7290 remedial activities and the release of substances, preventing 7300 future releases of substances, collecting amounts from persons 7310 liable or potentially liable for the costs of those 7320 activities, penalties imposed under environmental laws or 7330 regulations and other payments made to comply with those laws 7340 or regulations, statutory or common law claims by third 7350 parties, and defending claims based on environmental matters. 7360 2. If a trust owns a policy of insurance on the life of an 7370 individual and the trust is not the beneficiary of the policy, 7380 premiums paid on the policy are a distribution from principal 7390 to the policy beneficiary. 7400 3. If a principal asset is encumbered with an obligation 7410 that requires income from that asset to be paid directly to 7420 the creditor, the trustee shall transfer from principal to 7430 income an amount equal to the income paid to the creditor in 7440 reduction of the obligation's principal balance. 7450 Sec. 26. NEW SECTION. 637.503 TRANSFERS FROM INCOME TO 7460 PRINCIPAL FOR DEPRECIATION. 7470 1. For purposes of this section, "depreciation" means a 7480 reduction in value of a fixed asset having a useful life of 7490 more than one year due to wear, tear, decay, corrosion, or 7500 gradual obsolescence. 7510 2. A trustee may transfer to principal a reasonable amount 7520 of the net cash receipts from a principal asset that is 7530 subject to depreciation, but a transfer shall not be made for 7540 depreciation under any of the following circumstances: 7550 a. When the depreciation involves the portion of real 7560 property used or available for use by a beneficiary as a 7570 residence, or tangible personal property held or made 7580 available for the personal use or enjoyment of a beneficiary. 7590 b. When the depreciation occurs during the administration 7600 of a decedent's estate. 7610 c. If the trustee is accounting under section 637.403 for 7620 the business or activity in which the asset is used. 7630 3. An amount transferred to principal need not be held as 7640 a separate fund. 7650 Sec. 27. NEW SECTION. 637.504 TRANSFERS FROM INCOME TO 7660 REIMBURSE PRINCIPAL. 7670 1. If a trustee makes or expects to make a principal 7680 disbursement described in this section, the trustee may 7690 transfer an appropriate amount from income to principal in one 7700 or more accounting periods to reimburse principal or to 7710 provide a reserve for future principal disbursements. 7720 2. Principal disbursements to which subsection 1 applies 7730 include all of the following, but only to the extent that the 7740 trustee has not been and does not expect to be reimbursed by a 7750 third party: 7760 a. An amount chargeable to income but paid from principal 7770 because it is unusually large, including extraordinary 7780 repairs. 7790 b. A capital improvement to a principal asset, whether in 7800 the form of changes to an existing asset or the construction 7810 of a new asset, including special assessments. 7820 c. Disbursements made to prepare property for rental, 7830 including leasehold improvements and broker's commissions. 7840 d. Periodic payments on an obligation secured by a 7850 principal asset to the extent that the amount transferred from 7860 income to principal for depreciation is less than the periodic 7870 payments. 7880 e. Disbursements described in section 637.502, subsection 7890 1, paragraph "g". 7900 3. If the asset whose ownership gives rise to the 7910 disbursements becomes subject to a successive income interest 7920 after an income interest ends, a trustee may continue to 7930 transfer amounts from income to principal as provided in 7940 subsection 1. 7950 Sec. 28. NEW SECTION. 637.505 INCOME TAXES. 7960 1. A tax required to be paid by a trustee based on 7970 receipts allocated to income must be paid from income. 7980 2. A tax required to be paid by a trustee based on 7990 receipts allocated to principal must be paid from principal, 8000 even if the tax is called an income tax by the taxing 8010 authority. 8020 3. A tax required to be paid by a trustee on the trust's 8030 share of an entity's taxable income must be paid 8040 proportionately, according to all of the following principles: 8050 a. From income, to the extent that receipts from the 8060 entity are allocated to income. 8070 b. From principal, to the extent that the following 8080 principles are observed: 8090 (1) Receipts from the entity are allocated to principal. 8100 (2) The trust's share of the entity's taxable income 8110 exceeds the total receipts in paragraph "a" and in 8120 subparagraph (1). 8130 4. For purposes of this section, receipts allocated to 8140 principal or income shall be reduced by the amount distributed 8150 to a beneficiary from principal or income for which the trust 8160 receives a deduction in calculating the tax. 8170 Sec. 29. NEW SECTION. 637.506 ADJUSTMENTS BETWEEN 8180 PRINCIPAL AND INCOME BECAUSE OF TAXES. 8190 1. A fiduciary may make adjustments between principal and 8200 income to offset the shifting of economic interests or tax 8210 benefits between income beneficiaries and remainder 8220 beneficiaries which arise from any of the following: 8230 a. Elections and decisions, other than those described in 8240 subsection 2, that the fiduciary makes from time to time 8250 regarding tax matters. 8260 b. An income tax or any other tax that is imposed upon the 8270 fiduciary or a beneficiary as a result of a transaction 8280 involving or a distribution from the estate or trust. 8290 c. The ownership by an estate or trust of an interest in 8300 an entity whose taxable income, whether or not distributed, is 8310 includable in the taxable income of the estate, trust, or a 8320 beneficiary. 8330 2. If the amount of an estate tax marital deduction or 8340 charitable contributions deduction is reduced because a 8350 fiduciary deducts an amount that is paid from principal for 8360 income tax purposes instead of deducting it for estate tax 8370 purposes, and as a result estate taxes paid from principal are 8380 increased and income taxes paid by an estate, trust, or 8390 beneficiary are decreased, each estate, trust, or beneficiary 8400 that benefits from the decrease in income tax shall reimburse 8410 the principal from which the increase in estate tax is paid. 8420 The total reimbursement must equal the increase in the estate 8430 tax to the extent that the principal used to pay the increase 8440 would have qualified for a martial deduction or charitable 8450 contributions deduction but for the payment. The 8460 proportionate share of the reimbursement for each estate, 8470 trust, or beneficiary whose income taxes are reduced must be 8480 the same as its proportionate share of the total decrease in 8490 income tax. An estate or trust shall reimburse principal from 8500 income. 8520 SUBCHAPTER 6 8530 MISCELLANEOUS PROVISIONS 8550 Sec. 30. NEW SECTION. 637.601 APPLICATION OF CHAPTER TO 8560 EXISTING TRUSTS AND ESTATES CHAPTER PREVAILS. 8570 This chapter applies to every trust or decedent's estate on 8580 and after July 1, 2000, except as otherwise expressly provided 8590 in the will, the terms of the trust, or in this chapter. 8600 Notwithstanding any Code provision to the contrary, the 8610 provisions of this chapter shall prevail over any other 8620 applicable Code provision. 8630 Sec. 31. Section 633.352, Code 1999, is amended to read as 8640 follows: 8650 633.352 COLLECTION OF RENTS AND PAYMENT OF TAXES AND 8660 CHARGES. 8670 Unless otherwise provided by the will, the personal 8680 representative shall
collect the income from the property of 8690 which the personal representative has possession, pay the 8700 taxes and fixed charges thereon and apply the balance of such 8710 income to general estate obligationsallocate and distribute 8720 income of an estate in accordance with chapter 637. Unless 8730 otherwise provided by will, any unexpended portion of such 8740 income shall become a part of the general assets of such 8750 estate.8760 Sec. 32. Section 633.103, Code 1999, is repealed. 8780 8790 8800 8810 BRENT SIEGRIST 8820 Speaker of the House 8830 8840 8850 8860 MARY E. KRAMER 8870 President of the Senate 8880 8890 I hereby certify that this bill originated in the House and 8900 is known as House File 584, Seventy-eighth General Assembly. 8910 8920 8930 8940 ELIZABETH ISAACSON 8950 Chief Clerk of the House 8960 Approved , 1999 8970 8980 8990 9000 THOMAS J. VILSACK 9010 Governor
Text: HF00583 Text: HF00585 Text: HF00500 - HF00599 Text: HF Index Bills and Amendments: General Index Bill History: General Index
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