Citations Affected: IC 29-1-7.5-3 ; IC 30-2-14; IC 30-4-1 ; IC 30-4-5.
Synopsis: Uniform Principal and Income act. Adopts the Uniform
Principal and Income Act. Makes conforming changes. Repeals
Effective: July 1, 2001.
January 8, 2001, read first time and referred to Committee on Judiciary.
A BILL FOR AN ACT to amend the Indiana Code concerning trusts
, AS AMENDED BY P.L.182-1999,
SECTION 4, IS AMENDED TO READ AS FOLLOWS [EFFECTIVE
JULY 1, 2001]: Sec. 3. Subject to section 2(d) of this chapter, a
personal representative who administers an estate under this chapter
may do the following without order of the court:
(1) retain assets owned by the decedent pending distribution or liquidation including those in which the representative is personally interested or which are otherwise improper for trust investment;
(2) receive assets from fiduciaries or other sources;
(3) perform, compromise, or refuse performance of the decedent's contracts that continue as obligations of the estate, as he may determine under the circumstances. In performing enforceable contracts by the decedent to convey or lease land, the personal representative, among other possible courses of action, may:
(i) execute and deliver a deed of conveyance for cash payment of all sums remaining due or the purchaser's note for the sum
remaining due secured by a mortgage or deed of trust on the
(ii) deliver a deed in escrow with directions that the proceeds, when paid in accordance with the escrow agreement, be paid to the successors of the decedent, as designated in the escrow agreement;
(4) satisfy written charitable pledges of the decedent irrespective of whether the pledges constituted binding obligations of the decedent or were properly presented as claims, if in the judgment of the personal representative the decedent would have wanted the pledges completed under the circumstances;
(5) if funds are not needed to meet debts and expenses currently payable and are not immediately distributable, deposit or invest liquid assets of the estate, including moneys received from the sale of other assets, in federally insured interest-bearing accounts, readily marketable secured loan arrangements or other prudent investments which would be reasonable for use by trustees generally;
(6) acquire or dispose of an asset, including land in this or another state, for cash or on credit, at public or private sale; and manage, develop, improve, exchange, partition, change the character of, or abandon an estate asset;
(7) make ordinary or extraordinary repairs or alterations in buildings or other structures, demolish any improvements, raze existing or erect new party walls or buildings;
(8) subdivide, develop, or dedicate land to public use; make or obtain the vacation of plats and adjust boundaries; or adjust differences in valuation on exchange or partition by giving or receiving considerations; or dedicate easements to public use without consideration;
(9) enter for any purpose into a lease as lessor or lessee, with or without option to purchase or renew, for a term within or extending beyond the period of administration;
(10) enter into a lease or arrangement for exploration and removal of minerals or other natural resources or enter into a pooling or unitization agreement;
(11) abandon property when, in the opinion of the personal representatives, it is valueless, or is so encumbered, or is in condition that it is of no benefit to the estate;
(12) vote stocks or other securities in person or by general or limited proxy;
(13) pay calls, assessments, and other sums chargeable or
accruing against or on account of securities, unless barred by the
provisions relating to claims;
(14) hold a security in the name of a nominee or in other form without disclosure of the interest of the estate but the personal representative is liable for any act of the nominee in connection with the security so held;
(15) insure the assets of the estate against damage, loss and liability and himself against liability as to third persons;
(16) borrow money with or without security to be repaid from the estate assets or otherwise and advance money for the protection of the estate;
(17) effect a fair and reasonable compromise with any debtor or obligor, or extend, renew, or in any manner modify the terms of any obligation owing to the estate. If the personal representative holds a mortgage, pledge, or other lien upon property of another person, he may, in lieu of foreclosure, accept a conveyance or transfer of encumbered assets from the owner thereof in satisfaction of the indebtedness secured by lien;
(18) pay taxes, assessments, compensation of the personal representative, and other expenses incident to the administration of the estate;
(19) sell or exercise stock subscription or conversion rights and consent, directly or through a committee or other agent, to the reorganization, consolidation, merger, dissolution, or liquidation of a corporation or other business enterprise;
(20) allocate items of income or expense to either estate income or principal, as permitted or provided by
(21) employ persons, including attorneys, auditors, investment advisors, or agents, even if they are associated with the personal representative, to advise or assist the personal representative in the performance of his administrative duties; act without independent investigation upon their recommendations; and instead of acting personally, employ one (1) or more agents to perform any act of administration, whether or not discretionary;
(22) prosecute or defend claims or proceedings in any jurisdiction for the protection of the estate and of the personal representative in the performance of his duties;
(23) sell, mortgage, or lease any real or personal property of the estate or any interest therein for cash, credit, or for part cash and part credit, and with or without security for unpaid balances;
(24) continue any unincorporated business or venture in which the decedent was engaged at the time of his death:
person to whom net income of a trust is or may be payable.
Sec. 6. As used in this chapter, "income interest" means the right of an income beneficiary to receive all or part of net income, whether the terms of the trust require it to be distributed or authorize it to be distributed in the trustee's discretion.
Sec. 7. As used in this chapter, "mandatory income interest" means the right of an income beneficiary to receive net income that the terms of the trust require the fiduciary to distribute.
Sec. 8. As used in this chapter, "net income" means the total receipts allocated to income during an accounting period minus the disbursements made from income during the period, plus or minus transfers under this chapter to or from income during the period.
Sec. 9. As used in this chapter, "person" means an individual, corporation, business trust, estate, trust, partnership, limited liability company, association, joint venture, government; governmental subdivision, agency, or instrumentality; public corporation, or any other legal or commercial entity.
Sec. 10. As used in this chapter, "principal" means property held in trust for distribution to a remainder beneficiary when the trust terminates.
Sec. 11. As used in this chapter, "remainder beneficiary" means a person entitled to receive principal when an income interest ends.
Sec. 12. As used in this chapter, "terms of a trust" means the manifestation of the intent of a settlor or decedent with respect to the trust, expressed in a manner that admits of its proof in a judicial proceeding, whether by written or spoken words or by conduct.
Sec. 13. As used in this chapter, "trustee" includes an original, additional, or successor trustee, whether or not appointed or confirmed by a court.
Sec. 14. (a) In allocating receipts and disbursements to or between principal and income, and with respect to any matter within the scope of sections 16 through 20 of this chapter, a fiduciary:
(1) shall administer a trust or estate in accordance with the terms of the trust or the will, even if there is a different provision in this chapter;
(2) may administer a trust or estate by the exercise of a discretionary power of administration given to the fiduciary by the terms of the trust or the will, even if the exercise of the power produces a result different from a result required or permitted by this chapter;
and the increase or decrease in the value of the principal
assets, which the trustee may estimate as to assets for which
market values are not readily available.
(7) Whether and to what extent the terms of the trust give the trustee the power to invade principal or accumulate income or prohibit the trustee from invading principal or accumulating income, and the extent to which the trustee has exercised a power from time to time to invade principal or accumulate income.
(8) The actual and anticipated effect of economic conditions on principal and income and effects of inflation and deflation.
(9) The anticipated tax consequences of an adjustment.
(c) A trustee may not make an adjustment:
(1) that diminishes the income interest in a trust that requires all of the income to be paid at least annually to a spouse and for which an estate tax or gift tax marital deduction would be allowed, in whole or in part, if the trustee did not have the power to make the adjustment;
(2) that reduces the actuarial value of the income interest in a trust to which a person transfers property with the intent to qualify for a gift tax exclusion;
(3) that changes the amount payable to a beneficiary as a fixed annuity or a fixed fraction of the value of the trust assets;
(4) from any amount that is permanently set aside for charitable purposes under a will or the terms of a trust unless both income and principal are so set aside;
(5) if possessing or exercising the power to make an adjustment causes an individual to be treated as the owner of all or part of the trust for income tax purposes, and the individual would not be treated as the owner if the trustee did not possess the power to make an adjustment;
(6) if possessing or exercising the power to make an adjustment causes all or part of the trust assets to be included for estate tax purposes in the estate of an individual who has the power to remove a trustee or appoint a trustee, or both, and the assets would not be included in the estate of the individual if the trustee did not possess the power to make an adjustment;
(7) if the trustee is a beneficiary of the trust; or
(8) if the trustee is not a beneficiary, but the adjustment would benefit the trustee directly or indirectly.
(d) If subsection (c)(5), (c)(6), (c)(7), or (c)(8) applies to a trustee
and there is more than one (1) trustee, a cotrustee to whom the
provision does not apply may make the adjustment unless the
exercise of the power by the remaining trustee or trustees is not
permitted by the terms of the trust.
(e) A trustee may release the entire power conferred by subsection (a) or may release only the power to adjust from income to principal or the power to adjust from principal to income if the trustee is uncertain about whether possessing or exercising the power will cause a result described in subsection (c)(1) through (c)(6) or in subsection (c)(8) or if the trustee determines that possessing or exercising the power will or may deprive the trust of a tax benefit or impose a tax burden not described in subsection (c). The release may be permanent or for a specified period, including a period measured by the life of an individual.
(f) Terms of a trust that limit the power of a trustee to make an adjustment between principal and income do not affect the application of this section unless it is clear from the terms of the trust that the terms are intended to deny the trustee the power of adjustment conferred by subsection (a).
Sec. 16. After an individual dies, in the case of an estate, or after an income interest in a trust ends, the following rules apply:
(1) A fiduciary of an estate or of a terminating income interest shall determine the amount of net income and net principal receipts received from property specifically given to a beneficiary under the rules in sections 18 through 41 of this chapter that apply to trustees and the rules in subdivision (5). The fiduciary shall distribute the net income and net principal receipts to the beneficiary who is to receive the specific property.
(2) A fiduciary shall determine the remaining net income of a decedent's estate or a terminating income interest under the rules in sections 18 through 41 of this chapter that apply to trustees and by:
(A) including in net income all income from property used to discharge liabilities;
(B) paying from income or principal, in the fiduciary's discretion, fees of attorneys, accountants, and fiduciaries; court costs and other expenses of administration; and interest on death taxes, but the fiduciary may pay those expenses from income of property passing to a trust for which the fiduciary claims an estate tax marital or charitable deduction only to the extent that the payment of
those expenses from income will not cause the reduction or
loss of the deduction; and
(C) paying from principal all other disbursements made or incurred in connection with the settlement of a decedent's estate or the winding up of a terminating income interest, including debts, funeral expenses, disposition of remains, family allowances, and death taxes and related penalties that are apportioned to the estate or terminating income interest by the will, the terms of the trust, or applicable law.
(3) A fiduciary shall distribute to a beneficiary who receives a pecuniary amount outright the interest or any other amount provided by the will, the terms of the trust, or applicable law from net income determined under subdivision (2) or from principal to the extent that net income is insufficient. If a beneficiary is to receive a pecuniary amount outright from a trust after an income interest ends and no interest or other amount is provided for by the terms of the trust or applicable law, the fiduciary shall distribute the interest or other amount to which the beneficiary would be entitled under applicable law if the pecuniary amount were required to be paid under a will.
(4) A fiduciary shall distribute the net income remaining after distributions required by subdivision (3) in the manner described in section 17 of this chapter to all other beneficiaries, including a beneficiary who receives a pecuniary amount in trust, even if the beneficiary holds an unqualified power to withdraw assets from the trust or other presently exercisable general power of appointment over the trust.
(5) A fiduciary may not reduce principal or income receipts from property described in subdivision (1) because of a payment described in section 36 or 37 of this chapter to the extent that the will, the terms of the trust, or applicable law requires the fiduciary to make the payment from assets other than the property or to the extent that the fiduciary recovers or expects to recover the payment from a third party. The net income and principal receipts from the property are determined by including all of the amounts the fiduciary receives or pays with respect to the property, whether those amounts accrued or became due before, on, or after the date of an individual's death or an income interest's terminating
event, and by making a reasonable provision for amounts that
the fiduciary believes the estate or terminating income
interest may become obligated to pay after the property is
Sec. 17. (a) Each beneficiary described in section 16(4) of this chapter is entitled to receive a portion of the net income equal to the beneficiary's fractional interest in undistributed principal assets, using values as of the distribution date. If a fiduciary makes more than one (1) distribution of assets to beneficiaries to whom this section applies, each beneficiary, including one who does not receive part of the distribution, is entitled, as of each distribution date, to the net income the fiduciary has received after the date of death or terminating event or earlier distribution date but has not distributed as of the current distribution date.
(b) In determining a beneficiary's share of net income, the following rules apply:
(1) The beneficiary is entitled to receive a portion of the net income equal to the beneficiary's fractional interest in the undistributed principal assets immediately before the distribution date, including assets that later may be sold to meet principal obligations.
(2) The beneficiary's fractional interest in the undistributed principal assets must be calculated without regard to property specifically given to a beneficiary and property required to pay pecuniary amounts not in trust.
(3) The beneficiary's fractional interest in the undistributed principal assets must be calculated on the basis of the aggregate value of those assets as of the distribution date without reducing the value by any unpaid principal obligation.
(4) The distribution date for purposes of this section may be the date as of which the fiduciary calculates the value of the assets if that date is reasonably near the date on which assets are actually distributed.
(c) If a fiduciary does not distribute all of the collected but undistributed net income to each person as of a distribution date, the fiduciary shall maintain appropriate records showing the interest of each beneficiary in that net income.
(d) A fiduciary may apply the rules in this section, to the extent that the fiduciary considers it appropriate, to net gain or loss realized after the date of death or terminating event or earlier distribution date from the disposition of a principal asset if this
section applies to the income from the asset.
Sec. 18. (a) An income beneficiary is entitled to net income from the date on which the income interest begins. An income interest begins on the date specified in the terms of the trust or, if no date is specified, on the date an asset becomes subject to a trust or successive income interest.
(b) An asset becomes subject to a trust:
(1) on the date it is transferred to the trust in the case of an asset that is transferred to a trust during the transferor's life;
(2) on the date of a testator's death in the case of an asset that becomes subject to a trust by reason of a will, even if there is an intervening period of administration of the testator's estate; or
(3) on the date of an individual's death in the case of an asset that is transferred to a fiduciary by a third party because of the individual's death.
(c) An asset becomes subject to a successive income interest on the day after the preceding income interest ends, as determined under subsection (d), even if there is an intervening period of administration to wind up the preceding income interest.
(d) An income interest ends on the day before an income beneficiary dies or another terminating event occurs, or on the last day of a period during which there is no beneficiary to whom a trustee may distribute income.
Sec. 19. (a) A trustee shall allocate an income receipt or disbursement other than one to which section 16(1) of this chapter applies to principal if its due date occurs before an individual dies in the case of an estate or before an income interest begins in the case of a trust or successive income interest.
(b) A trustee shall allocate an income receipt or disbursement to income if its due date occurs on or after the date on which an individual dies or an income interest begins and it is a periodic due date. An income receipt or disbursement must be treated as accruing from day to day if its due date is not periodic or it has no due date. The portion of the receipt or disbursement accruing before the date on which an individual dies or an income interest begins must be allocated to principal and the balance must be allocated to income.
(c) An item of income or an obligation is due on the date the payer is required to make a payment. If a payment date is not stated, there is no due date for the purposes of this chapter. Distributions to shareholders or other owners from an entity to
which section 21 of this chapter applies are deemed to be due on
the date fixed by the entity for determining who is entitled to
receive the distribution or, if no date is fixed, on the declaration
date for the distribution. A due date is periodic for receipts or
disbursements that must be paid at regular intervals under a lease
or an obligation to pay interest or if an entity customarily makes
distributions at regular intervals.
Sec. 20. (a) As used in this section, "undistributed income" means net income received before the date on which an income interest ends. The term does not include an item of income or expense that is due or accrued or net income that has been added or is required to be added to principal under the terms of the trust.
(b) When a mandatory income interest ends, the trustee shall pay to a mandatory income beneficiary who survives that date, or the estate of a deceased mandatory income beneficiary whose death causes the interest to end, the beneficiary's share of the undistributed income that is not disposed of under the terms of the trust unless the beneficiary has an unqualified power to revoke more than five percent (5%) of the trust immediately before the income interest ends. In the latter case, the undistributed income from the portion of the trust that may be revoked must be added to principal.
(c) When a trustee's obligation to pay a fixed annuity or a fixed fraction of the value of the trust's assets ends, the trustee shall prorate the final payment if and to the extent required by applicable law to accomplish a purpose of the trust or its settlor relating to income, gift, estate, or other tax requirements.
Sec. 21. (a) As used in this section, "entity" means a corporation, partnership, limited liability company, regulated investment company, real estate investment trust, common trust fund, or any other organization in which a trustee has an interest other than a trust or an estate to which section 22 of this chapter applies, a business or activity to which section 23 of this chapter applies, or an asset backed security to which section 35 of this chapter applies.
(b) Except as otherwise provided in this section, a trustee shall allocate to income money received from an entity.
(c) A trustee shall allocate the following receipts from an entity to principal:
(1) Property other than money.
(2) Money received in one distribution or a series of related distributions in exchange for part or all of a trust's interest in
(3) Money received in total or partial liquidation of the entity.
(4) Money received from an entity that is a regulated investment company or a real estate investment trust if the money distributed is a capital gain dividend for federal income tax purposes.
(d) Money is received in partial liquidation:
(1) to the extent that the entity, at or near the time of a distribution, indicates that it is a distribution in partial liquidation; or
(2) if the total amount of money and property received in a distribution or series of related distributions is greater than twenty percent (20%) of the entity's gross assets, as shown by the entity's year end financial statements immediately preceding the initial receipt.
(e) Money is not received in partial liquidation, nor may it be taken into account under subsection (d)(2), to the extent that it does not exceed the amount of income tax that a trustee or beneficiary must pay on taxable income of the entity that distributes the money.
(f) A trustee may rely upon a statement made by an entity about the source or character of a distribution if the statement is made at or near the time of distribution by the entity's board of directors or other person or group of persons authorized to exercise powers to pay money or transfer property comparable to those of a corporation's board of directors.
Sec. 22. A trustee shall allocate to income an amount received as a distribution of income from a trust or an estate in which the trust has an interest other than a purchased interest, and shall allocate to principal an amount received as a distribution of principal from such a trust or estate. If a trustee purchases an interest in a trust that is an investment entity, or a decedent or donor transfers an interest in such a trust to a trustee, sections 21 or 35 of this chapter apply to a receipt from the trust.
Sec. 23. (a) If a trustee who conducts a business or other activity determines that it is in the best interest of all the beneficiaries to account separately for the business or activity instead of accounting for it as part of the trust's general accounting records, the trustee may maintain separate accounting records for its transactions, whether or not its assets are segregated from other trust assets.
(b) A trustee who accounts separately for a business or other
activity may determine the extent to which its net cash receipts
must be retained for working capital, the acquisition or
replacement of fixed assets, and other reasonably foreseeable needs
of the business or activity, and the extent to which the remaining
net cash receipts are accounted for as principal or income in the
trust's general accounting records. If a trustee sells assets of the
business or other activity, other than in the ordinary course of the
business or activity, the trustee shall account for the net amount
received as principal in the trust's general accounting records to
the extent the trustee determines that the amount received is no
longer required in the conduct of the business.
(c) Activities for which a trustee may maintain separate accounting records include:
(1) retail, manufacturing, service, and other traditional business activities;
(3) raising and selling livestock and other animals;
(4) management of rental properties;
(5) extraction of minerals and other natural resources;
(6) timber operations; and
(7) activities to which section 34 of this chapter applies.
Sec. 24. A trustee shall allocate to principal:
(1) to the extent not allocated to income under this chapter, assets received from a transferor during the transferor's lifetime, a decedent's estate, a trust with a terminating income interest, or a payer under a contract naming the trust or its trustee as beneficiary;
(2) money or other property received from the sale, exchange, liquidation, or change in form of a principal asset, including realized profit, subject to this sections 21 through 35 of this chapter;
(3) amounts recovered from third parties to reimburse the trust because of disbursements described in section 37(a)(7) of this chapter or for other reasons to the extent not based on the loss of income;
(4) proceeds of property taken by eminent domain, but a separate award made for the loss of income with respect to an accounting period during which a current income beneficiary had a mandatory income interest is income;
(5) net income received in an accounting period during which there is no beneficiary to whom a trustee may or must distribute income; and
trustee must allocate more of a payment to income than provided
for by this section, the trustee shall allocate to income the
additional amount necessary to obtain the marital deduction.
(e) This section does not apply to payments to which section 30 of this chapter applies.
Sec. 30. (a) As used in this section, "liquidating asset" means an asset whose value will diminish or terminate because the asset is expected to produce receipts for a period of limited duration. The term includes a leasehold, patent, copyright, royalty right, and right to receive payments during a period of more than one (1) year under an arrangement that does not provide for the payment of interest on the unpaid balance. The term does not include the following:
(1) A payment subject to section 29 of this chapter.
(2) Resources subject to section 31 of this chapter.
(3) Timber subject to section 32 of this chapter.
(4) An activity subject to section 34 of this chapter.
(5) An asset subject to section 35 of this chapter.
(6) Any asset for which the trustee establishes a reserve for depreciation under section 38 of this chapter.
(b) A trustee shall allocate to income ten percent (10%) of the receipts from a liquidating asset and the balance to principal.
Sec. 31. (a) To the extent that a trustee accounts for receipts from an interest in minerals or other natural resources under this section, the trustee shall allocate them as follows:
(1) If received as nominal delay rental or nominal annual rent on a lease, a receipt must be allocated to income.
(2) If received from a production payment, a receipt must be allocated to income if and to the extent that the agreement creating the production payment provides a factor for interest or its equivalent. The balance must be allocated to principal.
(3) If an amount received as a royalty, shut-in-well payment, take-or-pay payment, bonus, or delay rental is more than nominal, ninety percent (90%) must be allocated to principal and the balance to income.
(4) If an amount is received from a working interest or any other interest not provided for in subdivision (1), (2), or (3), ninety percent (90%) of the net amount received must be allocated to principal and the balance to income.
(b) An amount received on account of an interest in water that is renewable must be allocated to income. If the water is not renewable, ninety percent (90%) of the amount must be allocated
to principal and the balance to income.
(c) This chapter applies whether or not a decedent or donor was extracting minerals, water, or other natural resources before the interest became subject to the trust.
(d) If a trust owns an interest in minerals, water, or other natural resources on July 1, 2001, the trustee may allocate receipts from the interest as provided in this chapter or in the manner used by the trustee before July 1, 2001. If the trust acquires an interest in minerals, water, or other natural resources after June 30, 2001, the trustee shall allocate receipts from the interest as provided in this chapter.
Sec. 32. (a) To the extent that a trustee accounts for receipts from the sale of timber and related products pursuant to this section, the trustee shall allocate the net receipts:
(1) to income to the extent that the amount of timber removed from the land does not exceed the rate of growth of the timber during the accounting periods in which a beneficiary has a mandatory income interest;
(2) to principal to the extent that the amount of timber removed from the land exceeds the rate of growth of the timber or the net receipts are from the sale of standing timber;
(3) to or between income and principal if the net receipts are from the lease of timberland or from a contract to cut timber from land owned by a trust, by determining the amount of timber removed from the land under the lease or contract and applying the rules in subdivisions (1) and (2); or
(4) to principal to the extent that advance payments, bonuses, and other payments are not allocated under subdivision (1), (2), or (3).
(b) In determining net receipts to be allocated under subsection (a), a trustee shall deduct and transfer to principal a reasonable amount for depletion.
(c) This chapter applies whether or not a decedent or transferor was harvesting timber from the property before it became subject to the trust.
(d) If a trust owns an interest in timberland on July 1, 2001, the trustee may allocate net receipts from the sale of timber and related products as provided in this chapter or in the manner used by the trustee before July 1, 2001. If the trust acquires an interest in timberland after June 30, 2001, the trustee shall allocate net receipts from the sale of timber and related products as provided
in this chapter.
Sec. 33. (a) If a marital deduction is allowed for all or part of a trust whose assets consist substantially of property that does not provide the spouse with sufficient income from or use of the trust assets, and if the amounts that the trustee transfers from principal to income under section 15 of this chapter and distributes to the spouse from principal under the terms of the trust are insufficient to provide the spouse with the beneficial enjoyment required to obtain the marital deduction, the spouse may require the trustee to make property productive of income, convert property within a reasonable time, or exercise the power conferred by section 15(a) of this chapter. The trustee may decide which action or combination of actions to take.
(b) In cases not governed by subsection (a), proceeds from the sale or other disposition of an asset are principal without regard to the amount of income the asset produces during any accounting period.
Sec. 34. (a) As used in this section, "derivative" means a contract or financial instrument or a combination of contracts and financial instruments which gives a trust the right or obligation to participate in some or all changes in the price of a tangible or intangible asset or group of assets, or changes in a rate, an index of prices or rates, or other market indicator for an asset or a group of assets.
(b) To the extent that a trustee does not account under section 23 of this chapter for transactions in derivatives, the trustee shall allocate to principal receipts from and disbursements made in connection with those transactions.
(c) If a trustee grants an option to buy property from the trust, whether or not the trust owns the property when the option is granted, grants an option that permits another person to sell property to the trust, or acquires an option to buy property for the trust or an option to sell an asset owned by the trust, and the trustee or other owner of the asset is required to deliver the asset if the option is exercised, an amount received for granting the option must be allocated to principal. An amount paid to acquire the option must be paid from principal. A gain or loss realized upon the exercise of an option, including an option granted to a settlor of the trust for services rendered, must be allocated to principal.
Sec. 35. (a) As used in this section, "asset backed security" means an asset whose value is based upon the right it gives the
owner to receive distributions from the proceeds of financial assets
that provide collateral for the security. The term includes an asset
that gives the owner the right to receive from the collateral
financial assets only the interest or other current return or only the
proceeds other than interest or current return. The term does not
include an asset to which sections 21 or 29 of this chapter apply.
(b) If a trust receives a payment from interest or other current return and from other proceeds of the collateral financial assets, the trustee shall allocate to income the portion of the payment which the payer identifies as being from interest or other current return and shall allocate the balance of the payment to principal.
(c) If a trust receives one (1) or more payments in exchange for the trust's entire interest in an asset backed security in one (1) accounting period, the trustee shall allocate the payments to principal. If a payment is one (1) of a series of payments that will result in the liquidation of the trust's interest in the security over more than one (1) accounting period, the trustee shall allocate ten percent (10%) of the payment to income and the balance to principal.
Sec. 36. A trustee shall make the following disbursements from income to the extent that they are not disbursements to which section 16(2)(B) or 16(2)(C) of this chapter applies:
(1) one-half (1/2) of the regular compensation of the trustee and of any person providing investment advisory or custodial services to the trustee;
(2) one-half (1/2) of all expenses for accountings, judicial proceedings, or other matters that involve both the income and remainder interests;
(3) all of the other ordinary expenses incurred in connection with the administration, management, or preservation of trust property and the distribution of income, including interest, ordinary repairs, regularly recurring taxes assessed against principal, and expenses of a proceeding or other matter that concerns primarily the income interest; and
(4) recurring premiums on insurance covering the loss of a principal asset or the loss of income from or use of the asset.
Sec. 37. (a) A trustee shall make the following disbursements from principal:
(1) the remaining one-half (1/2) of the disbursements described in section 36(1) and 36(2) of this chapter;
(2) all of the trustee's compensation calculated on principal as a fee for acceptance, distribution, or termination, and
disbursements made to prepare property for sale;
(3) payments on the principal of a trust debt;
(4) expenses of a proceeding that concerns primarily principal, including a proceeding to construe the trust or to protect the trust or its property;
(5) premiums paid on a policy of insurance not described in section 36(4) of this chapter of which the trust is the owner and beneficiary;
(6) estate, inheritance, and other transfer taxes, including penalties, apportioned to the trust; and
(7) disbursements related to environmental matters, including reclamation, assessing environmental conditions, remedying and removing environmental contamination, monitoring remedial activities and the release of substances, preventing future releases of substances, collecting amounts from persons liable or potentially liable for the costs of those activities, penalties imposed under environmental laws or regulations and other payments made to comply with those laws or regulations, statutory or common law claims by third parties, and defending claims based on environmental matters.
(b) If a principal asset is encumbered with an obligation that requires income from that asset to be paid directly to the creditor, the trustee shall transfer from principal to income an amount equal to the income paid to the creditor in reduction of the principal balance of the obligation.
Sec. 38. (a) In this section, "depreciation" means a reduction in value due to wear, tear, decay, corrosion, or gradual obsolescence of a fixed asset having a useful life of more than one (1) year.
(b) A trustee may transfer to principal a reasonable amount of the net cash receipts from a principal asset that is subject to depreciation, but may not transfer any amount for depreciation:
(1) of that portion of real property used or available for use by a beneficiary as a residence or of tangible personal property held or made available for the personal use or enjoyment of a beneficiary;
(2) during the administration of a decedent's estate; or
(3) under this section if the trustee is accounting under section 23 of this chapter for the business or activity in which the asset is used.
(c) An amount transferred to principal need not be held as a separate fund.
Sec. 39. (a) If a trustee makes or expects to make a principal
disbursement described in this section, the trustee may transfer an
appropriate amount from income to principal in one (1) or more
accounting periods to reimburse principal or to provide a reserve
for future principal disbursements.
(b) Principal disbursements to which subsection (a) applies include the following, but only to the extent that the trustee has not been and does not expect to be reimbursed by a third party:
(1) an amount chargeable to income but paid from principal because it is unusually large, including extraordinary repairs;
(2) a capital improvement to a principal asset, whether in the form of changes to an existing asset or the construction of a new asset, including special assessments;
(3) disbursements made to prepare property for rental, including tenant allowances, leasehold improvements, and broker's commissions;
(4) periodic payments on an obligation secured by a principal asset to the extent that the amount transferred from income to principal for depreciation is less than the periodic payments; and
(5) disbursements described in section 37(a)(7) of this chapter.
(c) If the asset whose ownership gives rise to the disbursements becomes subject to a successive income interest after an income interest ends, a trustee may continue to transfer amounts from income to principal as provided in subsection (a).
Sec. 40. (a) A tax required to be paid by a trustee based on receipts allocated to income must be paid from income.
(b) A tax required to be paid by a trustee based on receipts allocated to principal must be paid from principal, even if the tax is called an income tax by the taxing authority.
(c) A tax required to be paid by a trustee on the trust's share of an entity's taxable income must be paid proportionately:
(1) from income to the extent that receipts from the entity are allocated to income; and
(2) from principal to the extent that:
(A) receipts from the entity are allocated to principal; and
(B) the trust's share of the entity's taxable income exceeds the total receipts described in subdivisions (1) and (2)(A).
(d) For purposes of this section, receipts allocated to principal or income must be reduced by the amount distributed to a beneficiary from principal or income for which the trust receives a deduction in calculating the tax.
Sec. 41. (a) A fiduciary may make adjustments between
principal and income to offset the shifting of economic interests or
tax benefits between income beneficiaries and remainder
beneficiaries that arise from:
(1) elections and decisions, other than those described in subsection (b), that the fiduciary makes from time to time regarding tax matters;
(2) an income tax or any other tax that is imposed upon the fiduciary or a beneficiary as a result of a transaction involving or a distribution from the estate or trust; or
(3) the ownership by an estate or trust of an interest in an entity whose taxable income, whether or not distributed, is includable in the taxable income of the estate, trust, or a beneficiary.
(b) If the amount of an estate tax marital deduction or charitable contribution deduction is reduced because a fiduciary deducts an amount paid from principal for income tax purposes instead of deducting it for estate tax purposes, and as a result estate taxes paid from principal are increased and income taxes paid by an estate, trust, or beneficiary are decreased, each estate, trust, or beneficiary that benefits from the decrease in income tax shall reimburse the principal from which the increase in estate tax is paid. The total reimbursement must equal the increase in the estate tax to the extent that the principal used to pay the increase would have qualified for a marital deduction or charitable contribution deduction but for the payment. The proportionate share of the reimbursement for each estate, trust, or beneficiary whose income taxes are reduced must be the same as its proportionate share of the total decrease in income tax. An estate or trust shall reimburse principal from income.
Sec. 42. In applying and construing this uniform act, consideration must be given to the need to promote uniformity of the law with respect to its subject matter among states that enact it.
Sec. 43. If any provision of this chapter or its application to any person or circumstance is held invalid, the invalidity does not affect other provisions or applications of this chapter that can be given effect without the invalid provision or application, and to this end the provisions of this chapter are severable.
SECTION 3. IC 30-4-1-1.5 IS AMENDED TO READ AS FOLLOWS [EFFECTIVE JULY 1, 2001]: Sec. 1.5. This article does not repeal:
(1) IC 30-2-4 (the Uniform Fiduciaries Act);
of record entitled to distribution or, if no date is fixed, on the date of
declaration of the distribution by the corporation.
SECTION 9. IC 30-4-5-8 IS AMENDED TO READ AS FOLLOWS [EFFECTIVE JULY 1, 2001]: Sec. 8.
(a) If any part of the principal consists of a right to receive royalties,
overriding or limited royalties, working interests, production payments,
net profit interests, delay rentals, or other interests in minerals or other
natural resources in, on, or under land, the receipts from taking the
natural resources from the land shall be allocated as follows:
(1) If received as rent on a lease or extension payments on a lease,
the receipts are income.
(2) If received from a production payment, the receipts are
income to the extent of any factor for interest or its equivalent
provided in the governing instrument. There shall be allocated to
principal all delay rentals and the fraction of the balance of the
receipts which the unrecovered cost of the production payments
bears to the balance owed on the production payment, exclusive
of any factor for interest or its equivalent. The receipts not
allocated to principal are income.
(3) If received as a royalty, overriding or limited royalty, or bonus,
or from a working interest, net profit interest, or any other interest
in minerals or other natural resources, receipts not provided for in
the preceding paragraphs of this section shall be apportioned on
a yearly basis in accordance with this paragraph whether or not
any natural resources were being taken from the land at the time
the trust was established. Twenty-seven and one-half percent
(27-1/2%) of the gross receipts (but not to exceed fifty percent
(50%) of the net receipts computed without allowance for
depletion) shall be added to principal as an allowance for
depletion. The balance of the gross receipts, after payment
therefrom of all expenses, direct and indirect, is income.
(b) If a trustee, on September 2, 1971, held an item of depletable
property of a type specified in this section he may allocate receipts
from the property in the manner used before September 2, 1971, but as
to all depletable property acquired after September 2, 1971, by an
existing or new trust, the method of allocation provided herein shall be
used. provided by
SECTION 10. IC 30-4-5-9 IS AMENDED TO READ AS FOLLOWS [EFFECTIVE JULY 1, 2001] : Sec. 9.
(Timber) If any part
of the principal consists of land from which merchantable timber may
be removed, the receipts from taking the timber from the land shall be
allocated in accordance with
SECTION 11. THE FOLLOWING ARE REPEALED [EFFECTIVE JULY 1, 2001]: IC 30-4-5-4 ; IC 30-4-5-5 ; IC 30-4-5-6 ; IC 30-4-5-7 ; IC 30-4-5-11.
SECTION 12. [EFFECTIVE JULY 1, 2001] IC 30-2-14 , as added by this act, applies to every trust or decedent's estate existing on or created after July 1, 2001, except as otherwise expressly provided:
(1) in the decedent's will;
(2) by the terms of the trust; or
(3) in IC 30-2-14, as added by this act.