CHAPTER 14. UNIFORM PRINCIPAL AND INCOME ACT

State Codes and Statutes

Statutes > Indiana > Title30 > Ar2 > Ch14

IC 30-2-14
Chapter 14. Uniform Principal and Income Act

IC 30-2-14-1
"Accounting period" defined
Sec. 1. As used in this chapter, "accounting period" means a calendar year unless another twelve (12) month period is selected by a fiduciary. The term includes a portion of a calendar year or other twelve (12) month period that begins when an income interest begins or ends when an income interest ends.
As added by P.L.84-2002, SEC.2.

IC 30-2-14-2
"Beneficiary" defined
     Sec. 2. As used in this chapter, "beneficiary" includes, in the case of:
        (1) a decedent's estate, an heir, and a devisee; and
        (2) a trust, an income beneficiary, and a remainder beneficiary.
As added by P.L.84-2002, SEC.2.

IC 30-2-14-3
"Fiduciary" defined
Sec. 3. As used in this chapter, "fiduciary" means a personal representative or a trustee. The term includes an executor, an administrator, a successor personal representative, a special administrator, and a person performing substantially the same function.
As added by P.L.84-2002, SEC.2.

IC 30-2-14-4
"Income" defined
Sec. 4. As used in this chapter, "income" means money or property that a fiduciary receives as current return from a principal asset. The term includes a portion of receipts from a sale, exchange, or liquidation of a principal asset, to the extent provided in sections 21 through 35 of this chapter.
As added by P.L.84-2002, SEC.2.

IC 30-2-14-5
"Income beneficiary" defined
Sec. 5. As used in this chapter, "income beneficiary" means a person to whom net income of a trust is or may be payable.
As added by P.L.84-2002, SEC.2.

IC 30-2-14-6
"Income interest" defined
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. As added by P.L.84-2002, SEC.2.

IC 30-2-14-7
"Mandatory income interest" defined
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.
As added by P.L.84-2002, SEC.2.

IC 30-2-14-8
"Net income" defined
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.
As added by P.L.84-2002, SEC.2.

IC 30-2-14-9
"Person" defined
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.
As added by P.L.84-2002, SEC.2.

IC 30-2-14-10
"Principal" defined
Sec. 10. As used in this chapter, "principal" means property that is held in trust for distribution to a remainder beneficiary when the trust terminates or that will remain perpetually vested in the trustee.
As added by P.L.84-2002, SEC.2.

IC 30-2-14-11
"Remainder beneficiary" defined
Sec. 11. As used in this chapter, "remainder beneficiary" means a person entitled to receive principal when an income interest ends.
As added by P.L.84-2002, SEC.2.

IC 30-2-14-12
"Terms of a trust" defined
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.
As added by P.L.84-2002, SEC.2.

IC 30-2-14-13
"Trustee" defined
Sec. 13. As used in this chapter, "trustee" includes an original,

additional, or successor trustee, whether or not appointed or confirmed by a court.
As added by P.L.84-2002, SEC.2.

IC 30-2-14-14
Allocating receipts and disbursements between principal and income
     Sec. 14. (a) The following applies to a fiduciary in allocating receipts and disbursements to or between principal and income, and with respect to any matter within the scope of this chapter:
        (1) A fiduciary 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) A fiduciary 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. An inference that the fiduciary has improperly exercised the discretion does not arise from the fact that the fiduciary has made or has not made an allocation contrary to a provision of this chapter.
        (3) A fiduciary shall administer a trust or an estate in accordance with this chapter if the terms of the trust or the will do not contain a different provision or do not give the fiduciary a discretionary power of administration.
        (4) A fiduciary shall add a receipt or charge a disbursement to principal to the extent that the terms of the trust or the will and this chapter do not provide a rule for allocating the receipt or disbursement to or between principal and income.
    (b) In exercising the power to adjust under section 15 of this chapter or a discretionary power of administration regarding a matter within the scope of this chapter, whether granted by the terms of a trust, a will, or this chapter, a fiduciary shall administer a trust or an estate impartially, based on what is fair and reasonable to all of the beneficiaries, except to the extent that the terms of the trust or the will clearly manifest an intention that the fiduciary shall or may favor one (1) or more of the beneficiaries. A determination in accordance with this chapter is presumed to be fair and reasonable to all of the beneficiaries.
As added by P.L.84-2002, SEC.2.

IC 30-2-14-15
Power of trustee to adjust between principal and income
     Sec. 15. (a) A trustee may adjust between principal and income to the extent the trustee considers necessary if:
        (1) the trustee invests and manages trust assets as a prudent investor;
        (2) the terms of the trust describe the amount that may or must be distributed to a beneficiary by referring to the trust's income; and         (3) the trustee determines:
            (A) after applying the rules in section 14(a) of this chapter; and
            (B) considering any power the trustee may have under the trust or the will to invade principal or accumulate income;
        that the trustee is unable to comply with section 14(b) of this chapter.
    (b) In deciding whether and to what extent to exercise the power conferred by subsection (a), a trustee may consider, but is not limited to, any of the following:
        (1) The nature, purpose, and expected duration of the trust.
        (2) The intent of the settlor.
        (3) The identity and circumstances of the beneficiaries.
        (4) The needs for liquidity, regularity of income, and preservation and appreciation of capital.
        (5) The assets held in the trust; the extent to which they consist of financial assets, interests in closely held enterprises, tangible and intangible personal property, or real property; the extent to which an asset is used by a beneficiary; and whether an asset was purchased by the trustee or received from the settlor.
        (6) The net amount allocated to income under 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; or
        (7) if the trustee is a beneficiary of the trust.
    (d) If subsection (c)(5), (c)(6), or (c)(7) 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:
        (1) is uncertain about whether possessing or exercising the power will cause a result described in subsection (c)(1) through (c)(6); or
        (2) 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).
    (g) Nothing in this chapter is intended to create or imply a duty to make an adjustment. A trustee incurs no liability for:
        (1) not considering whether to make an adjustment; or
        (2) choosing not to make an adjustment.
As added by P.L.84-2002, SEC.2.

IC 30-2-14-16
Notice of proposed action
     Sec. 16. (a) A trustee may give a notice of proposed action regarding a matter governed by this chapter as set forth in this section. For purposes of this section, a proposed action includes a course of action and a decision not to take action.
    (b) The trustee shall mail notice of the proposed action to all living beneficiaries who:
        (1) are receiving; or
        (2) are entitled to receive:
            (A) income under the trust; or
            (B) a distribution of principal;
        if the trust were terminated at the time the notice is given.
If a beneficiary described in this subsection is a minor, the trustee

may comply with this subsection by mailing the notice to any court appointed or natural guardian of the minor.
    (c) A trustee is not required to give notice of proposed action to any person who consents in writing to the proposed action. The consent may be executed at any time before or after the proposed action is taken.
    (d) The notice of proposed action shall state that the notice is given as set forth in this section and shall state all of the following:
        (1) The name and mailing address of the trustee.
        (2) The name and telephone number of a person who may be contacted for additional information.
        (3) A description of the action proposed to be taken and an explanation of the reasons for the action.
        (4) The time within which objections to the proposed action may be made, which shall be at least thirty (30) days after the mailing of the notice of proposed action.
        (5) The date on or after which the proposed action may be taken or is effective.
        (6) A beneficiary may object to the proposed action by mailing a written objection to the trustee at the address stated in the notice of proposed action within the period specified in the notice of proposed action.
    (e) A trustee is not liable to a beneficiary for an action regarding a matter governed by this chapter if:
        (1) the trustee does not receive a written objection to the proposed action from the beneficiary within the applicable period; and
        (2) the other requirements of this section are satisfied.
If a beneficiary not entitled to notice objects under this section, the trustee is not liable to any current or future beneficiary with respect to the proposed action.
    (f) If the trustee receives a written objection within the applicable period, either the trustee or a beneficiary may petition the court to have the proposed action taken as proposed, taken with modifications, or denied. In the proceeding, a beneficiary objecting to the proposed action has the burden of proving that the trustee's proposed action should not be taken. A beneficiary who has not objected is not estopped from opposing the proposed action in the proceeding. If the trustee decides not to implement the proposed action, the trustee shall mail notice to the beneficiaries described in subsection (b) of the decision not to take the action. The trustee's decision not to implement the proposed action does not itself give rise to liability to any current or future beneficiary. Within thirty (30) days after the mailing of the notice not to implement the proposed action, a beneficiary may petition the court to have the action taken and has the burden of proving that it should be taken.
As added by P.L.84-2002, SEC.2.

IC 30-2-14-17
Discretionary powers of fiduciary; failure to exercise power;

remedies
     Sec. 17. (a) A court shall not change a fiduciary's decision to exercise or not to exercise a discretionary power conferred by this chapter unless it determines that the decision was an abuse of the fiduciary's discretion. A court shall not determine that a fiduciary abused its discretion merely because the court would have exercised the discretion in a different manner or would not have exercised the discretion.
    (b) The decisions to which subsection (a) applies include the following:
        (1) A determination under section 15(a) of this chapter of whether and to what extent an amount should be transferred from principal to income or from income to principal.
        (2) In deciding whether and to what extent to exercise the power conferred by section 15(a) of this chapter, a determination of the following:
            (A) The factors that are relevant to the trust and the trust's beneficiaries.
            (B) The extent to which the factors are relevant.
            (C) The weight, if any, to be given to the relevant factors.
    (c) If a court determines that a fiduciary has abused the fiduciary's discretion, the remedy shall be to restore the income and remainder beneficiaries to the positions they would have occupied if the fiduciary had not abused the fiduciary's discretion, subject to the following:
        (1) To the extent that the abuse of discretion has resulted in no distribution to a beneficiary or a distribution that is too small, the court shall require the fiduciary to distribute to the beneficiary an amount that the court determines will restore the beneficiaries, in whole or in part, to their appropriate positions.
        (2) To the extent that the abuse of discretion has resulted in a distribution to a beneficiary that is too large, the court shall restore the beneficiaries, in whole or in part, to their appropriate positions by requiring:
            (A) the fiduciary to withhold an amount from at least one (1) future distribution to that beneficiary; or
            (B) the beneficiary to return some or all of the distribution to the trust.
        (3) To the extent the court is unable, after applying subdivisions (1) and (2), to restore the beneficiaries to the positions they would have occupied if the fiduciary had not abused the fiduciary's discretion, the court shall require the fiduciary to pay an appropriate amount to:
            (A) at least one (1) of the beneficiaries;
            (B) the trust; or
            (C) entities under both clauses (A) and (B).
    (d) Upon a petition by the fiduciary, the court having jurisdiction over the trust or estate shall determine whether a proposed exercise or nonexercise of a discretionary power by the fiduciary will result in an abuse of the fiduciary's discretion. The petition shall:         (1) describe the proposed exercise or nonexercise of the power;
        (2) contain sufficient information to inform the beneficiaries of:
            (A) the reasons for the proposal; and
            (B) the facts upon which the fiduciary relies; and
        (3) contain an explanation of how the income and remainder beneficiaries will be affected by the proposed exercise or nonexercise of the power.
    (e) A beneficiary who challenges a fiduciary's proposed decision or actual decision to exercise or not to exercise a discretionary power conferred by this chapter shall have the burden of establishing that it will result or did result in an abuse of discretion.
As added by P.L.84-2002, SEC.2.

IC 30-2-14-18
Distributions to beneficiaries; payment of fees and costs
     Sec. 18. After an income interest in a trust ends, the following rules apply:
        (1) A fiduciary 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 20 through 43 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 terminating income interest under the rules in sections 20 through 43 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:
                (i) fees of attorneys, accountants, and fiduciaries;
                (ii) court costs and other expenses of administration; and
                (iii) 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 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 terminating income interest by the terms of the trust or applicable law.
        (3) 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 19 of this chapter to all residuary beneficiaries, 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 38 or 39 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:
            (A) including all of the amounts the fiduciary receives or pays with respect to the property, whether those amounts:
                (i) accrued or became due before, on, or after the date of an individual's death; or
                (ii) an income interest's terminating event; and
            (B) making a reasonable provision for amounts that the fiduciary believes the terminating income interest may become obligated to pay after the property is distributed.
As added by P.L.84-2002, SEC.2. Amended by P.L.61-2006, SEC.6.

IC 30-2-14-19
Beneficiary's share of net income
     Sec. 19. (a) Each beneficiary described in section 18(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 a beneficiary 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.
As added by P.L.84-2002, SEC.2.

IC 30-2-14-20
Income interest; asset subject to trust
     Sec. 20. (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.
As added by P.L.84-2002, SEC.2.

IC 30-2-14-21
Income receipts and disbursements
     Sec. 21. (a) A trustee shall allocate an income receipt or disbursement other than one to which section 18(1) of this chapter applies to principal if its due date occurs before:         (1) an individual dies in the case of an estate; or
        (2) 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 23 of this chapter applies are considered to be due on:
        (1) the date fixed by the entity for determining who is entitled to receive the distribution; or
        (2) if no date is fixed, 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.
As added by P.L.84-2002, SEC.2.

IC 30-2-14-22
Termination of mandatory income interest
     Sec. 22. (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.
As added by P.L.84-2002, SEC.2.

IC 30-2-14-23
Receipts from an entity
Sec. 23. (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. The term does not include the following:
        (1) A trust or an estate to which section 24 of this chapter applies.
        (2) A business or an activity to which section 25 of this chapter applies.
        (3) An asset backed security to which section 37 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 (1) distribution or a series of related distributions in exchange for part or all of a trust's interest in the entity.
        (3) Money received in total or partial liquidation of the entity.
        (4) Money received from an entity that is:
            (A) a regulated investment company; or
            (B) 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:
        (1) the entity's board of directors; or
        (2) a 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.
As added by P.L.84-2002, SEC.2.

IC 30-2-14-24
Distributions of principal and income from trust or estate
Sec. 24. A trustee shall allocate to:
(1) income an amount received as a distribution of income; and (2) principal an amount received as a distribution of principal;
from a trust or an estate in which the trust has an interest other than a purchased interest. If a trustee purchases an interest in a trust that is an investment entity, or a decedent or donor transfers an interest in such a trust to a trustee, section 23 or 37 of this chapter applies to a receipt from the trust.
As added by P.L.84-2002, SEC.2.

IC 30-2-14-25
Separate accounting records for business or activity
     Sec. 25. (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:
        (1) its net cash receipts must be retained for:
            (A) working capital;
            (B) the acquisition or replacement of fixed assets; and
            (C) other reasonably foreseeable needs of the business or activity; and
        (2) 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;
        (2) farming;
        (3) raising and selling livestock and other animals;
        (4) management of rental properties;
        (5) extraction of minerals and other natural resources;
        (6) timber operations; and
        (7) activities to which section 36 of this chapter applies.
As added by P.L.84-2002, SEC.2.

IC 30-2-14-26
Receipts and property allocated to principal
     Sec. 26. A trustee shall allocate to principal:
        (1) to the extent not allocated to income under this chapter, assets received from:
            (A) a transferor during the transferor's lifetime;
            (B) a decedent's estate;
            (C) a trust with a terminating income interest; or             (D) 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 sections 23 through 37 of this chapter;
        (3) amounts recovered from third parties to reimburse the trust because of disbursements described in section 39(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
        (6) other receipts as provided in sections 30 through 37 of this chapter.
As added by P.L.84-2002, SEC.2.

IC 30-2-14-27
Rental property receipts
     Sec. 27. To the extent that a trustee accounts for receipts from rental property under this section, the trustee shall allocate to income an amount received as rent of real or personal property, including an amount received for cancellation or renewal of a lease. An amount received as a refundable deposit, including a security deposit or a deposit that is to be applied as rent for future periods, must be added to principal and held subject to the terms of the lease and is not available for distribution to a beneficiary until the trustee's contractual obligations have been satisfied with respect to that amount.
As added by P.L.84-2002, SEC.2.

IC 30-2-14-28
Obligation to pay money to trustee
     Sec. 28. (a) An amount received as interest, whether determined at a fixed, variable, or floating rate, on an obligation to pay money to the trustee, including an amount received as consideration for prepaying principal, must be allocated to income without any provision for amortization of premium.
    (b) A trustee shall allocate to principal an amount received from the sale, redemption, or other disposition of an obligation to pay money to the trustee more than one (1) year after it is purchased or acquired by the trustee, including an obligation whose purchase price or value when it is acquired is less than its value at maturity. If the obligation matures within one (1) year after it is purchased or acquired by the trustee, an amount received in excess of its purchase price or its value when acquired by the trust must be allocated to income.     (c) Notwithstanding any other provision of this section, when an obligation described in this section is held as an asset of a charitable remainder trust, an increase in the value of the obligation over the value of the obligation at the time of acquisition by the trust is distributable as income. For purposes of this subsection, the increase in value is available for distribution only when the trustee receives cash on account of the obligation. If the obligation is surrendered or liquidated partially, the cash available shall be attributed first to the increase. The increase is distributable to the income beneficiary who is the income beneficiary at the time the cash is received.
    (d) This section does not apply to an obligation to which section 31, 32, 33, 34, 36, or 37 of this chapter applies.
As added by P.L.84-2002, SEC.2.

IC 30-2-14-29
Life insurance policy proceeds; proceeds of other contracts
     Sec. 29. (a) Except as otherwise provided in subsection (b), a trustee shall allocate to principal the proceeds of a life insurance policy or other contract in which the trust or its trustee is named as beneficiary, including a contract that insures the trust or its trustee against loss for damage to, destruction of, or loss of title to a trust asset. The trustee shall allocate dividends on an insurance policy to income if the premiums on the policy are paid from income, and to principal if the premiums are paid from principal.
    (b) A trustee shall allocate to income proceeds of a contract that insures the trustee against loss of occupancy or other use by an income beneficiary, loss of income, or, subject to section 25 of this chapter, loss of profits from a business.
    (c) This section does not apply to a contract to which section 31 of this chapter applies.
As added by P.L.84-2002, SEC.2.

IC 30-2-14-30
Insubstantial allocation between principal and income
     Sec. 30. If a trustee determines that an allocation between principal and income required by section 31, 32, 33, 34, or 37 of this chapter is insubstantial, the trustee may allocate the entire amount to principal unless one (1) of the circumstances described in section 15(c) of this chapter applies to the allocation. This power may be exercised by a cotrustee in the circumstances described in section 15(d) of this chapter and may be released for the reasons and in the manner described in section 15(e) of this chapter. An allocation is presumed to be insubstantial if:
        (1) the amount of the allocation would increase or decrease net income in an accounting period, as determined before the allocation, by less than ten percent (10%); or
        (2) the value of the asset producing the receipt for which the allocation would be made is less than ten percent (10%) of the total value of the trust's assets at the beginning of the accounting period. As added by P.L.84-2002, SEC.2.

IC 30-2-14-31
Allocating payments to principal or income
     Sec. 31. (a) This section does not apply to a payment to which section 32 of this chapter applies.
    (b) As used in this section, "payment" means a payment that a trustee may receive over a fixed number of years or during the life of one (1) or more individuals because of services rendered or property transferred to the payer in exchange for future payments, regardless of whether the trustee also has the option to receive the payment in a lump sum or other form of payment, whether the payment is made in money or other property, and whether the payment is made from the payer's general assets or from a separate fund created by the payer. For purposes of subsection (h), the term also includes any payment from any separate fund, regardless of the reason for the payment.
    (c) As used in this section, "separate fund" includes a private or commercial annuity, an individual retirement account, and a pension, profit sharing, stock bonus, or stock ownership plan (including an individual account under a plan and a separate share of any account described in this subsection).
    (d) To the extent that a payment is characterized as interest, a dividend, or a payment made in lieu of interest or a dividend, a trustee shall allocate the payment to income. The trustee shall allocate to principal the balance of the payment and any other payment received in the same accounting period that is not characterized as interest, a dividend, or an equivalent payment.
    (e) If a payment is not characterized as interest, a dividend, or an equivalent payment and is made from a separate fund, the payment shall be allocated between income and principal as follows:
        (1) A trustee shall determine the internal income of each separate fund for the accounting period as if the separate fund were a trust subject to this chapter. The trustee shall allocate a payment from the separate fund to income to the extent of the internal income of the separate fund and allocate the balance of the payment to principal.
        (2) If a trustee cannot determine the internal income of the separate fund but can determine the value of the separate fund, the internal income of the separate fund is deemed to equal five percent (5%) of the fund's value, according to the most recent statement of value preceding the beginning of the accounting period. If the trustee cannot determine the internal income of the separate fund or the fund's value, the internal income of the fund is deemed to equal the product of the interest rate and the present value of the expected future payments, as determined under section 7520 of the Internal Revenue Code, for the month preceding the accounting period for which the computation is made.
    (f) If no part of a payment is characterized as interest, a dividend,

or an equivalent payment, and the payment is made otherwise than from a separate fund, then the trustee shall allocate to income ten percent (10%) of any part of the payment that is required to be made during the accounting period and the balance to principal, unless no part of the payment is required to be made or the payment received is the entire amount to which the trustee is entitled, in which case the trustee shall allocate the entire payment to principal. For purposes of this subsection, a payment is not "required to be made" to the extent that it is made because the trustee exercises a right of withdrawal.
    (g) Notwithstanding any other provision of this section, when a private or commercial deferred annuity is held as an asset of a charitable remainder trust, an increase in the value of the obligation over the value of the obligation at the time of the acquisition by the trust is distributable as income. For purposes of this subsection, the increase in value is available for distribution only when the trustee exercises a right of withdrawal or otherwise receives cash on account of the obligation. If the obligation is surrendered wholly or partially before annuitization, the cash available shall be attributed first to the increase. The increase is distributable to the income beneficiary who is the income beneficiary at the time the cash is received.
    (h) Except as provided in subdivision (2), trusts described in subdivision (1) are subject to the following special rules regarding allocations and distributions of income provided in subdivision (3):
        (1) This subsection applies to:
            (A) a trust to which an election to qualify for a marital deduction under Section 2056(b)(7) of the Internal Revenue Code has been made; or
            (B) a trust that qualifies for the marital deduction under Section 2056(b)(5) of the Internal Revenue Code.
        (2) This subsection does not apply to a series of payments if and to the extent that the series of payments would, without the application of this subsection, qualify for the marital deduction under Section 2056(b)(7)(C) of the Internal Revenue Code.
        (3) Except as provided in subdivision (2), a payment made from a separate fund to a trust described in subdivision (1) shall be allocated between income and principal in accordance with subsection (e)(1) and (e)(2) and not in accordance with subsection (d) or (f), even if part or all of the payment is characterized as interest, a dividend, or an equivalent payment, and even if the payment is the entire amount to which the trustee is entitled. The trustee shall distribute to the surviving spouse the part of the payment allocated to income. Upon request of the surviving spouse, the trustee shall demand that the person administering the separate fund distribute all of the internal income of the fund to the trust. Upon request of the surviving spouse, the trustee shall allocate principal to income to the extent the internal income of the separate fund exceeds payments from the separate fund to the trust during the accounting period.
As added by P.L.84-2002, SEC.2. Amended by P.L.143-2009,

SEC.19.

IC 30-2-14-32
Receipts from liquidating asset
     Sec. 32. (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 31 of this chapter.
        (2) Resources subject to section 33 of this chapter.
        (3) Timber subject to section 34 of this chapter.
        (4) An activity subject to section 36 of this chapter.
        (5) An asset subject to section 37 of this chapter.
        (6) Any asset for which the trustee establishes a reserve for depreciation under section 40 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.
As added by P.L.84-2002, SEC.2.

IC 30-2-14-33
Receipts from an interest in minerals or other natural resources
     Sec. 33. (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 January 1, 2003, the trustee may allocate receipts from

the interest as provided in this chapter or in the manner used by the trustee before January 1, 2003. If the trust acquires an interest in minerals, water, or other natural resources after December 31, 2002, the trustee shall allocate receipts from the interest as provided in this chapter.
As added by P.L.84-2002, SEC.2.

IC 30-2-14-34
Net receipts from the sale of timber and related products
     Sec. 34. (a) To the extent that a trustee accounts for receipts from the sale of timber and related products under this section, the trustee shall allocate the net receipts:
        (1) to income to the extent that the amount of timber removed from the land does not exceed the rate of growth of the timber during the accounting periods in which a beneficiary has a mandatory income interest;
        (2) to principal to the extent that 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:
            (A) the lease of timberland; or
            (B) 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, 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 January 1, 2003. If the trust acquires an interest in timberland after December 31, 2002, the trustee shall allocate net receipts from the sale of timber and related products as provided in this chapter.
As added by P.L.84-2002, SEC.2.

IC 30-2-14-35
Marital deduction for trust assets
     Sec. 35. (a) If:
        (1) 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         (2) 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.
As added by P.L.84-2002, SEC.2.

IC 30-2-14-36
Transactions in derivatives; granting, acquiring, or exercising an option
     Sec. 36. (a) As used in this section, "derivative" means a contract or financial instrument or a combination of contracts and financial instruments that gives a trust the right or obligation to participate in:
        (1) some or all changes in the price of a tangible or intangible asset or group of assets; or
        (2) 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 25 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:
        (1) grants an option to buy property from the trust, whether or not the trust owns the property when the option is granted;
        (2) grants an option that permits another person to sell property to the trust; or
        (3) 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.
As added by P.L.84-2002, SEC.2.

IC 30-2-14-37
Asset backed securities
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