Text: HF00583                           Text: HF00585
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House File 584

Partial Bill History

Bill Text

    20                                              HOUSE FILE 584
    50 AN ACT
   130                           CHAPTER 637
   150                          SUBCHAPTER 1
   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
   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
  1080    Sec. 4.  NEW SECTION.  637.201  DETERMINATION AND
  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.
  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
  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.
  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.
  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
  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
  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
  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
  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,
  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
  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
  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
  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
  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
  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
  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
  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:
  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 obligations allocate 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.  
  8810                               BRENT SIEGRIST
  8820                               Speaker of the House
  8860                               MARY E. KRAMER
  8870                               President of the Senate
  8890    I hereby certify that this bill originated in the House and
  8900 is known as House File 584, Seventy-eighth General Assembly.
  8940                               ELIZABETH ISAACSON
  8950                               Chief Clerk of the House
  8960 Approved                , 1999
  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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