SENATE BILL NO. 1255 September 15, 1998, Introduced by Senator DINGELL and referred to the Committee on Economic Development, International Trade and Regulatory Affairs. A bill to create the uniform principal and income act; to prescribe the manner in which receipts and expenditures of trusts and estates are credited and charged between income and princi- pal; to make uniform the law with respect to principal and income allocation; and to repeal acts and parts of acts. THE PEOPLE OF THE STATE OF MICHIGAN ENACT: 1 ARTICLE 1 2 Sec. 101. This act shall be known and may be cited as the 3 "uniform principal and income act". 4 Sec. 102. As used in this act: 5 (a) "Accounting period" means a calendar year unless another 6 12-month period is selected by a fiduciary. Accounting period 7 includes a portion of a calendar year or other 12-month period 8 that begins when an income interest begins or ends when an income 9 interest ends. 04749'97 JLB 2 1 (b) "Beneficiary" means, in the case of a decedent's estate, 2 an heir, legatee, and devisee and, in the case of a trust, an 3 income beneficiary and a remainder beneficiary. 4 (c) "Fiduciary" means a personal representative or a 5 trustee. Fiduciary includes an executor, administrator, succes- 6 sor personal representative, special administrator, and a person 7 performing substantially the same function. 8 (d) "Income" means money or property that a fiduciary 9 receives as current return from a principal asset. Income 10 includes a portion of receipts from a sale, exchange, or liquida- 11 tion of a principal asset, to the extent provided in article 4. 12 (e) "Income beneficiary" means a person to whom net income 13 of a trust is or may be payable. 14 (f) "Income interest" means the right of an income benefi- 15 ciary to receive all or part of net income, whether the terms of 16 the trust require it to be distributed or authorize it to be dis- 17 tributed in the trustee's discretion. 18 (g) "Mandatory income interest" means the right of an income 19 beneficiary to receive net income that the terms of the trust 20 require the fiduciary to distribute. 21 (h) "Net income" means the total receipts allocated to 22 income during an accounting period minus the disbursements made 23 from income during the period, plus or minus transfers under this 24 act to or from income during the period. 25 (i) "Person" means an individual, corporation, business 26 trust, estate, trust, partnership, limited liability company, 27 association, joint venture, government; governmental subdivision, 04749'97 3 1 agency, or instrumentality; public corporation; or any other 2 legal or commercial entity. 3 (j) "Principal" means property held in trust for distribu- 4 tion to a remainder beneficiary when the trust terminates. 5 (k) "Remainder beneficiary" means a person entitled to 6 receive principal when an income interest ends. 7 (l) "Terms of a trust" means the manifestation of the intent 8 of a settlor or decedent with respect to the trust, expressed in 9 a manner that admits of its proof in a judicial proceeding, 10 whether by written or spoken words or by conduct. 11 (m) "Trustee" includes an original, additional, or successor 12 trustee, whether or not appointed or confirmed by a court. 13 Sec. 103. (1) In allocating receipts and disbursements to 14 or between principal and income, and with respect to any matter 15 found within the scope of articles 2 and 3, a fiduciary shall do 16 all of the following: 17 (a) Administer a trust or estate in accordance with the 18 terms of the trust or the will, even if there is a different pro- 19 vision in this act. 20 (b) Administer a trust or estate in accordance with this act 21 if the terms of the trust or the will do not contain a different 22 provision or do not give the fiduciary a discretionary power of 23 administration. 24 (c) Add a receipt or charge a disbursement to principal to 25 the the extent that the terms of the trust and this act do not 26 provide a rule for allocating the receipt or disbursement to or 27 between principal and income. 04749'97 4 1 (2) A fiduciary may administer a trust or estate by the 2 exercise of a discretionary power of administration given to the 3 fiduciary by the terms of the trust or the will, even if the 4 exercise of the power produces a result different from a result 5 required or permitted under this act. 6 (3) In exercising the power to adjust under section 104(1) 7 or a discretionary power of administration regarding a matter 8 within the scope of this act, whether granted by the terms of a 9 trust, a will, or as provided in this act, a fiduciary shall 10 administer a trust or estate impartially, based on what is fair 11 and reasonable to all of the beneficiaries, except to the extent 12 that the terms of the trust or the will clearly manifest an 13 intention that the fiduciary shall or may favor 1 or more of the 14 beneficiaries. A determination in accordance with this act is 15 presumed to be fair and reasonable to all of the beneficiaries. 16 Sec. 104. (1) A trustee may adjust between principal and 17 income to the extent the trustee considers necessary if the 18 trustee invests and manages trust assets as a prudent investor, 19 the terms of the trust describe the amount that may or must be 20 distributed to a beneficiary by referring to the trust's income, 21 and the trustee determines, after applying the provisions in sec- 22 tion 103(1), that the trustee is unable to comply with section 23 103(3). 24 (2) In deciding whether and to what extent to exercise the 25 power conferred by subsection (1), a trustee shall consider all 26 factors relevant to the trust and its beneficiaries, including 27 the following factors to the extent they are relevant: 04749'97 5 1 (a) The nature, purpose, and expected duration of the 2 trust. 3 (b) The intent of the settlor. 4 (c) The identity and circumstances of the beneficiaries. 5 (d) The needs for liquidity, regularity of income, and pre- 6 servation and appreciation of capital. 7 (e) The assets held in the trust; the extent to which they 8 consist of financial assets, interests in closely held enter- 9 prises, tangible and intangible personal property, or real prop- 10 erty; the extent to which an asset is used by a beneficiary; and 11 whether an asset was purchased by the trustee or received from 12 the settlor. 13 (f) The net amount allocated to income under the other sec- 14 tions of this act and the increase or decrease in the value of 15 the principal assets, which the trustee may estimate as to assets 16 for which market values are not readily available. 17 (g) Whether and to what extent the terms of the trust give 18 the trustee the power to invade principal or accumulate income or 19 prohibit the trustee from invading principal or accumulating 20 income, and the extent to which the trustee has exercised a power 21 from time to time to invade principal or accumulate income. 22 (h) The actual and anticipated effect of economic conditions 23 on principal and income and effects of inflation and deflation. 24 (i) The anticipated tax consequences of an adjustment. 25 (3) A trustee may not make an adjustment that does any of 26 the following: 04749'97 6 1 (a) Diminishes the income interest in a trust that requires 2 all of the income to be paid at least annually to a surviving 3 spouse and for which an estate tax or gift tax marital deduction 4 would be allowed, in whole or in part, if the trustee did not 5 have the power to make the adjustment. 6 (b) Reduces the actuarial value of the income interest in a 7 trust to which a person transfers property with the intent to 8 qualify for a gift tax exclusion. 9 (c) Changes the amount payable to a beneficiary as a fixed 10 annuity or a fixed fraction of the value of the trust assets. 11 (d) Alters any amount that is permanently set aside for 12 charitable purposes under a will or the terms of a trust unless 13 both income and principal are so set aside. 14 (e) If possessing or exercising the power to make an adjust- 15 ment causes an individual to be treated as the owner of all or 16 part of the trust for income tax purposes, and the individual 17 would not be treated as the owner if the trustee did not possess 18 the power to make an adjustment. 19 (f) If possessing or exercising the power to make an adjust- 20 ment causes all or part of the trust assets to be included for 21 estate tax purposes in the estate of an individual who has the 22 power to remove a trustee or appoint a trustee, or both, and the 23 assets would not be included in the estate of the individual if 24 the trustee did not possess the power to make an adjustment. 25 (g) If the trustee is a beneficiary of the trust. 26 (h) If the trustee is not a beneficiary, but the adjustment 27 would benefit the trustee directly or indirectly. 04749'97 7 1 (4) If subsection (3)(e), (f), (g), or (h) applies to a 2 trustee and there is more than 1 trustee, a cotrustee to whom the 3 provision does not apply may make the adjustment unless the exer- 4 cise of the power by the remaining trustee or trustees is not 5 permitted by the terms of the trust. 6 (5) A trustee may release the entire power conferred by sub- 7 section (1) or may release only the power to adjust from income 8 to principal or the power to adjust from principal to income if 9 the trustee is uncertain about whether possessing or exercising 10 the power will cause a result described in subsection (3)(a) 11 through (f) or (3)(h) or if the trustee determines that possess- 12 ing or exercising the power will or may deprive the trust of a 13 tax benefit or impose a tax burden not described in subsection 14 (3). The release may be permanent or for a specified period, 15 including a period measured by the life of an individual. 16 (6) Terms of a trust that limit the power of a trustee to 17 make an adjustment between principal and income do not affect the 18 application of this section unless it is clear from the terms of 19 the trust that the terms are intended to deny the trustee the 20 power of adjustment conferred by subsection (1). 21 ARTICLE 2 22 Sec. 201. After a decedent dies, in the case of an estate, 23 or after an income interest in a trust ends, all the following 24 apply: 25 (a) A fiduciary of an estate or of a terminating income 26 interest shall determine the amount of net income and net 27 principal receipts received from property specifically given to a 04749'97 8 1 beneficiary under articles 3 through 5 which apply to trustees 2 and as provided in subdivision (e). The fiduciary shall distrib- 3 ute the net income and net principal receipts to the beneficiary 4 who is to receive the specific property. 5 (b) A fiduciary shall determine the remaining net income of 6 a decedent's estate or a terminating income interest under the 7 provisions of articles 3 through 5 which apply to trustees and by 8 doing all the following: 9 (i) Including in net income all income from property used to 10 discharge liabilities. 11 (ii) Paying from income or principal, in the fiduciary's 12 discretion, fees of attorneys, accountants, and fiduciaries; 13 court costs and other expenses of administration; and interest on 14 death taxes, but the fiduciary may pay those expenses from income 15 of property passing to a trust for which the fiduciary claims an 16 estate tax marital or charitable deduction only to the extent 17 that the payment of those expenses from income will not cause the 18 reduction or loss of the deduction. 19 (iii) Paying from principal all other disbursements made or 20 incurred in connection with the settlement of a decedent's estate 21 or the winding up of a terminating income interest, including 22 debts, funeral expenses, disposition of remains, family allow- 23 ances, and death taxes and related penalties that are apportioned 24 to the estate or terminating income interest by the will, the 25 terms of the trust, or applicable law. 26 (c) A fiduciary shall distribute to a beneficiary who 27 receives a pecuniary amount outright the interest or any other 04749'97 9 1 amount provided by the will, the terms of the trust, or 2 applicable law from net income determined under subdivision (b) 3 or from principal to the extent that net income is insufficient. 4 If a beneficiary is to receive a pecuniary amount outright from a 5 trust after an income interest ends and no interest or other 6 amount is provided for by the terms of the trust or applicable 7 law, the fiduciary shall distribute the interest or other amount 8 to which the beneficiary would be entitled under applicable law 9 if the pecuniary amount were required to be paid under a will. 10 (d) A fiduciary shall distribute the net income remaining 11 after distributions required by subdivision (c) in the manner 12 described in section 202 to all other beneficiaries, including a 13 beneficiary who receives a pecuniary amount in trust, even if the 14 beneficiary holds an unqualified power to withdraw assets from 15 the trust or other presently exercisable general power of 16 appointment over the trust. 17 (e) A fiduciary may not reduce principal or income receipts 18 from property described in subdivision (a) because of a payment 19 or disbursement, or both, described in section 501 or 502 to the 20 extent that the will, the terms of the trust, or applicable law 21 requires the fiduciary to make the payment from assets other than 22 the property or to the extent that the fiduciary recovers or 23 expects to recover the payment from a third party. The net 24 income and principal receipts from the property are determined by 25 including all of the amounts the fiduciary receives or pays with 26 respect to the property, whether those amounts accrued or became 27 due before, on, or after the date of a decedent's death or an 04749'97 10 1 income interest's terminating event, and by making a reasonable 2 provision for amounts that the fiduciary believes the estate or 3 terminating income interest may become obligated to pay after the 4 property is distributed. 5 Sec. 202. (1) Each beneficiary described in section 201(d) 6 is entitled to receive a portion of the net income equal to the 7 beneficiary's fractional interest in undistributed principal 8 assets, using values as of the distribution date. If a fiduciary 9 makes more than 1 distribution of assets to beneficiaries to whom 10 this section applies, each beneficiary, including one who does 11 not receive part of the distribution, is entitled, as of each 12 distribution date, to the net income the fiduciary has received 13 after the date of death or terminating event or earlier distribu- 14 tion date but has not distributed as of the current distribution 15 date. 16 (2) In determining a beneficiary's share of net income, the 17 following apply: 18 (a) The beneficiary is entitled to receive a portion of the 19 net income equal to the beneficiary's fractional interest in the 20 undistributed principal assets immediately before the distribu- 21 tion date, including assets that later may be sold to meet prin- 22 cipal obligations. 23 (b) The beneficiary's fractional interest in the undistrib- 24 uted principal assets must be calculated without regard to prop- 25 erty specifically given to a beneficiary and property required to 26 pay pecuniary amounts not in trust. 04749'97 11 1 (c) The beneficiary's fractional interest in the 2 undistributed principal assets must be calculated on the basis of 3 the aggregate value of those assets as of the distribution date 4 without reducing the value by any unpaid principal obligation. 5 (d) The distribution date for purposes of this section may 6 be the date as of which the fiduciary calculates the value of the 7 assets if that date is reasonably near the date on which assets 8 are actually distributed. 9 (3) If a fiduciary does not distribute all of the collected 10 but undistributed net income to each person as of a distribution 11 date, the fiduciary shall maintain appropriate records showing 12 the interest of each beneficiary in that net income. 13 (4) A trustee may apply the provisions in this section, to 14 the extent that the trustee considers it appropriate, to net gain 15 or loss realized after the date of death or terminating event or 16 earlier distribution date from the disposition of a principal 17 asset if this section applies to the income from the asset. 18 ARTICLE 3 19 Sec. 301. (1) An income beneficiary is entitled to net 20 income from the date on which the income interest begins. An 21 income interest begins on the date specified in the terms of the 22 trust or, if no date is specified, on the date an asset becomes 23 subject to a trust or successive income interest. 24 (2) An asset becomes subject to a trust on 1 of the 25 following: 04749'97 12 1 (a) On the date it is transferred to the trust in the case 2 of an asset that is transferred to a trust during the 3 transferor's life. 4 (b) On the date of a testator's death in the case of an 5 asset that becomes subject to a trust by reason of a will, even 6 if there is an intervening period of administration of the 7 testator's estate. 8 (c) On the date of an individual's death in the case of an 9 asset that is transferred to a fiduciary by a third party because 10 of the individual's death. 11 (3) An asset becomes subject to a successive income interest 12 on the day after the preceding income interest ends, as deter- 13 mined under subsection (4), even if there is an intervening 14 period of administration to wind up the preceding income 15 interest. 16 (4) An income interest ends on the day before an income ben- 17 eficiary dies or another terminating event occurs, or on the last 18 day of a period during which there is no beneficiary to whom a 19 trustee may distribute income. 20 Sec. 302. (1) Except as provided in section 201(a), a 21 trustee shall allocate an income receipt or disbursement to prin- 22 cipal if its due date occurs before a decedent dies in the case 23 of an estate or before an income interest begins in the case of a 24 trust or successive income interest. 25 (2) A trustee shall allocate an income receipt or disburse- 26 ment to income if its due date occurs on or after the date on 27 which a decedent dies or an income interest begins and it is a 04749'97 13 1 periodic due date. An income receipt or disbursement shall be 2 treated as accruing from day to day if its due date is not 3 periodic or it has no due date. The portion of the receipt or 4 disbursement accruing before the date on which a decedent dies or 5 an income interest begins shall be allocated to principal and the 6 balance shall be allocated to income. 7 (3) An item of income or an obligation is due on the date 8 the payer is required to make a payment. If a payment date is 9 not stated, there is no due date for the purposes of this act. 10 Distributions to shareholders or other owners from an entity to 11 which section 401 applies are considered to be due on the date 12 fixed by the entity for determining who is entitled to receive 13 the distribution or, if no date is fixed, on the declaration date 14 for the distribution. A due date is periodic for receipts of 15 disbursements that must be paid at regular intervals under a 16 lease or an obligation to pay interest or if an entity customar- 17 ily makes distributions at regular intervals. 18 Sec. 303. (1) In this section, "undistributed income" means 19 net income received before the date on which an income interest 20 ends. Undistributed income does not include an item of income or 21 expense that is due or accrued or net income that has been added 22 or is required to be added to principal under the terms of the 23 trust. 24 (2) Except as otherwise provided in this subsection, when a 25 mandatory income interest ends, the trustee shall pay to a manda- 26 tory income beneficiary who survives that date, or the estate of 27 a deceased mandatory income beneficiary whose death causes the 04749'97 14 1 interest to end, the beneficiary's share of the undistributed 2 income that is not disposed of under the terms of the trust. If 3 the beneficiary has an unqualified power to revoke more than 5% 4 of the trust immediately before the income interest ends, the 5 undistributed income from the portion of the trust that may be 6 revoked shall be added to principal. 7 (3) When a trustee's obligation to pay a fixed annuity or a 8 fixed fraction of the value of the trust's assets ends, the 9 trustee shall prorate the final payment if and to the extent 10 required by applicable law to accomplish a purpose of the trust 11 or its settlor relating to income, gift, estate, or other tax 12 requirements. 13 ARTICLE 4 14 PART 1 15 Sec. 401. (1) As used in this section, "entity" means a 16 corporation, partnership, limited liability company, regulated 17 investment company, real estate investment trust, common trust 18 fund, or any other organization in which a trustee has an inter- 19 est other than a trust or estate to which section 402 applies, a 20 business or other activity to which section 403 applies, or an 21 asset-backed security to which section 415 applies. 22 (2) Except as otherwise provided in this section, a trustee 23 shall allocate to income money received from an entity. 24 (3) A trustee shall allocate the following receipts from an 25 entity to principal: 26 (a) Property other than money. 04749'97 15 1 (b) Money received in 1 distribution or a series of related 2 distributions in exchange for part or all of a trust's interest 3 in the entity. 4 (c) Money received in total or partial liquidation of the 5 entity. 6 (d) Money received from an entity that is a regulated 7 investment company or a real estate investment trust if the money 8 distributed is a capital gain dividend for federal income tax 9 purposes. 10 (4) Money is received in partial liquidation as follows: 11 (a) To the extent that the entity, at or near the time of a 12 distribution, indicates that it is a distribution in partial 13 liquidation. 14 (b) If the total amount of money and property received in a 15 distribution or series of related distributions is greater than 16 20% of the entity's gross assets, as shown by the entity's 17 year-end financial statements immediately preceding the initial 18 receipt. 19 (5) Money is not received in partial liquidation, nor may it 20 be taken into account under subsection (4)(b), to the extent that 21 it does not exceed the amount of income tax that a trustee or 22 beneficiary must pay on taxable income of the entity that dis- 23 tributes the money. 24 (6) A trustee may rely upon a statement made by an entity 25 about the source or character of a distribution if the statement 26 is made at or near the time of distribution by the entity's board 27 of directors or other person or group of persons authorized to 04749'97 16 1 exercise powers to pay money or transfer property comparable to 2 those of a corporation's board of directors. 3 Sec. 402. A trustee shall allocate to income an amount 4 received as a distribution of income from a trust or an estate in 5 which the trust has an interest other than a purchased interest, 6 and shall allocate to principal an amount received as a distribu- 7 tion of principal from such a trust or estate. If a trustee pur- 8 chases an interest in a trust that is an investment entity, or a 9 decedent or donor transfers an interest in such a trust to a 10 trustee, section 401 or 415 applies to a receipt from the trust. 11 Sec. 403. (1) If a trustee who conducts a business or other 12 activity determines that it is in the best interest of all the 13 beneficiaries to account separately for the business or activity 14 instead of accounting for it as part of the trust's general 15 accounting records, the trustee may maintain separate accounting 16 records for its transactions, whether or not its assets are seg- 17 regated from other trust assets. 18 (2) A trustee who accounts separately for a business or 19 other activity may determine the extent to which its net cash 20 receipts must be retained for working capital, the acquisition or 21 replacement of fixed assets, and other reasonably foreseeable 22 needs of the business or activity, and the extent to which the 23 remaining net cash receipts are accounted for as principal or 24 income in the trust's general accounting records. If a trustee 25 sells assets of the business or other activity, other than in the 26 ordinary course of the business or activity, the trustee shall 27 account for the net amount received as principal in the trust's 04749'97 17 1 general accounting records to the extent the trustee determines 2 that the amount received is no longer required in the conduct of 3 business. 4 (3) Activities for which a trustee may maintain separate 5 accounting records include all of the following: 6 (a) Retail, manufacturing, service, and other traditional 7 business activities. 8 (b) Farming. 9 (c) Raising and selling livestock and other animals. 10 (d) Management of rental properties. 11 (e) Extraction of minerals and other natural resources. 12 (f) Timber operations. 13 (g) Activities to which section 414 applies. 14 PART 2 15 Sec. 404. A trustee shall allocate to principal all of the 16 following: 17 (a) To the extent not allocated to income under this act, 18 assets received from a transferor during the transferor's life- 19 time, a decedent's estate, a trust with a terminating income 20 interest, or a payer under a contract naming the trust or its 21 trustee as beneficiary. 22 (b) Money or other property received from the sale, 23 exchange, liquidation, or change in form of a principal asset, 24 including realized profit, subject to this article. 25 (c) Amounts recovered from third parties to reimburse the 26 trust because of disbursements described in section 502(1)(g) or 27 for other reasons to the extent not based on the loss of income. 04749'97 18 1 (d) Proceeds of property taken by eminent domain, but a 2 separate award made for the loss of income with respect to an 3 accounting period during which a current income beneficiary had a 4 mandatory income interest is income. 5 (e) Net income received in an accounting period during which 6 there is no beneficiary to whom a trustee may or must distribute 7 income. 8 (f) Other receipts as provided in part 3. 9 Sec. 405. To the extent that a trustee accounts for 10 receipts from rental property pursuant to this section, the 11 trustee shall allocate to income an amount received as rent of 12 real or personal property, including an amount received for can- 13 cellation or renewal of a lease. An amount received as a refund- 14 able deposit, including a security deposit or a deposit that is 15 to be applied as rent for future periods, shall be added to prin- 16 cipal and held subject to the terms of the lease and is not 17 available for distribution to a beneficiary until the trustee's 18 contractual obligations have been satisfied with respect to that 19 amount. 20 Sec. 406. (1) An amount received as interest, whether 21 determined at a fixed, variable, or floating rate, on an obliga- 22 tion to pay money to the trustee, including an amount received as 23 consideration for prepaying principal, shall be allocated to 24 income without any provision for amortization of premium. 25 (2) A trustee shall allocate to principal an amount received 26 from the sale, redemption, or other disposition of an obligation 27 to pay money to the trustee more than 1 year after it is 04749'97 19 1 purchased or acquired by the trustee, including an obligation 2 whose purchase price or value when it is acquired is less than 3 its value at maturity. If the obligation matures within 1 year 4 after it is purchased or acquired by the trustee, an amount 5 received in excess of its purchase price or its value when 6 acquired by the trust must be allocated to income. 7 (3) This section does not apply to an obligation to which 8 section 409, 410, 411, 412, 414, or 415 applies. 9 Sec. 407. (1) Except as otherwise provided in subsection 10 (2), a trustee shall allocate to principal the proceeds of a life 11 insurance policy or other contract in which the trust or its 12 trustee is named as beneficiary, including a contract that 13 insures the trust or its trustee against loss for damage to, 14 destruction of, or loss of title to a trust asset. The trustee 15 shall allocate dividends on an insurance policy to income if the 16 premiums on the policy are paid from income, and to principal if 17 the premiums are paid from principal. 18 (2) A trustee shall allocate to income proceeds of a con- 19 tract that insures the trustee against loss of occupancy or other 20 use by an income beneficiary, loss of income, or, subject to sec- 21 tion 403, loss of profits from a business. 22 (3) This section does not apply to a contract to which sec- 23 tion 409 applies. 24 PART 3 25 Sec. 408. If a trustee determines that an allocation 26 between principal and income required by section 409, 410, 411, 27 412, or 415 is insubstantial, the trustee may allocate the entire 04749'97 20 1 amount to principal unless 1 of the circumstances described in 2 section 104(3) applies to the allocation. This power may be 3 exercised by a cotrustee in the circumstances described in sec- 4 tion 104(4) and may be released for the reasons and in the manner 5 described in section 104(5). An allocation is presumed to be 6 insubstantial if 1 or more of the following apply: 7 (a) The amount of the allocation would increase or decrease 8 net income in an accounting period, as determined before the 9 allocation, by less than 10%. 10 (b) The value of the asset producing the receipt for which 11 the allocation would be made is less than 10% of the total value 12 of the trust's assets at the beginning of the accounting period. 13 Sec. 409. (1) As used in this section, "payment" means a 14 payment that a trustee may receive over a fixed number of years 15 or during the life of 1 or more individuals because of services 16 rendered or property transferred to the payer in exchange for 17 future payments. The term includes a payment made in money or 18 property from the payer's general assets or from a separate fund 19 created by the payer, including a private or commercial annuity, 20 an individual retirement account, and a pension, profit-sharing, 21 stock-bonus, or stock-ownership plan. 22 (2) To the extent that a payment is characterized as inter- 23 est or a dividend or a payment made in lieu of interest or a div- 24 idend, a trustee shall allocate it to income. The trustee shall 25 allocate to principal the balance of the payment and any other 26 payment received in the same accounting period that is not 27 characterized as interest, a dividend, or an equivalent payment. 04749'97 21 1 (3) If no part of a payment is characterized as interest, a 2 dividend, or an equivalent payment, and all or part of the pay- 3 ment is required to be made, a trustee shall allocate to income 4 10% of the part that is required to be made during the accounting 5 period and the balance to principal. If no part of a payment is 6 required to be made or the payment received is the entire amount 7 to which the trustee is entitled, the trustee shall allocate the 8 entire payment to principal. For purposes of this subsection, a 9 payment is not required to be made to the extent that it is made 10 because the trustee exercises a right of withdrawal. 11 (4) If, to obtain an estate tax marital deduction for a 12 trust, a trustee must allocate more of a payment to income than 13 provided for by this section, the trustee shall allocate to 14 income the additional amount necessary to obtain the marital 15 deduction. 16 (5) This section does not apply to payments to which section 17 410 applies. 18 Sec. 410. (1) As used in this section, "liquidating asset" 19 means an asset whose value will diminish or terminate because the 20 asset is expected to produce receipts for a period of limited 21 duration. Liquidating asset includes a leasehold, patent, copy- 22 right, royalty right, and right to receive payments during a 23 period of more than 1 year under an arrangement that does not 24 provide for the payment of interest on the unpaid balance. 25 Liquidating asset does not include a payment subject to section 26 409, natural resources subject to section 411, timber subject to 27 section 412, an activity subject to section 414, an asset subject 04749'97 22 1 to section 415, or any asset for which the trustee establishes a 2 reserve for depreciation under section 503. 3 (2) A trustee shall allocate to income 10% of the receipts 4 from a liquidating asset and the balance to principal. 5 Sec. 411. (1) To the extent that a trustee accounts for 6 receipts from an interest in minerals or other natural resources 7 pursuant to this section, the trustee shall allocate them as 8 follows: 9 (a) If received as nominal delay rental or nominal annual 10 rent on a lease, a receipt must be allocated to income. 11 (b) If received from a production payment, a receipt must be 12 allocated to income if and to the extent that the agreement cre- 13 ating the production payment provides a factor for interest or 14 its equivalent. The balance must be allocated to principal. 15 (c) If an amount received as a royalty, shut-in-well pay- 16 ment, take-or-pay payment, bonus, or delay rental is more than 17 nominal, 90% must be allocated to principal and the balance to 18 income. 19 (d) If an amount is received from a working interest or any 20 other interest not provided for in subdivision (a), (b), or (c), 21 90% of the net amount received must be allocated to principal and 22 the balance to income. 23 (2) An amount received on account of an interest in water 24 that is renewable must be allocated to income. If the water is 25 not renewable, 90% of the amount must be allocated to principal 26 and the balance to income. 04749'97 23 1 (3) This act applies whether or not a decedent or donor was 2 extracting minerals, water, or other natural resources before the 3 interest became subject to the trust. 4 (4) If a trust owns an interest in minerals, water, or other 5 natural resources on the effective date of this act, the trustee 6 may allocate receipts from the interest as provided in this act 7 or in the manner used by the trustee before the effective date of 8 this act. If the trust acquires an interest in minerals, water, 9 or other natural resources after the effective date of this act, 10 the trustee shall allocate receipts from the interest as provided 11 in this act. 12 Sec. 412. (1) To the extent that a trustee accounts for 13 receipts from the sale of timber and related products pursuant to 14 this section, the trustee shall allocate the net receipts as 15 follows: 16 (a) To income to the extent that the amount of timber 17 removed from the land does not exceed the rate of growth of the 18 timber during the accounting periods in which a beneficiary has a 19 mandatory income interest. 20 (b) To principal to the extent that the amount of timber 21 removed from the land exceeds the rate of growth of the timber or 22 the net receipts are from the sale of standing timber. 23 (c) To or between income and principal if the net receipts 24 are from the lease of timberland or from a contract to cut timber 25 from land owned by a trust, by determining the amount of timber 26 removed from the land under the lease or contract and applying 27 the rules in subdivisions (a) and (b). 04749'97 24 1 (d) To principal to the extent that advance payments, 2 bonuses, and other payments are not allocated pursuant to subdi- 3 vision (a), (b), or (c). 4 (2) In determining net receipts to be allocated pursuant to 5 subsection (1), a trustee shall deduct and transfer to principal 6 a reasonable amount for depletion. 7 (3) This act applies whether or not a decedent or transferor 8 was harvesting timber from the property before it became subject 9 to the trust. 10 (4) If a trust owns an interest in timberland on the effec- 11 tive date of this act, the trustee may allocate net receipts from 12 the sale of timber and related products as provided in this act 13 or in the manner used by the trustee before the effective date of 14 this act. If the trust acquires an interest in timberland after 15 the effective date of this act, the trustee shall allocate net 16 receipts from the sale of timber and related products as provided 17 in this act. 18 Sec. 413. (1) If a marital deduction is allowed for all or 19 part of a trust whose assets consist substantially of property 20 that does not provide the surviving spouse with sufficient income 21 from or use of the trust assets, and if the amounts that the 22 trustee transfers from principal to income under section 104 and 23 distributes to the spouse from principal pursuant to the terms of 24 the trust are insufficient to provide the spouse with the benefi- 25 cial enjoyment required to obtain the marital deduction, the 26 spouse may require the trustee to make property productive of 27 income, convert property within a reasonable time, or exercise 04749'97 25 1 the power conferred by section 104(1). The trustee may decide 2 which action or combination of actions to take. 3 (2) In cases not governed by subsection (1), proceeds from 4 the sale or other disposition of an asset are principal without 5 regard to the amount of income the asset produces during any 6 accounting period. 7 Sec. 414. (1) As used in this section, "derivative" means a 8 contract or financial instrument or a combination of contracts 9 and financial instruments which gives a trust the right or obli- 10 gation to participate in some or all changes in the price of a 11 tangible or intangible asset or group of assets, or changes in a 12 rate, an index of prices or rates, or other market indicator for 13 an asset or a group of assets. 14 (2) To the extent that a trustee accounts for transactions 15 in derivatives under this section, the trustee shall allocate to 16 principal receipts from and disbursements made in connection with 17 those transactions. 18 (3) If a trustee grants an option to buy property from the 19 trust, whether or not the trust owns the property when the option 20 is granted, grants an option that permits another person to sell 21 property to the trust, or acquires an option to buy property for 22 the trust or an option to sell an asset owned by the trust, and 23 the trustee or other owner of the asset is required to deliver 24 the asset if the option is exercised, an amount received for 25 granting the option must be allocated to principal. An amount 26 paid to acquire the option must be paid from principal. A gain 27 or loss realized upon the exercise of an option, including an 04749'97 26 1 option granted to a settlor of the trust for services rendered, 2 must be allocated to principal. 3 Sec. 415. (1) As used in this section, "asset-backed 4 security" means an asset whose value is based upon the right it 5 gives the owner to receive distributions from the proceeds of 6 financial assets that provide collateral for the security. 7 Asset-backed security includes an asset that gives the owner the 8 right to receive from the collateral financial assets only the 9 interest or other current return or only the proceeds other than 10 interest or current return. Asset-backed security does not 11 include an asset to which section 401 or 409 applies. 12 (2) If a trust receives a payment from interest or other 13 current return and from other proceeds of the collateral finan- 14 cial assets, the trustee shall allocate to income the portion of 15 the payment which the payer identifies as being from interest or 16 other current return and shall allocate the balance of the pay- 17 ment to principal. 18 (3) If a trust receives 1 or more payments in exchange for 19 the trust's entire interest in an asset-backed security in 1 20 accounting period, the trustee shall allocate the payments to 21 principal. If a payment is 1 of a series of payments that will 22 result in the liquidation of the trust's interest in the security 23 over more than 1 accounting period, the trustee shall allocate 24 10% of the payment to income and the balance to principal. 04749'97 27 1 ARTICLE 5 2 Sec. 501. A trustee shall make the following disbursements 3 from income to the extent that they are not disbursements to 4 which section 201(b)(ii) or (iii) applies: 5 (a) One-half of the regular compensation of the trustee and 6 of any person providing investment advisory or custodial services 7 to the trustee. 8 (b) One-half of all expenses for accountings, judicial pro- 9 ceedings, or other matters that involve both the income and 10 remainder interests. 11 (c) All of the other ordinary expenses incurred in connec- 12 tion with the administration, management, or preservation of 13 trust property and the distribution of income, including inter- 14 est, ordinary repairs, regularly recurring taxes assessed against 15 principal, and expenses of a proceeding or other matter that con- 16 cerns primarily the income interest. 17 (d) Recurring premiums on insurance covering the loss of a 18 principal asset or the loss of income from or use of the asset. 19 Sec. 502. (1) A trustee shall make the following disburse- 20 ments from principal: 21 (a) The remaining 1/2 of the disbursements described in sec- 22 tion 501(a) and (b). 23 (b) All of the trustee's compensation calculated on princi- 24 pal as a fee for acceptance, distribution, or termination, and 25 disbursements made to prepare property for sale. 26 (c) Payments on the principal of a trust debt. 04749'97 28 1 (d) Expenses of a proceeding that concerns primarily 2 principal, including a proceeding to construe the trust or to 3 protect the trust or its property. 4 (e) Premiums paid on a policy of insurance not described in 5 section 501(d) of which the trust is the owner and beneficiary. 6 (f) Estate, inheritance, and other transfer taxes, including 7 penalties, apportioned to the trust. 8 (g) Disbursements related to environmental matters, includ- 9 ing reclamation, assessing environmental conditions, remedying 10 and removing environmental contamination, monitoring remedial 11 activities and the release of substances, preventing future 12 releases of substances, collecting amounts from persons liable or 13 potentially liable for the costs of those activities, penalties 14 imposed under environmental laws or regulations and other pay- 15 ments made to comply with those laws or regulations, statutory or 16 common law claims by third parties, and defending claims based on 17 environmental matters. 18 (2) If a principal asset is encumbered with an obligation 19 that requires income from that asset to be paid directly to the 20 creditor, the trustee shall transfer from principal to income an 21 amount equal to the income paid to the creditor in reduction of 22 the principal balance of the obligation. 23 Sec. 503. (1) As used in this section, "depreciation" means 24 a reduction in value due to wear, tear, decay, corrosion, or 25 gradual obsolescence of a fixed asset having a useful life of 26 more than 1 year. 04749'97 29 1 (2) A trustee may transfer to principal a reasonable amount 2 of the net cash receipts from a principal asset that is subject 3 to depreciation, but may not transfer any amount for depreciation 4 as follows: 5 (a) Of that portion of real property used or available for 6 use by a beneficiary as a residence or of tangible personal prop- 7 erty held or made available for the personal use or enjoyment of 8 a beneficiary. 9 (b) During the administration of a descendant's estate. 10 (c) Under this section if the trustee is accounting under 11 section 403 for the business or other activity in which the asset 12 is used. 13 (3) An amount transferred to principal need not be held as a 14 separate fund. 15 Sec. 504. (1) If a trustee makes or expects to make a prin- 16 cipal disbursement described in this section, the trustee may 17 transfer an appropriate amount from income to principal in 1 or 18 more accounting periods to reimburse principal or to provide a 19 reserve for future principal disbursements. 20 (2) Principal disbursements to which subsection (1) applies 21 include the following, but only to the extent that the trustee 22 has not been and does not expect to be reimbursed by a third 23 party: 24 (a) An amount chargeable to income but paid from principal 25 because it is unusually large, including extraordinary repairs. 04749'97 30 1 (b) A capital improvement to a principal asset, whether in 2 the form of changes to an existing asset or the construction of a 3 new asset, including special assessments. 4 (c) Disbursements made to prepare property for rental, 5 including tenant allowances, leasehold improvements, and broker's 6 commissions. 7 (d) Periodic payments on an obligation secured by a princi- 8 pal asset to the extent that the amount transferred from income 9 to principal for depreciation is less than the periodic 10 payments. 11 (e) Disbursements described in section 502(1)(g). 12 (3) If the asset whose ownership gives rights to the dis- 13 bursements becomes subject to a successive income interest after 14 an income interest ends, a trustee may continue to transfer 15 amounts from income to principal as provided in subsection (1). 16 Sec. 505. (1) A tax required to be paid by a trustee based 17 on receipts allocated to income shall be paid from income. 18 (2) A tax required to be paid by a trustee based on receipts 19 allocated to principal shall be paid from principal, even if the 20 tax is called an income tax by the taxing authority. 21 (3) A tax required to be paid by a trustee on the trust's 22 share of an entity's taxable income must be paid proportionately 23 as follows: 24 (a) From income to the extent that receipts from the entity 25 are allocated to income. 26 (b) From principal to the extent as follows: 04749'97 31 1 (i) Receipts from the entity are allocated to principal. 2 (ii) The trust's share of the entity's taxable income 3 exceeds the total receipts described in subdivisions (a) and 4 (b)(i). 5 (4) For purposes of this section, receipts allocated to 6 principal or income must be reduced by the amount distributed to 7 a beneficiary from principal or income for which the trust 8 receives a deduction in calculating the tax. 9 Sec. 506. (1) A fiduciary may make adjustments between 10 principal and income to offset the shifting of economic interests 11 or tax benefits between income beneficiaries and remainder bene- 12 ficiaries which arise from 1 or more of the following: 13 (a) Elections and decisions, other than those described in 14 subsection (2), that the fiduciary makes from time to time 15 regarding tax matters. 16 (b) An income tax or any other tax that is imposed upon the 17 fiduciary or a beneficiary as a result of a transaction involving 18 or a distribution from the estate or trust. 19 (c) The ownership by an estate or trust of an interest in an 20 entity whose taxable income, whether or not distributed, is 21 includable in the taxable income of the estate, trust, or a 22 beneficiary. 23 (2) If the amount of an estate tax marital deduction or 24 charitable contribution deduction is reduced because a fiduciary 25 deducts an amount paid from principal for income tax purposes 26 instead of deducting it for estate tax purposes, and as a result 27 estate taxes paid from principal are increased and income taxes 04749'97 32 1 paid by an estate, trust, or beneficiary are decreased, each 2 estate, trust, or beneficiary that benefits from the decrease in 3 income tax shall reimburse the principal from which the increase 4 in estate tax is paid. The total reimbursement must equal the 5 increase in the estate tax to the extent that the principal used 6 to pay the increase would have qualified for a marital deduction 7 or charitable contribution deduction but for the payment. The 8 proportionate share of the reimbursement for each estate, trust, 9 or beneficiary whose income taxes are reduced must be the same as 10 its proportionate share of the total decrease in income tax. An 11 estate or trust shall reimburse principal from income. 12 ARTICLE 6 13 Sec. 601. In applying and construing this act, considera- 14 tion shall be given to the need to promote uniformity of the law 15 with respect to this act among states that enact it. 16 Sec. 602. If any provision of this act or its application 17 to any person or circumstance is held invalid, the invalidity 18 does not affect other provisions or applications of this act 19 which can be given effect without the invalid provision or appli- 20 cation, and to this end the provisions of this act are 21 severable. 22 Sec. 603. The revised uniform principal and income act, 23 1965 PA 340, MCL 555.51 to 555.68, is repealed effective January 24 1, 1999. 25 Sec. 604. This act takes effect January 1, 1999. 26 Sec. 605. This act applies to every trust or decedent's 27 estate existing on the effective date of this act except as 04749'97 33 1 otherwise expressly provided in the will or terms of the trust or 2 in this act. 04749'97 Final page. JLB