CHAPTER 59-04.2UNIFORM PRINCIPAL AND INCOME ACT59-04.2-01. (102) Definitions. In this chapter:1."Accounting period" means a calendar year unless another twelve-month period is<br>selected by a fiduciary. The term includes a portion of a calendar year or other<br>twelve-month period that begins when an income interest begins or ends when an<br>income interest ends.2."Beneficiary" includes, in the case of a decedent's estate, an heir, legatee, and<br>devisee and, in the case of a trust, an income beneficiary and a remainder<br>beneficiary.3."Fiduciary" means a personal representative or a trustee. The term includes an<br>executor, administrator, successor personal representative, special administrator,<br>and a person performing substantially the same function.4."Income" means money or property that a fiduciary receives as current return from a<br>principal asset. The term includes a portion of receipts from a sale, exchange, or<br>liquidation of a principal asset, to the extent provided in sections 59-04.2-09 through<br>59-04.2-23.5."Income beneficiary" means a person to whom net income of a trust is or may be<br>payable.6."Income interest" means the right of an income beneficiary to receive all or part of<br>net income, whether the terms of the trust require it to be distributed or authorize it to<br>be distributed in the trustee's discretion.7."Mandatory income interest" means the right of an income beneficiary to receive net<br>income that the terms of the trust require the fiduciary to distribute.8."Net income" means the total receipts allocated to income during an accounting<br>period minus the disbursements made from income during the period, plus or minus<br>transfers under this chapter to or from income during the period.9."Principal" means property held in trust for distribution to a remainder beneficiary<br>when the trust terminates.10."Remainder beneficiary" means a person entitled to receive principal when an<br>income interest ends.11."Terms of a trust" means the manifestation of the intent of a settlor or decedent with<br>respect to the trust, expressed in a manner that admits of its proof in a judicial<br>proceeding, whether by written or spoken words or by conduct.12."Trustee" includes an original, additional, or successor trustee, whether or not<br>appointed or confirmed by a court.59-04.2-02. (103) Fiduciary duties - General principles.1.In allocating receipts and disbursements to or between principal and income, and<br>with respect to any matter within the scope of sections 59-04.2-04 through<br>59-04.2-08, a fiduciary:a.Shall administer a trust or estate in accordance with the terms of the trust or the<br>will, even if there is a different provision in this chapter.Page No. 1b.May administer a trust or estate by the exercise of a discretionary power of<br>administration given to the fiduciary by the terms of the trust or the will, even if<br>the exercise of the power produces a result different from a result required or<br>permitted by this chapter.c.Shall administer a trust or estate in accordance with this chapter if the terms of<br>the trust or the will do not contain a different provision or do not give the<br>fiduciary a discretionary power of administration.d.Shall add a receipt or charge a disbursement to principal to the extent that the<br>terms of the trust and this chapter do not provide a rule for allocating the receipt<br>or disbursement to or between principal and income.2.In exercising a discretionary power of administration regarding a matter within the<br>scope of this chapter, whether granted by the terms of a trust, a will, or this chapter,<br>a fiduciary shall administer a trust or estate impartially, based on what is fair and<br>reasonable to all of the beneficiaries, except to the extent that the terms of the trust<br>or the will clearly manifest an intention that the fiduciary shall or may favor one or<br>more of the beneficiaries.A determination in accordance with this chapter ispresumed to be fair and reasonable to all of the beneficiaries.59-04.2-03. (104) Trustee's power to adjust. Reserved.59-04.2-04. (201) Determination and distribution of net income. After a decedentdies, in the case of an estate, or after an income interest in a trust ends, the following rules apply:1.A fiduciary of an estate or of a terminating income interest shall determine the<br>amount of net income and net principal receipts received from property specifically<br>given to a beneficiary under the rules in sections 59-04.2-06 through 59-04.2-29<br>which apply to trustees and the rules in subsection 5. The fiduciary shall distribute<br>the net income and net principal receipts to the beneficiary who is to receive the<br>specific property.2.A fiduciary shall determine the remaining net income of a decedent's estate or a<br>terminating income interest under the rules in sections 59-04.2-06 through<br>59-04.2-29 which apply to trustees and by:a.Including in net income all income from property used to discharge liabilities.b.Paying from income or principal, in the fiduciary's discretion, fees of attorneys,<br>accountants, and fiduciaries; court costs and other expenses of administration;<br>and interest on death taxes, but the fiduciary may pay those expenses from<br>income of property passing to a trust for which the fiduciary claims an estate tax<br>marital or charitable deduction only to the extent that the payment of those<br>expenses from income will not cause the reduction or loss of the deduction.c.Paying from principal all other disbursements made or incurred in connection<br>with the settlement of a decedent's estate or the winding up of a terminating<br>income interest, including debts, funeral expenses, disposition of remains,<br>family allowances, and death taxes and related penalties that are apportioned<br>to the estate or terminating income interest by the will, the terms of the trust, or<br>applicable law.3.A fiduciary shall distribute to a beneficiary who receives a pecuniary amount outright<br>the interest or any other amount provided by the will, the terms of the trust, or<br>applicable law from net income determined under subsection 2 or from principal to<br>the extent that net income is insufficient. If a beneficiary is to receive a pecuniary<br>amount outright from a trust after an income interest ends and no interest or other<br>amount is provided for by the terms of the trust or applicable law, the fiduciary shallPage No. 2distribute the interest or other amount to which the beneficiary would be entitled<br>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<br>subsection 3 in the manner described in section 59-04.2-05 to all other beneficiaries,<br>including a beneficiary who receives a pecuniary amount in trust, even if the<br>beneficiary holds an unqualified power to withdraw assets from the trust or other<br>presently exercisable general power of appointment over the trust.5.A fiduciary may not reduce principal or income receipts from property described in<br>subsection 1 because of a payment described in section 59-04.2-24 or 59-04.2-25 to<br>the extent that the will, the terms of the trust, or applicable law requires the fiduciary<br>to make the payment from assets other than the property or to the extent that the<br>fiduciary recovers or expects to recover the payment from a third party. The net<br>income and principal receipts from the property are determined by including all of<br>the amounts the fiduciary receives or pays with respect to the property, whether<br>those amounts accrued or became due before, on, or after the date of a decedent's<br>death or an income interest's terminating event, and by making a reasonable<br>provision for amounts that the fiduciary believes the estate or terminating income<br>interest may become obligated to pay after the property is distributed.59-04.2-05. (202) Distribution to residuary and remainder beneficiaries.1.Each beneficiary described in subsection 4 of section 59-04.2-04 is entitled to<br>receive a portion of the net income equal to the beneficiary's fractional interest in<br>undistributed principal assets, using values as of the distribution date. If a fiduciary<br>makes more than one distribution of assets to beneficiaries to whom this section<br>applies, each beneficiary, including one who does not receive part of the distribution,<br>is entitled, as of each distribution date, to the net income the fiduciary has received<br>after the date of death or terminating event or earlier distribution date but has not<br>distributed as of the current distribution date.2.In determining a beneficiary's share of net income, the following rules apply:a.The beneficiary is entitled to receive a portion of the net income equal to the<br>beneficiary's fractional interest in the undistributed principal assets immediately<br>before the distribution date, including assets that later may be sold to meet<br>principal obligations.b.The beneficiary's fractional interest in the undistributed principal assets must be<br>calculated without regard to property specifically given to a beneficiary and<br>property required to pay pecuniary amounts not in trust.c.The beneficiary's fractional interest in the undistributed principal assets must be<br>calculated on the basis of the aggregate value of those assets as of the<br>distribution date without reducing the value by any unpaid principal obligation.d.The distribution date for purposes of this section may be the date as of which<br>the fiduciary calculates the value of the assets if that date is reasonably near<br>the date on which assets are actually distributed.3.If a fiduciary does not distribute all of the collected but undistributed net income to<br>each person as of a distribution date, the fiduciary shall maintain appropriate records<br>showing the interest of each beneficiary in that net income.4.A fiduciary may apply the rules in this section, to the extent that the fiduciary<br>considers it appropriate, to net gain or loss realized after the date of death or<br>terminating event or earlier distribution date from the disposition of a principal asset<br>if this section applies to the income from the asset.Page No. 359-04.2-06. (301) When right to income begins and ends.1.An income beneficiary is entitled to net income from the date on which the income<br>interest begins. An income interest begins on the date specified in the terms of the<br>trust or, if no date is specified, on the date an asset becomes subject to a trust or<br>successive income interest.2.An asset becomes subject to a trust:a.On the date it is transferred to the trust in the case of an asset that is<br>transferred to a trust during the transferor's life;b.On the date of a testator's death in the case of an asset that becomes subject<br>to a trust by reason of a will, even if there is an intervening period of<br>administration of the testator's estate; orc.On the date of an individual's death in the case of an asset that is transferred to<br>a fiduciary by a third party because of the individual's death.3.An asset becomes subject to a successive income interest on the day after the<br>preceding income interest ends, as determined under subsection 4, even if there is<br>an intervening period of administration to wind up the preceding income interest.4.An income interest ends on the day before an income beneficiary dies or another<br>terminating event occurs, or on the last day of a period during which there is no<br>beneficiary to whom a trustee may distribute income.59-04.2-07.(302) Apportionment of receipts and disbursements when decedentdies or income interest begins.1.A trustee shall allocate an income receipt or disbursement other than one to which<br>subsection 1 of section 59-04.2-04 applies to principal if its due date occurs before a<br>decedent dies in the case of an estate or before an income interest begins in the<br>case of a trust or successive income interest.2.A trustee shall allocate an income receipt or disbursement to income if its due date<br>occurs on or after the date on which a decedent dies or an income interest begins<br>and it is a periodic due date. An income receipt or disbursement must be treated as<br>accruing from day to day if its due date is not periodic or it has no due date. The<br>portion of the receipt or disbursement accruing before the date on which a decedent<br>dies or an income interest begins must be allocated to principal and the balance<br>must be allocated to income.3.An item of income or an obligation is due on the date the payer is required to make a<br>payment. If a payment date is not stated, there is no due date for the purposes of<br>this chapter. Distributions to shareholders or other owners from an entity to which<br>section 59-04.2-09 applies are deemed to be due on the date fixed by the entity for<br>determining who is entitled to receive the distribution or, if no date is fixed, on the<br>declaration date for the distribution.A due date is periodic for receipts ordisbursements that must be paid at regular intervals under a lease or an obligation<br>to pay interest or if an entity customarily makes distributions at regular intervals.59-04.2-08. (303) Apportionment when income interest ends.1.In this section, "undistributed income" means net income received before the date<br>on which an income interest ends. The term does not include an item of income or<br>expense that is due or accrued or net income that has been added or is required to<br>be added to principal under the terms of the trust.Page No. 42.When a mandatory income interest ends, the trustee shall pay to a mandatory<br>income beneficiary who survives that date, or the estate of a deceased mandatory<br>income beneficiary whose death causes the interest to end, the beneficiary's share<br>of the undistributed income that is not disposed of under the terms of the trust unless<br>the beneficiary has an unqualified power to revoke more than five percent of the<br>trust immediately before the income interest ends.In the latter case, theundistributed income from the portion of the trust that may be revoked must be<br>added to principal.3.When a trustee's obligation to pay a fixed annuity or a fixed fraction of the value of<br>the trust's assets ends, the trustee shall prorate the final payment if and to the extent<br>required by applicable law to accomplish a purpose of the trust or its settlor relating<br>to income, gift, estate, or other tax requirements.59-04.2-09. (401) Character of receipts.1.In this section, "entity" means a corporation, partnership, limited liability company,<br>regulated investment company, real estate investment trust, common trust fund, or<br>any other organization in which a trustee has an interest other than a trust or estate<br>to which section 59-04.2-10 applies, a business or activity to which section<br>59-04.2-11 applies, or an asset-backed security to which section 59-04.2-23 applies.2.Except as otherwise provided in this section, a trustee shall allocate to income<br>money received from an entity.3.A trustee shall allocate the following receipts from an entity to principal:a.Property other than money.b.Money received in one distribution or a series of related distributions in<br>exchange for part or all of a trust's interest in the entity.c.Money received in total or partial liquidation of the entity.d.Money received from an entity that is a regulated investment company or a real<br>estate investment trust if the money distributed is a capital gain dividend for<br>federal income tax purposes.4.Money is received in partial liquidation:a.To the extent that the entity, at or near the time of a distribution, indicates that it<br>is a distribution in partial liquidation; orb.If the total amount of money and property received in a distribution or series of<br>related distributions is greater than twenty percent of the entity's gross assets,<br>as shown by the entity's year-end financial statements immediately preceding<br>the initial receipt.5.Money is not received in partial liquidation, nor may it be taken into account under<br>subdivision b of subsection 4, to the extent that it does not exceed the amount of<br>income tax that a trustee or beneficiary must pay on taxable income of the entity that<br>distributes the money.6.A trustee may rely upon a statement made by an entity about the source or<br>character of a distribution if the statement is made at or near the time of distribution<br>by the entity's board of directors or other person or group of persons authorized to<br>exercise powers to pay money or transfer property comparable to those of a<br>corporation's board of directors.Page No. 559-04.2-10. (402) Distribution from trust or estate. A trustee shall allocate to incomean amount received as a distribution of income from a trust or an estate in which the trust has an<br>interest other than a purchased interest and shall allocate to principal an amount received as a<br>distribution of principal from such a trust or estate. If a trustee purchases an interest in a trust<br>that is an investment entity, or a decedent or donor transfers an interest in such a trust to a<br>trustee, section 59-04.2-09 or 59-04.2-23 applies to a receipt from the trust.59-04.2-11. (403) Business and other activities conducted by trustee.1.If a trustee who conducts a business or other activity determines that it is in the best<br>interest of all the beneficiaries to account separately for the business or activity<br>instead of accounting for it as part of the trust's general accounting records, the<br>trustee may maintain separate accounting records for its transactions, whether or<br>not its assets are segregated from other trust assets.2.A trustee who accounts separately for a business or other activity may determine the<br>extent to which its net cash receipts must be retained for working capital, the<br>acquisition or replacement of fixed assets, and other reasonably foreseeable needs<br>of the business or activity, and the extent to which the remaining net cash receipts<br>are accounted for as principal or income in the trust's general accounting records. If<br>a trustee sells assets of the business or other activity, other than in the ordinary<br>course of the business or activity, the trustee shall account for the net amount<br>received as principal in the trust's general accounting records to the extent the<br>trustee determines that the amount received is no longer required in the conduct of<br>the business.3.Activities for which a trustee may maintain separate accounting records include<br>retail, manufacturing, service, and other traditional business activities; farming;<br>raising and selling livestock and other animals; management of rental properties;<br>extraction of minerals and other natural resources; timber operations; and activities<br>to which section 59-04.2-22 applies.59-04.2-12. (404) Principal receipts. A trustee shall allocate to principal:1.To the extent not allocated to income under this chapter, assets received from a<br>transferor during the transferor's lifetime, a decedent's estate, a trust with a<br>terminating income interest, or a payer under a contract naming the trust or its<br>trustee as beneficiary.2.Money or other property received from the sale, exchange, liquidation, or change in<br>form of a principal asset, including realized profit, subject to sections 59-04.2-09<br>through 59-04.2-23.3.Amounts recovered from third parties to reimburse the trust because of<br>disbursements described in subdivision g of subsection 1 of section 59-04.2-25 or<br>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<br>loss of income with respect to an accounting period during which a current income<br>beneficiary had a mandatory income interest is income.5.Net income received in an accounting period during which there is no beneficiary to<br>whom a trustee may or must distribute income.6.Other receipts as provided in sections 59-04.2-16 through 59-04.2-23.59-04.2-13. (405) Rental property. To the extent that a trustee accounts for receiptsfrom rental property pursuant to this section, the trustee shall allocate to income an amount<br>received as rent of real or personal property, including an amount received for cancellation orPage No. 6renewal of a lease. An amount received as a refundable deposit, including a security deposit or<br>a deposit that is to be applied as rent for future periods, must be added to principal and held<br>subject to the terms of the lease and is not available for distribution to a beneficiary until the<br>trustee's contractual obligations have been satisfied with respect to that amount.59-04.2-14. (406) Obligation to pay money.1.An amount received as interest, whether determined at a fixed, variable, or floating<br>rate, on an obligation to pay money to the trustee, including an amount received as<br>consideration for prepaying principal, must be allocated to income without any<br>provision for amortization of premium.2.A trustee shall allocate to principal an amount received from the sale, redemption, or<br>other disposition of an obligation to pay money to the trustee more than one year<br>after it is purchased or acquired by the trustee, including an obligation whose<br>purchase price or value when it is acquired is less than its value at maturity. If the<br>obligation matures within one year after it is purchased or acquired by the trustee, an<br>amount received in excess of its purchase price or its value when acquired by the<br>trust must be allocated to income.3.This section does not apply to an obligation to which section 59-04.2-17, 59-04.2-18,<br>59-04.2-19, 59-04.2-20, 59-04.2-22, or 59-04.2-23 applies.59-04.2-15. (407) Insurance policies and similar contracts.1.Except as otherwise provided in subsection 2, a trustee shall allocate to principal the<br>proceeds of a life insurance policy or other contract in which the trust or its trustee is<br>named as beneficiary, including a contract that insures the trust or its trustee against<br>loss for damage to, destruction of, or loss of title to a trust asset. The trustee shall<br>allocate dividends on an insurance policy to income if the premiums on the policy<br>are paid from income, and to principal if the premiums are paid from principal.2.A trustee shall allocate to income proceeds of a contract that insures the trustee<br>against loss of occupancy or other use by an income beneficiary, loss of income, or,<br>subject to section 59-04.2-11, loss of profits from a business.3.This section does not apply to a contract to which section 59-04.2-17 applies.59-04.2-16. (408) Insubstantial allocations not required. Reserved.59-04.2-17. (409) Deferred compensation, annuities, and similar payments.1.In this section, "payment" means a payment that a trustee may receive over a fixed<br>number of years or during the life of one or more individuals because of services<br>rendered or property transferred to the payer in exchange for future payments. The<br>term includes a payment made in money or property from the payer's general assets<br>or from a separate fund created by the payer. For purposes of subsections 4, 5, 6,<br>and 7, the term includes any payment from a separate fund, regardless of the<br>reason for the payment.In this section, "separate fund" includes a private orcommercial annuity, an individual retirement account, and a pension, profit-sharing,<br>stock-bonus, or stock-ownership plan.2.To the extent that a payment is characterized as interest, a dividend, or a payment<br>made in lieu of interest or a dividend, a trustee shall allocate the payment to income.<br>The trustee shall allocate to principal the balance of the payment and any other<br>payment received in the same accounting period that is not characterized as<br>interest, a dividend, or an equivalent payment.Page No. 73.If no part of a payment is characterized as interest, a dividend, or an equivalent<br>payment, and all or part of the payment is required to be made, a trustee shall<br>allocate to income ten percent of the part that is required to be made during the<br>accounting period and the balance to principal. If no part of a payment is required to<br>be made or the payment received is the entire amount to which the trustee is<br>entitled, the trustee shall allocate the entire payment to principal. For purposes of<br>this subsection, a payment is not required to be made to the extent that it is made<br>because the trustee exercises a right of withdrawal.4.Except as otherwise provided in subsection 5, subsections 6 and 7 apply, and<br>subsections 2 and 3 do not apply, in determining the allocation of a payment made<br>from a separate fund to a trust to which an election to qualify for marital deduction<br>under section 2056(b)(7) of the Internal Revenue Code of 1986, as amended, has<br>been made or to a trust that qualified for the marital deduction under section<br>2056(b)(5) of the Internal Revenue Code of 1986, as amended.5.Subsections 4, 6, and 7 do not apply if and to the extent that the series of payments<br>would, without application of subsection 4, qualify for the marital deduction under<br>section 2056(b)(7)(C) of the Internal Revenue Code of 1986, as amended.6.A trustee shall determine the internal income of each separate fund for the<br>accounting period as if the separate fund were a trust subject to this chapter. Upon<br>request of the surviving spouse, the trustee shall demand of the persons<br>administering the separate fund that this internal income be distributed to the trust.<br>The trustee shall allocate a payment from the separate fund to income to the extent<br>of the internal income of the separate fund and distribute that amount to the<br>surviving spouse. The trustee shall allocate the balance to principal. Upon request<br>of the surviving spouse, the trustee shall allocate principal to income to the extent<br>the internal income of the separate fund exceeds payments made from the separate<br>fund to the trust during the accounting period.7.If a trustee cannot determine the internal income of a separate fund but can<br>determine the value of a separate fund, the internal income of the separate fund is<br>deemed to equal four percent of the fund's value, according to the most recent<br>statement of value preceding the beginning of the accounting period. If the trustee<br>can determine neither the internal income of the separate fund nor the fund's value,<br>the internal income of the fund is deemed to equal the product of the interest rate<br>and the present value of the expected future payments, as determined under section<br>7520 of the Internal Revenue Code of 1986, as amended, for the month preceding<br>the accounting period for which the computation is made.8.This section does not apply to a payment to which section 59-04.2-18 applies.59-04.2-18. (410) Liquidating asset.1.In this section, "liquidating asset" means an asset whose value will diminish or<br>terminate because the asset is expected to produce receipts for a period of limited<br>duration. The term includes a leasehold, patent, copyright, royalty right, and right to<br>receive payments during a period of more than one year under an arrangement that<br>does not provide for the payment of interest on the unpaid balance. The term does<br>not include a payment subject to section 59-04.2-17, resources subject to section<br>59-04.2-19, timber subject to section 59-04.2-20, an activity subject to section<br>59-04.2-22, an asset subject to section 59-04.2-23, or any asset for which the<br>trustee establishes a reserve for depreciation under section 59-04.2-26.2.A trustee shall allocate to income ten percent of the receipts from a liquidating asset<br>and the balance to principal.59-04.2-19. (411) Minerals, water, and other natural resources.Page No. 81.To the extent that a trustee accounts for receipts from an interest in minerals or<br>other natural resources pursuant to this section, the trustee shall allocate them as<br>follows:a.If received as nominal delay rental or nominal annual rent on a lease, a receipt<br>must be allocated to income.b.If received from a production payment, a receipt must be allocated to income if<br>and to the extent that the agreement creating the production payment provides<br>a factor for interest or its equivalent.The balance must be allocated toprincipal.c.If an amount received as a royalty, shut-in-well payment, take-or-pay payment,<br>bonus, or delay rental is more than nominal, ninety percent must be allocated<br>to principal and the balance to income.d.If an amount is received from a working interest or any other interest not<br>provided for in subdivision a, b, or c, ninety percent of the net amount received<br>must be allocated to principal and the balance to income.2.An amount received on account of an interest in water that is renewable must be<br>allocated to income. If the water is not renewable, ninety percent of the amount<br>must be allocated to principal and the balance to income.3.This chapter applies whether or not a decedent or donor was extracting minerals,<br>water, or other natural resources before the interest became subject to the trust.4.If a trust owns an interest in minerals, water, or other natural resources on August 1,<br>1999, the trustee may allocate receipts from the interest as provided in this chapter<br>or in the manner used by the trustee before August 1, 1999. If the trust acquires an<br>interest in minerals, water, or other natural resources after August 1, 1999, the<br>trustee shall allocate receipts from the interest as provided in this chapter.59-04.2-20. (412) Timber.1.To the extent that a trustee accounts for receipts from the sale of timber and related<br>products pursuant to this section, the trustee shall allocate the net receipts:a.To income to the extent that the amount of timber removed from the land does<br>not exceed the rate of growth of the timber during the accounting periods in<br>which a beneficiary has a mandatory income interest;b.To principal to the extent that the amount of timber removed from the land<br>exceeds the rate of growth of the timber or the net receipts are from the sale of<br>standing timber;c.To or between income and principal if the net receipts are from the lease of<br>timberland or from a contract to cut timber from land owned by a trust, by<br>determining the amount of timber removed from the land under the lease or<br>contract and applying the rules in subdivisions a and b; ord.To principal to the extent that advance payments, bonuses, and other<br>payments are not allocated pursuant to subdivision a, b, or c.2.In determining net receipts to be allocated pursuant to subsection 1, a trustee shall<br>deduct and transfer to principal a reasonable amount for depletion.3.This chapter applies whether or not a decedent or transferor was harvesting timber<br>from the property before it became subject to the trust.Page No. 94.If a trust owns an interest in timberland on August 1, 1999, the trustee may allocate<br>net receipts from the sale of timber and related products as provided in this chapter<br>or in the manner used by the trustee before August 1, 1999. If the trust acquires an<br>interest in timberland after August 1, 1999, the trustee shall allocate net receipts<br>from the sale of timber and related products as provided in this chapter.59-04.2-21. (413) Property not productive of income. Reserved.59-04.2-22. (414) Derivatives and options.1.In this section, "derivative" means a contract or financial instrument or a combination<br>of contracts and financial instruments which gives a trust the right or obligation to<br>participate in some or all changes in the price of a tangible or intangible asset or<br>group of assets, or changes in a rate, an index of prices or rates, or other market<br>indicator for an asset or a group of assets.2.To the extent that a trustee does not account under section 59-04.2-11 for<br>transactions in derivatives, the trustee shall allocate to principal receipts from and<br>disbursements made in connection with those transactions.3.If a trustee grants an option to buy property from the trust, whether or not the trust<br>owns the property when the option is granted, grants an option that permits another<br>person to sell property to the trust, or acquires an option to buy property for the trust<br>or an option to sell an asset owned by the trust, and the trustee or other owner of the<br>asset is required to deliver the asset if the option is exercised, an amount received<br>for granting the option must be allocated to principal. An amount paid to acquire the<br>option must be paid from principal. A gain or loss realized upon the exercise of an<br>option, including an option granted to a settlor of the trust for services rendered,<br>must be allocated to principal.59-04.2-23. (415) Asset-backed securities.1.In this section, "asset-backed security" means an asset whose value is based upon<br>the right it gives the owner to receive distributions from the proceeds of financial<br>assets that provide collateral for the security. The term includes an asset that gives<br>the owner the right to receive from the collateral financial assets only the interest or<br>other current return or only the proceeds other than interest or current return. The<br>term does not include an asset to which section 59-04.2-09 or 59-04.2-17 applies.2.If a trust receives a payment from interest or other current return and from other<br>proceeds of the collateral financial assets, the trustee shall allocate to income the<br>portion of the payment which the payer identifies as being from interest or other<br>current return and shall allocate the balance of the payment to principal.3.If a trust receives one or more payments in exchange for the trust's entire interest in<br>an asset-backed security in one accounting period, the trustee shall allocate the<br>payments to principal. If a payment is one of a series of payments that will result in<br>the liquidation of the trust's interest in the security over more than one accounting<br>period, the trustee shall allocate ten percent of the payment to income and the<br>balance to principal.59-04.2-24. (501) Disbursements from income. A trustee shall make the followingdisbursements from income to the extent that they are not disbursements to which subdivision b<br>or c of subsection 2 of section 59-04.2-04 applies:1.One-half of the regular compensation of the trustee and of any person providing<br>investment advisory or custodial services to the trustee.Page No. 102.One-half of all expenses for accountings, judicial proceedings, or other matters that<br>involve both the income and remainder interests.3.All of the other ordinary expenses incurred in connection with the administration,<br>management, or preservation of trust property and the distribution of income,<br>including interest, ordinary repairs, regularly recurring taxes assessed against<br>principal, and expenses of a proceeding or other matter that concerns primarily the<br>income interest.4.Recurring premiums on insurance covering the loss of a principal asset or the loss of<br>income from or use of the asset.59-04.2-25. (502) Disbursements from principal.1.A trustee shall make the following disbursements from principal:a.The remaining one-half of the disbursements described in subsections 1 and 2<br>of section 59-04.2-24;b.All of the trustee's compensation calculated on principal as a fee for<br>acceptance, distribution, or termination, and disbursements made to prepare<br>property for sale;c.Payments on the principal of a trust debt;d.Expenses of a proceeding that concerns primarily principal, including a<br>proceeding to construe the trust or to protect the trust or its property;e.Premiums paid on a policy of insurance not described in subsection 4 of section<br>59-04.2-24 of which the trust is the owner and beneficiary;f.Estate, inheritance, and other transfer taxes, including penalties, apportioned to<br>the trust; andg.Disbursements related to environmental matters, including reclamation,<br>assessing environmental conditions, remedying and removing environmental<br>contamination, monitoring remedial activities and the release of substances,<br>preventing future releases of substances, collecting amounts from persons<br>liable or potentially liable for the costs of those activities, penalties imposed<br>under environmental laws or regulations and other payments made to comply<br>with those laws or regulations, statutory or common-law claims by third parties,<br>and defending claims based on environmental matters.2.If a principal asset is encumbered with an obligation that requires income from that<br>asset to be paid directly to the creditor, the trustee shall transfer from principal to<br>income an amount equal to the income paid to the creditor in reduction of the<br>principal balance of the obligation.59-04.2-26. (503) Transfers from income to principal for depreciation.1.In this section, "depreciation" means a reduction in value due to wear, tear, decay,<br>corrosion, or gradual obsolescence of a fixed asset having a useful life of more than<br>one year.2.A trustee may transfer to principal a reasonable amount of the net cash receipts<br>from a principal asset that is subject to depreciation, but may not transfer any<br>amount for depreciation:Page No. 11a.Of that portion of real property used or available for use by a beneficiary as a<br>residence or of tangible personal property held or made available for the<br>personal use or enjoyment of a beneficiary;b.During the administration of a decedent's estate; orc.Under this section if the trustee is accounting under section 59-04.2-11 for the<br>business or activity in which the asset is used.3.An amount transferred to principal need not be held as a separate fund.59-04.2-27. (504) Transfers from income to reimburse principal.1.If a trustee makes or expects to make a principal disbursement described in this<br>section, the trustee may transfer an appropriate amount from income to principal in<br>one or more accounting periods to reimburse principal or to provide a reserve for<br>future principal disbursements.2.Principal disbursements to which subsection 1 applies include the following, but only<br>to the extent that the trustee has not been and does not expect to be reimbursed by<br>a third party:a.An amount chargeable to income but paid from principal because it is unusually<br>large, including extraordinary repairs;b.A capital improvement to a principal asset, whether in the form of changes to<br>an existing asset or the construction of a new asset, including special<br>assessments;c.Disbursements made to prepare property for rental, including tenant<br>allowances, leasehold improvements, and broker's commissions;d.Periodic payments on an obligation secured by a principal asset to the extent<br>that the amount transferred from income to principal for depreciation is less<br>than the periodic payments; ande.Disbursementsdescribedinsubdivision gofsubsection 1ofsection59-04.2-25.3.If the asset whose ownership gives rise to the disbursements becomes subject to a<br>successive income interest after an income interest ends, a trustee may continue to<br>transfer amounts from income to principal as provided in subsection 1.59-04.2-28. (505) Income taxes.1.A tax required to be paid by a trustee based on receipts allocated to income must be<br>paid from income.2.A tax required to be paid by a trustee based on receipts allocated to principal must<br>be paid from principal, even if the tax is called an income tax by the taxing authority.3.A tax required to be paid by a trustee on the trust's share of an entity's taxable<br>income must be paid:a.From income to the extent that receipts from the entity are allocated to income;b.From principal to the extent that receipts from the entity are allocated only to<br>principal;Page No. 12c.Proportionately from principal and income to the extent that receipts from the<br>entity are allocated to both income and principal; andd.From principal to the extent that the tax exceeds the total receipts from the<br>entity.4.After applying subsections 1 through 3, the trustee shall adjust income or principal<br>receipts to the extent that the trust's taxes are reduced because the trust receives a<br>deduction for payments made to a beneficiary.59-04.2-29. (506) Adjustments between principal and income because of taxes.1.A fiduciary may make adjustments between principal and income to offset the<br>shifting of economic interests or tax benefits between income beneficiaries and<br>remainder beneficiaries which arise from:a.Elections and decisions, other than those described in subsection 2, that the<br>fiduciary makes from time to time regarding tax matters;b.An income tax or any other tax that is imposed upon the fiduciary or a<br>beneficiary as a result of a transaction involving or a distribution from the estate<br>or trust; orc.The ownership by an estate or trust of an interest in an entity whose taxable<br>income, whether or not distributed, is includable in the taxable income of the<br>estate, trust, or a beneficiary.2.If the amount of an estate tax marital deduction or charitable contribution deduction<br>is reduced because a fiduciary deducts an amount paid from principal for income tax<br>purposes instead of deducting it for estate tax purposes, and as a result estate taxes<br>paid from principal are increased and income taxes paid by an estate, trust, or<br>beneficiary are decreased, each estate, trust, or beneficiary that benefits from the<br>decrease in income tax shall reimburse the principal from which the increase in<br>estate tax is paid. The total reimbursement must equal the increase in the estate tax<br>to the extent that the principal used to pay the increase would have qualified for a<br>marital deduction or charitable contribution deduction but for the payment.Theproportionate share of the reimbursement for each estate, trust, or beneficiary<br>whose income taxes are reduced must be the same as its proportionate share of the<br>total decrease in income tax.An estate or trust shall reimburse principal fromincome.59-04.2-30. Certain charitable remainder unitrusts.1.Notwithstanding any other provision of this chapter, unless the trust instrument<br>directs otherwise, an increase in the value of the obligations described in this<br>subsection owned by a charitable remainder unitrust of the type authorized in<br>section 664(d)(3) of the Internal Revenue Code [26 U.S.C. 664(d)(3)] or its<br>successor provisions is distributable as income when it becomes available for<br>distribution:a.A zero coupon bond;b.An annuity contract before annuitization;c.A life insurance contract before the death of the insured;d.An interest in a common trust fund as defined in section 584 of the Internal<br>Revenue Code [26 U.S.C. 584] or its successor provisions;Page No. 13e.An interest in a partnership as defined in section 7701 of the Internal Revenue<br>Code [26 U.S.C. 7701] or its successor provisions; andf.Any other obligation for the payment of money that is payable at a future time in<br>accordance with a fixed, variable, or discretionary schedule of appreciation in<br>excess of the price at which it was issued.2.The increase in value of the obligations described in subsection 1 is distributable to<br>the beneficiary who was the income beneficiary at the time of the increase.3.For purposes of this section, the increase in value of an obligation described in<br>subsection 1 is available for distribution only when the trustee receives cash on<br>account of the obligation. If the obligation is surrendered or liquidated partially, the<br>cash available must be attributed first to the increase.Page No. 14Document Outlinechapter 59-04.2 uniform principal and income act
CHAPTER 59-04.2UNIFORM PRINCIPAL AND INCOME ACT59-04.2-01. (102) Definitions. In this chapter:1."Accounting period" means a calendar year unless another twelve-month period is<br>selected by a fiduciary. The term includes a portion of a calendar year or other<br>twelve-month period that begins when an income interest begins or ends when an<br>income interest ends.2."Beneficiary" includes, in the case of a decedent's estate, an heir, legatee, and<br>devisee and, in the case of a trust, an income beneficiary and a remainder<br>beneficiary.3."Fiduciary" means a personal representative or a trustee. The term includes an<br>executor, administrator, successor personal representative, special administrator,<br>and a person performing substantially the same function.4."Income" means money or property that a fiduciary receives as current return from a<br>principal asset. The term includes a portion of receipts from a sale, exchange, or<br>liquidation of a principal asset, to the extent provided in sections 59-04.2-09 through<br>59-04.2-23.5."Income beneficiary" means a person to whom net income of a trust is or may be<br>payable.6."Income interest" means the right of an income beneficiary to receive all or part of<br>net income, whether the terms of the trust require it to be distributed or authorize it to<br>be distributed in the trustee's discretion.7."Mandatory income interest" means the right of an income beneficiary to receive net<br>income that the terms of the trust require the fiduciary to distribute.8."Net income" means the total receipts allocated to income during an accounting<br>period minus the disbursements made from income during the period, plus or minus<br>transfers under this chapter to or from income during the period.9."Principal" means property held in trust for distribution to a remainder beneficiary<br>when the trust terminates.10."Remainder beneficiary" means a person entitled to receive principal when an<br>income interest ends.11."Terms of a trust" means the manifestation of the intent of a settlor or decedent with<br>respect to the trust, expressed in a manner that admits of its proof in a judicial<br>proceeding, whether by written or spoken words or by conduct.12."Trustee" includes an original, additional, or successor trustee, whether or not<br>appointed or confirmed by a court.59-04.2-02. (103) Fiduciary duties - General principles.1.In allocating receipts and disbursements to or between principal and income, and<br>with respect to any matter within the scope of sections 59-04.2-04 through<br>59-04.2-08, a fiduciary:a.Shall administer a trust or estate in accordance with the terms of the trust or the<br>will, even if there is a different provision in this chapter.Page No. 1b.May administer a trust or estate by the exercise of a discretionary power of<br>administration given to the fiduciary by the terms of the trust or the will, even if<br>the exercise of the power produces a result different from a result required or<br>permitted by this chapter.c.Shall administer a trust or estate in accordance with this chapter if the terms of<br>the trust or the will do not contain a different provision or do not give the<br>fiduciary a discretionary power of administration.d.Shall add a receipt or charge a disbursement to principal to the extent that the<br>terms of the trust and this chapter do not provide a rule for allocating the receipt<br>or disbursement to or between principal and income.2.In exercising a discretionary power of administration regarding a matter within the<br>scope of this chapter, whether granted by the terms of a trust, a will, or this chapter,<br>a fiduciary shall administer a trust or estate impartially, based on what is fair and<br>reasonable to all of the beneficiaries, except to the extent that the terms of the trust<br>or the will clearly manifest an intention that the fiduciary shall or may favor one or<br>more of the beneficiaries.A determination in accordance with this chapter ispresumed to be fair and reasonable to all of the beneficiaries.59-04.2-03. (104) Trustee's power to adjust. Reserved.59-04.2-04. (201) Determination and distribution of net income. After a decedentdies, in the case of an estate, or after an income interest in a trust ends, the following rules apply:1.A fiduciary of an estate or of a terminating income interest shall determine the<br>amount of net income and net principal receipts received from property specifically<br>given to a beneficiary under the rules in sections 59-04.2-06 through 59-04.2-29<br>which apply to trustees and the rules in subsection 5. The fiduciary shall distribute<br>the net income and net principal receipts to the beneficiary who is to receive the<br>specific property.2.A fiduciary shall determine the remaining net income of a decedent's estate or a<br>terminating income interest under the rules in sections 59-04.2-06 through<br>59-04.2-29 which apply to trustees and by:a.Including in net income all income from property used to discharge liabilities.b.Paying from income or principal, in the fiduciary's discretion, fees of attorneys,<br>accountants, and fiduciaries; court costs and other expenses of administration;<br>and interest on death taxes, but the fiduciary may pay those expenses from<br>income of property passing to a trust for which the fiduciary claims an estate tax<br>marital or charitable deduction only to the extent that the payment of those<br>expenses from income will not cause the reduction or loss of the deduction.c.Paying from principal all other disbursements made or incurred in connection<br>with the settlement of a decedent's estate or the winding up of a terminating<br>income interest, including debts, funeral expenses, disposition of remains,<br>family allowances, and death taxes and related penalties that are apportioned<br>to the estate or terminating income interest by the will, the terms of the trust, or<br>applicable law.3.A fiduciary shall distribute to a beneficiary who receives a pecuniary amount outright<br>the interest or any other amount provided by the will, the terms of the trust, or<br>applicable law from net income determined under subsection 2 or from principal to<br>the extent that net income is insufficient. If a beneficiary is to receive a pecuniary<br>amount outright from a trust after an income interest ends and no interest or other<br>amount is provided for by the terms of the trust or applicable law, the fiduciary shallPage No. 2distribute the interest or other amount to which the beneficiary would be entitled<br>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<br>subsection 3 in the manner described in section 59-04.2-05 to all other beneficiaries,<br>including a beneficiary who receives a pecuniary amount in trust, even if the<br>beneficiary holds an unqualified power to withdraw assets from the trust or other<br>presently exercisable general power of appointment over the trust.5.A fiduciary may not reduce principal or income receipts from property described in<br>subsection 1 because of a payment described in section 59-04.2-24 or 59-04.2-25 to<br>the extent that the will, the terms of the trust, or applicable law requires the fiduciary<br>to make the payment from assets other than the property or to the extent that the<br>fiduciary recovers or expects to recover the payment from a third party. The net<br>income and principal receipts from the property are determined by including all of<br>the amounts the fiduciary receives or pays with respect to the property, whether<br>those amounts accrued or became due before, on, or after the date of a decedent's<br>death or an income interest's terminating event, and by making a reasonable<br>provision for amounts that the fiduciary believes the estate or terminating income<br>interest may become obligated to pay after the property is distributed.59-04.2-05. (202) Distribution to residuary and remainder beneficiaries.1.Each beneficiary described in subsection 4 of section 59-04.2-04 is entitled to<br>receive a portion of the net income equal to the beneficiary's fractional interest in<br>undistributed principal assets, using values as of the distribution date. If a fiduciary<br>makes more than one distribution of assets to beneficiaries to whom this section<br>applies, each beneficiary, including one who does not receive part of the distribution,<br>is entitled, as of each distribution date, to the net income the fiduciary has received<br>after the date of death or terminating event or earlier distribution date but has not<br>distributed as of the current distribution date.2.In determining a beneficiary's share of net income, the following rules apply:a.The beneficiary is entitled to receive a portion of the net income equal to the<br>beneficiary's fractional interest in the undistributed principal assets immediately<br>before the distribution date, including assets that later may be sold to meet<br>principal obligations.b.The beneficiary's fractional interest in the undistributed principal assets must be<br>calculated without regard to property specifically given to a beneficiary and<br>property required to pay pecuniary amounts not in trust.c.The beneficiary's fractional interest in the undistributed principal assets must be<br>calculated on the basis of the aggregate value of those assets as of the<br>distribution date without reducing the value by any unpaid principal obligation.d.The distribution date for purposes of this section may be the date as of which<br>the fiduciary calculates the value of the assets if that date is reasonably near<br>the date on which assets are actually distributed.3.If a fiduciary does not distribute all of the collected but undistributed net income to<br>each person as of a distribution date, the fiduciary shall maintain appropriate records<br>showing the interest of each beneficiary in that net income.4.A fiduciary may apply the rules in this section, to the extent that the fiduciary<br>considers it appropriate, to net gain or loss realized after the date of death or<br>terminating event or earlier distribution date from the disposition of a principal asset<br>if this section applies to the income from the asset.Page No. 359-04.2-06. (301) When right to income begins and ends.1.An income beneficiary is entitled to net income from the date on which the income<br>interest begins. An income interest begins on the date specified in the terms of the<br>trust or, if no date is specified, on the date an asset becomes subject to a trust or<br>successive income interest.2.An asset becomes subject to a trust:a.On the date it is transferred to the trust in the case of an asset that is<br>transferred to a trust during the transferor's life;b.On the date of a testator's death in the case of an asset that becomes subject<br>to a trust by reason of a will, even if there is an intervening period of<br>administration of the testator's estate; orc.On the date of an individual's death in the case of an asset that is transferred to<br>a fiduciary by a third party because of the individual's death.3.An asset becomes subject to a successive income interest on the day after the<br>preceding income interest ends, as determined under subsection 4, even if there is<br>an intervening period of administration to wind up the preceding income interest.4.An income interest ends on the day before an income beneficiary dies or another<br>terminating event occurs, or on the last day of a period during which there is no<br>beneficiary to whom a trustee may distribute income.59-04.2-07.(302) Apportionment of receipts and disbursements when decedentdies or income interest begins.1.A trustee shall allocate an income receipt or disbursement other than one to which<br>subsection 1 of section 59-04.2-04 applies to principal if its due date occurs before a<br>decedent dies in the case of an estate or before an income interest begins in the<br>case of a trust or successive income interest.2.A trustee shall allocate an income receipt or disbursement to income if its due date<br>occurs on or after the date on which a decedent dies or an income interest begins<br>and it is a periodic due date. An income receipt or disbursement must be treated as<br>accruing from day to day if its due date is not periodic or it has no due date. The<br>portion of the receipt or disbursement accruing before the date on which a decedent<br>dies or an income interest begins must be allocated to principal and the balance<br>must be allocated to income.3.An item of income or an obligation is due on the date the payer is required to make a<br>payment. If a payment date is not stated, there is no due date for the purposes of<br>this chapter. Distributions to shareholders or other owners from an entity to which<br>section 59-04.2-09 applies are deemed to be due on the date fixed by the entity for<br>determining who is entitled to receive the distribution or, if no date is fixed, on the<br>declaration date for the distribution.A due date is periodic for receipts ordisbursements that must be paid at regular intervals under a lease or an obligation<br>to pay interest or if an entity customarily makes distributions at regular intervals.59-04.2-08. (303) Apportionment when income interest ends.1.In this section, "undistributed income" means net income received before the date<br>on which an income interest ends. The term does not include an item of income or<br>expense that is due or accrued or net income that has been added or is required to<br>be added to principal under the terms of the trust.Page No. 42.When a mandatory income interest ends, the trustee shall pay to a mandatory<br>income beneficiary who survives that date, or the estate of a deceased mandatory<br>income beneficiary whose death causes the interest to end, the beneficiary's share<br>of the undistributed income that is not disposed of under the terms of the trust unless<br>the beneficiary has an unqualified power to revoke more than five percent of the<br>trust immediately before the income interest ends.In the latter case, theundistributed income from the portion of the trust that may be revoked must be<br>added to principal.3.When a trustee's obligation to pay a fixed annuity or a fixed fraction of the value of<br>the trust's assets ends, the trustee shall prorate the final payment if and to the extent<br>required by applicable law to accomplish a purpose of the trust or its settlor relating<br>to income, gift, estate, or other tax requirements.59-04.2-09. (401) Character of receipts.1.In this section, "entity" means a corporation, partnership, limited liability company,<br>regulated investment company, real estate investment trust, common trust fund, or<br>any other organization in which a trustee has an interest other than a trust or estate<br>to which section 59-04.2-10 applies, a business or activity to which section<br>59-04.2-11 applies, or an asset-backed security to which section 59-04.2-23 applies.2.Except as otherwise provided in this section, a trustee shall allocate to income<br>money received from an entity.3.A trustee shall allocate the following receipts from an entity to principal:a.Property other than money.b.Money received in one distribution or a series of related distributions in<br>exchange for part or all of a trust's interest in the entity.c.Money received in total or partial liquidation of the entity.d.Money received from an entity that is a regulated investment company or a real<br>estate investment trust if the money distributed is a capital gain dividend for<br>federal income tax purposes.4.Money is received in partial liquidation:a.To the extent that the entity, at or near the time of a distribution, indicates that it<br>is a distribution in partial liquidation; orb.If the total amount of money and property received in a distribution or series of<br>related distributions is greater than twenty percent of the entity's gross assets,<br>as shown by the entity's year-end financial statements immediately preceding<br>the initial receipt.5.Money is not received in partial liquidation, nor may it be taken into account under<br>subdivision b of subsection 4, to the extent that it does not exceed the amount of<br>income tax that a trustee or beneficiary must pay on taxable income of the entity that<br>distributes the money.6.A trustee may rely upon a statement made by an entity about the source or<br>character of a distribution if the statement is made at or near the time of distribution<br>by the entity's board of directors or other person or group of persons authorized to<br>exercise powers to pay money or transfer property comparable to those of a<br>corporation's board of directors.Page No. 559-04.2-10. (402) Distribution from trust or estate. A trustee shall allocate to incomean amount received as a distribution of income from a trust or an estate in which the trust has an<br>interest other than a purchased interest and shall allocate to principal an amount received as a<br>distribution of principal from such a trust or estate. If a trustee purchases an interest in a trust<br>that is an investment entity, or a decedent or donor transfers an interest in such a trust to a<br>trustee, section 59-04.2-09 or 59-04.2-23 applies to a receipt from the trust.59-04.2-11. (403) Business and other activities conducted by trustee.1.If a trustee who conducts a business or other activity determines that it is in the best<br>interest of all the beneficiaries to account separately for the business or activity<br>instead of accounting for it as part of the trust's general accounting records, the<br>trustee may maintain separate accounting records for its transactions, whether or<br>not its assets are segregated from other trust assets.2.A trustee who accounts separately for a business or other activity may determine the<br>extent to which its net cash receipts must be retained for working capital, the<br>acquisition or replacement of fixed assets, and other reasonably foreseeable needs<br>of the business or activity, and the extent to which the remaining net cash receipts<br>are accounted for as principal or income in the trust's general accounting records. If<br>a trustee sells assets of the business or other activity, other than in the ordinary<br>course of the business or activity, the trustee shall account for the net amount<br>received as principal in the trust's general accounting records to the extent the<br>trustee determines that the amount received is no longer required in the conduct of<br>the business.3.Activities for which a trustee may maintain separate accounting records include<br>retail, manufacturing, service, and other traditional business activities; farming;<br>raising and selling livestock and other animals; management of rental properties;<br>extraction of minerals and other natural resources; timber operations; and activities<br>to which section 59-04.2-22 applies.59-04.2-12. (404) Principal receipts. A trustee shall allocate to principal:1.To the extent not allocated to income under this chapter, assets received from a<br>transferor during the transferor's lifetime, a decedent's estate, a trust with a<br>terminating income interest, or a payer under a contract naming the trust or its<br>trustee as beneficiary.2.Money or other property received from the sale, exchange, liquidation, or change in<br>form of a principal asset, including realized profit, subject to sections 59-04.2-09<br>through 59-04.2-23.3.Amounts recovered from third parties to reimburse the trust because of<br>disbursements described in subdivision g of subsection 1 of section 59-04.2-25 or<br>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<br>loss of income with respect to an accounting period during which a current income<br>beneficiary had a mandatory income interest is income.5.Net income received in an accounting period during which there is no beneficiary to<br>whom a trustee may or must distribute income.6.Other receipts as provided in sections 59-04.2-16 through 59-04.2-23.59-04.2-13. (405) Rental property. To the extent that a trustee accounts for receiptsfrom rental property pursuant to this section, the trustee shall allocate to income an amount<br>received as rent of real or personal property, including an amount received for cancellation orPage No. 6renewal of a lease. An amount received as a refundable deposit, including a security deposit or<br>a deposit that is to be applied as rent for future periods, must be added to principal and held<br>subject to the terms of the lease and is not available for distribution to a beneficiary until the<br>trustee's contractual obligations have been satisfied with respect to that amount.59-04.2-14. (406) Obligation to pay money.1.An amount received as interest, whether determined at a fixed, variable, or floating<br>rate, on an obligation to pay money to the trustee, including an amount received as<br>consideration for prepaying principal, must be allocated to income without any<br>provision for amortization of premium.2.A trustee shall allocate to principal an amount received from the sale, redemption, or<br>other disposition of an obligation to pay money to the trustee more than one year<br>after it is purchased or acquired by the trustee, including an obligation whose<br>purchase price or value when it is acquired is less than its value at maturity. If the<br>obligation matures within one year after it is purchased or acquired by the trustee, an<br>amount received in excess of its purchase price or its value when acquired by the<br>trust must be allocated to income.3.This section does not apply to an obligation to which section 59-04.2-17, 59-04.2-18,<br>59-04.2-19, 59-04.2-20, 59-04.2-22, or 59-04.2-23 applies.59-04.2-15. (407) Insurance policies and similar contracts.1.Except as otherwise provided in subsection 2, a trustee shall allocate to principal the<br>proceeds of a life insurance policy or other contract in which the trust or its trustee is<br>named as beneficiary, including a contract that insures the trust or its trustee against<br>loss for damage to, destruction of, or loss of title to a trust asset. The trustee shall<br>allocate dividends on an insurance policy to income if the premiums on the policy<br>are paid from income, and to principal if the premiums are paid from principal.2.A trustee shall allocate to income proceeds of a contract that insures the trustee<br>against loss of occupancy or other use by an income beneficiary, loss of income, or,<br>subject to section 59-04.2-11, loss of profits from a business.3.This section does not apply to a contract to which section 59-04.2-17 applies.59-04.2-16. (408) Insubstantial allocations not required. Reserved.59-04.2-17. (409) Deferred compensation, annuities, and similar payments.1.In this section, "payment" means a payment that a trustee may receive over a fixed<br>number of years or during the life of one or more individuals because of services<br>rendered or property transferred to the payer in exchange for future payments. The<br>term includes a payment made in money or property from the payer's general assets<br>or from a separate fund created by the payer. For purposes of subsections 4, 5, 6,<br>and 7, the term includes any payment from a separate fund, regardless of the<br>reason for the payment.In this section, "separate fund" includes a private orcommercial annuity, an individual retirement account, and a pension, profit-sharing,<br>stock-bonus, or stock-ownership plan.2.To the extent that a payment is characterized as interest, a dividend, or a payment<br>made in lieu of interest or a dividend, a trustee shall allocate the payment to income.<br>The trustee shall allocate to principal the balance of the payment and any other<br>payment received in the same accounting period that is not characterized as<br>interest, a dividend, or an equivalent payment.Page No. 73.If no part of a payment is characterized as interest, a dividend, or an equivalent<br>payment, and all or part of the payment is required to be made, a trustee shall<br>allocate to income ten percent of the part that is required to be made during the<br>accounting period and the balance to principal. If no part of a payment is required to<br>be made or the payment received is the entire amount to which the trustee is<br>entitled, the trustee shall allocate the entire payment to principal. For purposes of<br>this subsection, a payment is not required to be made to the extent that it is made<br>because the trustee exercises a right of withdrawal.4.Except as otherwise provided in subsection 5, subsections 6 and 7 apply, and<br>subsections 2 and 3 do not apply, in determining the allocation of a payment made<br>from a separate fund to a trust to which an election to qualify for marital deduction<br>under section 2056(b)(7) of the Internal Revenue Code of 1986, as amended, has<br>been made or to a trust that qualified for the marital deduction under section<br>2056(b)(5) of the Internal Revenue Code of 1986, as amended.5.Subsections 4, 6, and 7 do not apply if and to the extent that the series of payments<br>would, without application of subsection 4, qualify for the marital deduction under<br>section 2056(b)(7)(C) of the Internal Revenue Code of 1986, as amended.6.A trustee shall determine the internal income of each separate fund for the<br>accounting period as if the separate fund were a trust subject to this chapter. Upon<br>request of the surviving spouse, the trustee shall demand of the persons<br>administering the separate fund that this internal income be distributed to the trust.<br>The trustee shall allocate a payment from the separate fund to income to the extent<br>of the internal income of the separate fund and distribute that amount to the<br>surviving spouse. The trustee shall allocate the balance to principal. Upon request<br>of the surviving spouse, the trustee shall allocate principal to income to the extent<br>the internal income of the separate fund exceeds payments made from the separate<br>fund to the trust during the accounting period.7.If a trustee cannot determine the internal income of a separate fund but can<br>determine the value of a separate fund, the internal income of the separate fund is<br>deemed to equal four percent of the fund's value, according to the most recent<br>statement of value preceding the beginning of the accounting period. If the trustee<br>can determine neither the internal income of the separate fund nor the fund's value,<br>the internal income of the fund is deemed to equal the product of the interest rate<br>and the present value of the expected future payments, as determined under section<br>7520 of the Internal Revenue Code of 1986, as amended, for the month preceding<br>the accounting period for which the computation is made.8.This section does not apply to a payment to which section 59-04.2-18 applies.59-04.2-18. (410) Liquidating asset.1.In this section, "liquidating asset" means an asset whose value will diminish or<br>terminate because the asset is expected to produce receipts for a period of limited<br>duration. The term includes a leasehold, patent, copyright, royalty right, and right to<br>receive payments during a period of more than one year under an arrangement that<br>does not provide for the payment of interest on the unpaid balance. The term does<br>not include a payment subject to section 59-04.2-17, resources subject to section<br>59-04.2-19, timber subject to section 59-04.2-20, an activity subject to section<br>59-04.2-22, an asset subject to section 59-04.2-23, or any asset for which the<br>trustee establishes a reserve for depreciation under section 59-04.2-26.2.A trustee shall allocate to income ten percent of the receipts from a liquidating asset<br>and the balance to principal.59-04.2-19. (411) Minerals, water, and other natural resources.Page No. 81.To the extent that a trustee accounts for receipts from an interest in minerals or<br>other natural resources pursuant to this section, the trustee shall allocate them as<br>follows:a.If received as nominal delay rental or nominal annual rent on a lease, a receipt<br>must be allocated to income.b.If received from a production payment, a receipt must be allocated to income if<br>and to the extent that the agreement creating the production payment provides<br>a factor for interest or its equivalent.The balance must be allocated toprincipal.c.If an amount received as a royalty, shut-in-well payment, take-or-pay payment,<br>bonus, or delay rental is more than nominal, ninety percent must be allocated<br>to principal and the balance to income.d.If an amount is received from a working interest or any other interest not<br>provided for in subdivision a, b, or c, ninety percent of the net amount received<br>must be allocated to principal and the balance to income.2.An amount received on account of an interest in water that is renewable must be<br>allocated to income. If the water is not renewable, ninety percent of the amount<br>must be allocated to principal and the balance to income.3.This chapter applies whether or not a decedent or donor was extracting minerals,<br>water, or other natural resources before the interest became subject to the trust.4.If a trust owns an interest in minerals, water, or other natural resources on August 1,<br>1999, the trustee may allocate receipts from the interest as provided in this chapter<br>or in the manner used by the trustee before August 1, 1999. If the trust acquires an<br>interest in minerals, water, or other natural resources after August 1, 1999, the<br>trustee shall allocate receipts from the interest as provided in this chapter.59-04.2-20. (412) Timber.1.To the extent that a trustee accounts for receipts from the sale of timber and related<br>products pursuant to this section, the trustee shall allocate the net receipts:a.To income to the extent that the amount of timber removed from the land does<br>not exceed the rate of growth of the timber during the accounting periods in<br>which a beneficiary has a mandatory income interest;b.To principal to the extent that the amount of timber removed from the land<br>exceeds the rate of growth of the timber or the net receipts are from the sale of<br>standing timber;c.To or between income and principal if the net receipts are from the lease of<br>timberland or from a contract to cut timber from land owned by a trust, by<br>determining the amount of timber removed from the land under the lease or<br>contract and applying the rules in subdivisions a and b; ord.To principal to the extent that advance payments, bonuses, and other<br>payments are not allocated pursuant to subdivision a, b, or c.2.In determining net receipts to be allocated pursuant to subsection 1, a trustee shall<br>deduct and transfer to principal a reasonable amount for depletion.3.This chapter applies whether or not a decedent or transferor was harvesting timber<br>from the property before it became subject to the trust.Page No. 94.If a trust owns an interest in timberland on August 1, 1999, the trustee may allocate<br>net receipts from the sale of timber and related products as provided in this chapter<br>or in the manner used by the trustee before August 1, 1999. If the trust acquires an<br>interest in timberland after August 1, 1999, the trustee shall allocate net receipts<br>from the sale of timber and related products as provided in this chapter.59-04.2-21. (413) Property not productive of income. Reserved.59-04.2-22. (414) Derivatives and options.1.In this section, "derivative" means a contract or financial instrument or a combination<br>of contracts and financial instruments which gives a trust the right or obligation to<br>participate in some or all changes in the price of a tangible or intangible asset or<br>group of assets, or changes in a rate, an index of prices or rates, or other market<br>indicator for an asset or a group of assets.2.To the extent that a trustee does not account under section 59-04.2-11 for<br>transactions in derivatives, the trustee shall allocate to principal receipts from and<br>disbursements made in connection with those transactions.3.If a trustee grants an option to buy property from the trust, whether or not the trust<br>owns the property when the option is granted, grants an option that permits another<br>person to sell property to the trust, or acquires an option to buy property for the trust<br>or an option to sell an asset owned by the trust, and the trustee or other owner of the<br>asset is required to deliver the asset if the option is exercised, an amount received<br>for granting the option must be allocated to principal. An amount paid to acquire the<br>option must be paid from principal. A gain or loss realized upon the exercise of an<br>option, including an option granted to a settlor of the trust for services rendered,<br>must be allocated to principal.59-04.2-23. (415) Asset-backed securities.1.In this section, "asset-backed security" means an asset whose value is based upon<br>the right it gives the owner to receive distributions from the proceeds of financial<br>assets that provide collateral for the security. The term includes an asset that gives<br>the owner the right to receive from the collateral financial assets only the interest or<br>other current return or only the proceeds other than interest or current return. The<br>term does not include an asset to which section 59-04.2-09 or 59-04.2-17 applies.2.If a trust receives a payment from interest or other current return and from other<br>proceeds of the collateral financial assets, the trustee shall allocate to income the<br>portion of the payment which the payer identifies as being from interest or other<br>current return and shall allocate the balance of the payment to principal.3.If a trust receives one or more payments in exchange for the trust's entire interest in<br>an asset-backed security in one accounting period, the trustee shall allocate the<br>payments to principal. If a payment is one of a series of payments that will result in<br>the liquidation of the trust's interest in the security over more than one accounting<br>period, the trustee shall allocate ten percent of the payment to income and the<br>balance to principal.59-04.2-24. (501) Disbursements from income. A trustee shall make the followingdisbursements from income to the extent that they are not disbursements to which subdivision b<br>or c of subsection 2 of section 59-04.2-04 applies:1.One-half of the regular compensation of the trustee and of any person providing<br>investment advisory or custodial services to the trustee.Page No. 102.One-half of all expenses for accountings, judicial proceedings, or other matters that<br>involve both the income and remainder interests.3.All of the other ordinary expenses incurred in connection with the administration,<br>management, or preservation of trust property and the distribution of income,<br>including interest, ordinary repairs, regularly recurring taxes assessed against<br>principal, and expenses of a proceeding or other matter that concerns primarily the<br>income interest.4.Recurring premiums on insurance covering the loss of a principal asset or the loss of<br>income from or use of the asset.59-04.2-25. (502) Disbursements from principal.1.A trustee shall make the following disbursements from principal:a.The remaining one-half of the disbursements described in subsections 1 and 2<br>of section 59-04.2-24;b.All of the trustee's compensation calculated on principal as a fee for<br>acceptance, distribution, or termination, and disbursements made to prepare<br>property for sale;c.Payments on the principal of a trust debt;d.Expenses of a proceeding that concerns primarily principal, including a<br>proceeding to construe the trust or to protect the trust or its property;e.Premiums paid on a policy of insurance not described in subsection 4 of section<br>59-04.2-24 of which the trust is the owner and beneficiary;f.Estate, inheritance, and other transfer taxes, including penalties, apportioned to<br>the trust; andg.Disbursements related to environmental matters, including reclamation,<br>assessing environmental conditions, remedying and removing environmental<br>contamination, monitoring remedial activities and the release of substances,<br>preventing future releases of substances, collecting amounts from persons<br>liable or potentially liable for the costs of those activities, penalties imposed<br>under environmental laws or regulations and other payments made to comply<br>with those laws or regulations, statutory or common-law claims by third parties,<br>and defending claims based on environmental matters.2.If a principal asset is encumbered with an obligation that requires income from that<br>asset to be paid directly to the creditor, the trustee shall transfer from principal to<br>income an amount equal to the income paid to the creditor in reduction of the<br>principal balance of the obligation.59-04.2-26. (503) Transfers from income to principal for depreciation.1.In this section, "depreciation" means a reduction in value due to wear, tear, decay,<br>corrosion, or gradual obsolescence of a fixed asset having a useful life of more than<br>one year.2.A trustee may transfer to principal a reasonable amount of the net cash receipts<br>from a principal asset that is subject to depreciation, but may not transfer any<br>amount for depreciation:Page No. 11a.Of that portion of real property used or available for use by a beneficiary as a<br>residence or of tangible personal property held or made available for the<br>personal use or enjoyment of a beneficiary;b.During the administration of a decedent's estate; orc.Under this section if the trustee is accounting under section 59-04.2-11 for the<br>business or activity in which the asset is used.3.An amount transferred to principal need not be held as a separate fund.59-04.2-27. (504) Transfers from income to reimburse principal.1.If a trustee makes or expects to make a principal disbursement described in this<br>section, the trustee may transfer an appropriate amount from income to principal in<br>one or more accounting periods to reimburse principal or to provide a reserve for<br>future principal disbursements.2.Principal disbursements to which subsection 1 applies include the following, but only<br>to the extent that the trustee has not been and does not expect to be reimbursed by<br>a third party:a.An amount chargeable to income but paid from principal because it is unusually<br>large, including extraordinary repairs;b.A capital improvement to a principal asset, whether in the form of changes to<br>an existing asset or the construction of a new asset, including special<br>assessments;c.Disbursements made to prepare property for rental, including tenant<br>allowances, leasehold improvements, and broker's commissions;d.Periodic payments on an obligation secured by a principal asset to the extent<br>that the amount transferred from income to principal for depreciation is less<br>than the periodic payments; ande.Disbursementsdescribedinsubdivision gofsubsection 1ofsection59-04.2-25.3.If the asset whose ownership gives rise to the disbursements becomes subject to a<br>successive income interest after an income interest ends, a trustee may continue to<br>transfer amounts from income to principal as provided in subsection 1.59-04.2-28. (505) Income taxes.1.A tax required to be paid by a trustee based on receipts allocated to income must be<br>paid from income.2.A tax required to be paid by a trustee based on receipts allocated to principal must<br>be paid from principal, even if the tax is called an income tax by the taxing authority.3.A tax required to be paid by a trustee on the trust's share of an entity's taxable<br>income must be paid:a.From income to the extent that receipts from the entity are allocated to income;b.From principal to the extent that receipts from the entity are allocated only to<br>principal;Page No. 12c.Proportionately from principal and income to the extent that receipts from the<br>entity are allocated to both income and principal; andd.From principal to the extent that the tax exceeds the total receipts from the<br>entity.4.After applying subsections 1 through 3, the trustee shall adjust income or principal<br>receipts to the extent that the trust's taxes are reduced because the trust receives a<br>deduction for payments made to a beneficiary.59-04.2-29. (506) Adjustments between principal and income because of taxes.1.A fiduciary may make adjustments between principal and income to offset the<br>shifting of economic interests or tax benefits between income beneficiaries and<br>remainder beneficiaries which arise from:a.Elections and decisions, other than those described in subsection 2, that the<br>fiduciary makes from time to time regarding tax matters;b.An income tax or any other tax that is imposed upon the fiduciary or a<br>beneficiary as a result of a transaction involving or a distribution from the estate<br>or trust; orc.The ownership by an estate or trust of an interest in an entity whose taxable<br>income, whether or not distributed, is includable in the taxable income of the<br>estate, trust, or a beneficiary.2.If the amount of an estate tax marital deduction or charitable contribution deduction<br>is reduced because a fiduciary deducts an amount paid from principal for income tax<br>purposes instead of deducting it for estate tax purposes, and as a result estate taxes<br>paid from principal are increased and income taxes paid by an estate, trust, or<br>beneficiary are decreased, each estate, trust, or beneficiary that benefits from the<br>decrease in income tax shall reimburse the principal from which the increase in<br>estate tax is paid. The total reimbursement must equal the increase in the estate tax<br>to the extent that the principal used to pay the increase would have qualified for a<br>marital deduction or charitable contribution deduction but for the payment.Theproportionate share of the reimbursement for each estate, trust, or beneficiary<br>whose income taxes are reduced must be the same as its proportionate share of the<br>total decrease in income tax.An estate or trust shall reimburse principal fromincome.59-04.2-30. Certain charitable remainder unitrusts.1.Notwithstanding any other provision of this chapter, unless the trust instrument<br>directs otherwise, an increase in the value of the obligations described in this<br>subsection owned by a charitable remainder unitrust of the type authorized in<br>section 664(d)(3) of the Internal Revenue Code [26 U.S.C. 664(d)(3)] or its<br>successor provisions is distributable as income when it becomes available for<br>distribution:a.A zero coupon bond;b.An annuity contract before annuitization;c.A life insurance contract before the death of the insured;d.An interest in a common trust fund as defined in section 584 of the Internal<br>Revenue Code [26 U.S.C. 584] or its successor provisions;Page No. 13e.An interest in a partnership as defined in section 7701 of the Internal Revenue<br>Code [26 U.S.C. 7701] or its successor provisions; andf.Any other obligation for the payment of money that is payable at a future time in<br>accordance with a fixed, variable, or discretionary schedule of appreciation in<br>excess of the price at which it was issued.2.The increase in value of the obligations described in subsection 1 is distributable to<br>the beneficiary who was the income beneficiary at the time of the increase.3.For purposes of this section, the increase in value of an obligation described in<br>subsection 1 is available for distribution only when the trustee receives cash on<br>account of the obligation. If the obligation is surrendered or liquidated partially, the<br>cash available must be attributed first to the increase.Page No. 14Document Outlinechapter 59-04.2 uniform principal and income act
CHAPTER 59-04.2UNIFORM PRINCIPAL AND INCOME ACT59-04.2-01. (102) Definitions. In this chapter:1."Accounting period" means a calendar year unless another twelve-month period is<br>selected by a fiduciary. The term includes a portion of a calendar year or other<br>twelve-month period that begins when an income interest begins or ends when an<br>income interest ends.2."Beneficiary" includes, in the case of a decedent's estate, an heir, legatee, and<br>devisee and, in the case of a trust, an income beneficiary and a remainder<br>beneficiary.3."Fiduciary" means a personal representative or a trustee. The term includes an<br>executor, administrator, successor personal representative, special administrator,<br>and a person performing substantially the same function.4."Income" means money or property that a fiduciary receives as current return from a<br>principal asset. The term includes a portion of receipts from a sale, exchange, or<br>liquidation of a principal asset, to the extent provided in sections 59-04.2-09 through<br>59-04.2-23.5."Income beneficiary" means a person to whom net income of a trust is or may be<br>payable.6."Income interest" means the right of an income beneficiary to receive all or part of<br>net income, whether the terms of the trust require it to be distributed or authorize it to<br>be distributed in the trustee's discretion.7."Mandatory income interest" means the right of an income beneficiary to receive net<br>income that the terms of the trust require the fiduciary to distribute.8."Net income" means the total receipts allocated to income during an accounting<br>period minus the disbursements made from income during the period, plus or minus<br>transfers under this chapter to or from income during the period.9."Principal" means property held in trust for distribution to a remainder beneficiary<br>when the trust terminates.10."Remainder beneficiary" means a person entitled to receive principal when an<br>income interest ends.11."Terms of a trust" means the manifestation of the intent of a settlor or decedent with<br>respect to the trust, expressed in a manner that admits of its proof in a judicial<br>proceeding, whether by written or spoken words or by conduct.12."Trustee" includes an original, additional, or successor trustee, whether or not<br>appointed or confirmed by a court.59-04.2-02. (103) Fiduciary duties - General principles.1.In allocating receipts and disbursements to or between principal and income, and<br>with respect to any matter within the scope of sections 59-04.2-04 through<br>59-04.2-08, a fiduciary:a.Shall administer a trust or estate in accordance with the terms of the trust or the<br>will, even if there is a different provision in this chapter.Page No. 1b.May administer a trust or estate by the exercise of a discretionary power of<br>administration given to the fiduciary by the terms of the trust or the will, even if<br>the exercise of the power produces a result different from a result required or<br>permitted by this chapter.c.Shall administer a trust or estate in accordance with this chapter if the terms of<br>the trust or the will do not contain a different provision or do not give the<br>fiduciary a discretionary power of administration.d.Shall add a receipt or charge a disbursement to principal to the extent that the<br>terms of the trust and this chapter do not provide a rule for allocating the receipt<br>or disbursement to or between principal and income.2.In exercising a discretionary power of administration regarding a matter within the<br>scope of this chapter, whether granted by the terms of a trust, a will, or this chapter,<br>a fiduciary shall administer a trust or estate impartially, based on what is fair and<br>reasonable to all of the beneficiaries, except to the extent that the terms of the trust<br>or the will clearly manifest an intention that the fiduciary shall or may favor one or<br>more of the beneficiaries.A determination in accordance with this chapter ispresumed to be fair and reasonable to all of the beneficiaries.59-04.2-03. (104) Trustee's power to adjust. Reserved.59-04.2-04. (201) Determination and distribution of net income. After a decedentdies, in the case of an estate, or after an income interest in a trust ends, the following rules apply:1.A fiduciary of an estate or of a terminating income interest shall determine the<br>amount of net income and net principal receipts received from property specifically<br>given to a beneficiary under the rules in sections 59-04.2-06 through 59-04.2-29<br>which apply to trustees and the rules in subsection 5. The fiduciary shall distribute<br>the net income and net principal receipts to the beneficiary who is to receive the<br>specific property.2.A fiduciary shall determine the remaining net income of a decedent's estate or a<br>terminating income interest under the rules in sections 59-04.2-06 through<br>59-04.2-29 which apply to trustees and by:a.Including in net income all income from property used to discharge liabilities.b.Paying from income or principal, in the fiduciary's discretion, fees of attorneys,<br>accountants, and fiduciaries; court costs and other expenses of administration;<br>and interest on death taxes, but the fiduciary may pay those expenses from<br>income of property passing to a trust for which the fiduciary claims an estate tax<br>marital or charitable deduction only to the extent that the payment of those<br>expenses from income will not cause the reduction or loss of the deduction.c.Paying from principal all other disbursements made or incurred in connection<br>with the settlement of a decedent's estate or the winding up of a terminating<br>income interest, including debts, funeral expenses, disposition of remains,<br>family allowances, and death taxes and related penalties that are apportioned<br>to the estate or terminating income interest by the will, the terms of the trust, or<br>applicable law.3.A fiduciary shall distribute to a beneficiary who receives a pecuniary amount outright<br>the interest or any other amount provided by the will, the terms of the trust, or<br>applicable law from net income determined under subsection 2 or from principal to<br>the extent that net income is insufficient. If a beneficiary is to receive a pecuniary<br>amount outright from a trust after an income interest ends and no interest or other<br>amount is provided for by the terms of the trust or applicable law, the fiduciary shallPage No. 2distribute the interest or other amount to which the beneficiary would be entitled<br>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<br>subsection 3 in the manner described in section 59-04.2-05 to all other beneficiaries,<br>including a beneficiary who receives a pecuniary amount in trust, even if the<br>beneficiary holds an unqualified power to withdraw assets from the trust or other<br>presently exercisable general power of appointment over the trust.5.A fiduciary may not reduce principal or income receipts from property described in<br>subsection 1 because of a payment described in section 59-04.2-24 or 59-04.2-25 to<br>the extent that the will, the terms of the trust, or applicable law requires the fiduciary<br>to make the payment from assets other than the property or to the extent that the<br>fiduciary recovers or expects to recover the payment from a third party. The net<br>income and principal receipts from the property are determined by including all of<br>the amounts the fiduciary receives or pays with respect to the property, whether<br>those amounts accrued or became due before, on, or after the date of a decedent's<br>death or an income interest's terminating event, and by making a reasonable<br>provision for amounts that the fiduciary believes the estate or terminating income<br>interest may become obligated to pay after the property is distributed.59-04.2-05. (202) Distribution to residuary and remainder beneficiaries.1.Each beneficiary described in subsection 4 of section 59-04.2-04 is entitled to<br>receive a portion of the net income equal to the beneficiary's fractional interest in<br>undistributed principal assets, using values as of the distribution date. If a fiduciary<br>makes more than one distribution of assets to beneficiaries to whom this section<br>applies, each beneficiary, including one who does not receive part of the distribution,<br>is entitled, as of each distribution date, to the net income the fiduciary has received<br>after the date of death or terminating event or earlier distribution date but has not<br>distributed as of the current distribution date.2.In determining a beneficiary's share of net income, the following rules apply:a.The beneficiary is entitled to receive a portion of the net income equal to the<br>beneficiary's fractional interest in the undistributed principal assets immediately<br>before the distribution date, including assets that later may be sold to meet<br>principal obligations.b.The beneficiary's fractional interest in the undistributed principal assets must be<br>calculated without regard to property specifically given to a beneficiary and<br>property required to pay pecuniary amounts not in trust.c.The beneficiary's fractional interest in the undistributed principal assets must be<br>calculated on the basis of the aggregate value of those assets as of the<br>distribution date without reducing the value by any unpaid principal obligation.d.The distribution date for purposes of this section may be the date as of which<br>the fiduciary calculates the value of the assets if that date is reasonably near<br>the date on which assets are actually distributed.3.If a fiduciary does not distribute all of the collected but undistributed net income to<br>each person as of a distribution date, the fiduciary shall maintain appropriate records<br>showing the interest of each beneficiary in that net income.4.A fiduciary may apply the rules in this section, to the extent that the fiduciary<br>considers it appropriate, to net gain or loss realized after the date of death or<br>terminating event or earlier distribution date from the disposition of a principal asset<br>if this section applies to the income from the asset.Page No. 359-04.2-06. (301) When right to income begins and ends.1.An income beneficiary is entitled to net income from the date on which the income<br>interest begins. An income interest begins on the date specified in the terms of the<br>trust or, if no date is specified, on the date an asset becomes subject to a trust or<br>successive income interest.2.An asset becomes subject to a trust:a.On the date it is transferred to the trust in the case of an asset that is<br>transferred to a trust during the transferor's life;b.On the date of a testator's death in the case of an asset that becomes subject<br>to a trust by reason of a will, even if there is an intervening period of<br>administration of the testator's estate; orc.On the date of an individual's death in the case of an asset that is transferred to<br>a fiduciary by a third party because of the individual's death.3.An asset becomes subject to a successive income interest on the day after the<br>preceding income interest ends, as determined under subsection 4, even if there is<br>an intervening period of administration to wind up the preceding income interest.4.An income interest ends on the day before an income beneficiary dies or another<br>terminating event occurs, or on the last day of a period during which there is no<br>beneficiary to whom a trustee may distribute income.59-04.2-07.(302) Apportionment of receipts and disbursements when decedentdies or income interest begins.1.A trustee shall allocate an income receipt or disbursement other than one to which<br>subsection 1 of section 59-04.2-04 applies to principal if its due date occurs before a<br>decedent dies in the case of an estate or before an income interest begins in the<br>case of a trust or successive income interest.2.A trustee shall allocate an income receipt or disbursement to income if its due date<br>occurs on or after the date on which a decedent dies or an income interest begins<br>and it is a periodic due date. An income receipt or disbursement must be treated as<br>accruing from day to day if its due date is not periodic or it has no due date. The<br>portion of the receipt or disbursement accruing before the date on which a decedent<br>dies or an income interest begins must be allocated to principal and the balance<br>must be allocated to income.3.An item of income or an obligation is due on the date the payer is required to make a<br>payment. If a payment date is not stated, there is no due date for the purposes of<br>this chapter. Distributions to shareholders or other owners from an entity to which<br>section 59-04.2-09 applies are deemed to be due on the date fixed by the entity for<br>determining who is entitled to receive the distribution or, if no date is fixed, on the<br>declaration date for the distribution.A due date is periodic for receipts ordisbursements that must be paid at regular intervals under a lease or an obligation<br>to pay interest or if an entity customarily makes distributions at regular intervals.59-04.2-08. (303) Apportionment when income interest ends.1.In this section, "undistributed income" means net income received before the date<br>on which an income interest ends. The term does not include an item of income or<br>expense that is due or accrued or net income that has been added or is required to<br>be added to principal under the terms of the trust.Page No. 42.When a mandatory income interest ends, the trustee shall pay to a mandatory<br>income beneficiary who survives that date, or the estate of a deceased mandatory<br>income beneficiary whose death causes the interest to end, the beneficiary's share<br>of the undistributed income that is not disposed of under the terms of the trust unless<br>the beneficiary has an unqualified power to revoke more than five percent of the<br>trust immediately before the income interest ends.In the latter case, theundistributed income from the portion of the trust that may be revoked must be<br>added to principal.3.When a trustee's obligation to pay a fixed annuity or a fixed fraction of the value of<br>the trust's assets ends, the trustee shall prorate the final payment if and to the extent<br>required by applicable law to accomplish a purpose of the trust or its settlor relating<br>to income, gift, estate, or other tax requirements.59-04.2-09. (401) Character of receipts.1.In this section, "entity" means a corporation, partnership, limited liability company,<br>regulated investment company, real estate investment trust, common trust fund, or<br>any other organization in which a trustee has an interest other than a trust or estate<br>to which section 59-04.2-10 applies, a business or activity to which section<br>59-04.2-11 applies, or an asset-backed security to which section 59-04.2-23 applies.2.Except as otherwise provided in this section, a trustee shall allocate to income<br>money received from an entity.3.A trustee shall allocate the following receipts from an entity to principal:a.Property other than money.b.Money received in one distribution or a series of related distributions in<br>exchange for part or all of a trust's interest in the entity.c.Money received in total or partial liquidation of the entity.d.Money received from an entity that is a regulated investment company or a real<br>estate investment trust if the money distributed is a capital gain dividend for<br>federal income tax purposes.4.Money is received in partial liquidation:a.To the extent that the entity, at or near the time of a distribution, indicates that it<br>is a distribution in partial liquidation; orb.If the total amount of money and property received in a distribution or series of<br>related distributions is greater than twenty percent of the entity's gross assets,<br>as shown by the entity's year-end financial statements immediately preceding<br>the initial receipt.5.Money is not received in partial liquidation, nor may it be taken into account under<br>subdivision b of subsection 4, to the extent that it does not exceed the amount of<br>income tax that a trustee or beneficiary must pay on taxable income of the entity that<br>distributes the money.6.A trustee may rely upon a statement made by an entity about the source or<br>character of a distribution if the statement is made at or near the time of distribution<br>by the entity's board of directors or other person or group of persons authorized to<br>exercise powers to pay money or transfer property comparable to those of a<br>corporation's board of directors.Page No. 559-04.2-10. (402) Distribution from trust or estate. A trustee shall allocate to incomean amount received as a distribution of income from a trust or an estate in which the trust has an<br>interest other than a purchased interest and shall allocate to principal an amount received as a<br>distribution of principal from such a trust or estate. If a trustee purchases an interest in a trust<br>that is an investment entity, or a decedent or donor transfers an interest in such a trust to a<br>trustee, section 59-04.2-09 or 59-04.2-23 applies to a receipt from the trust.59-04.2-11. (403) Business and other activities conducted by trustee.1.If a trustee who conducts a business or other activity determines that it is in the best<br>interest of all the beneficiaries to account separately for the business or activity<br>instead of accounting for it as part of the trust's general accounting records, the<br>trustee may maintain separate accounting records for its transactions, whether or<br>not its assets are segregated from other trust assets.2.A trustee who accounts separately for a business or other activity may determine the<br>extent to which its net cash receipts must be retained for working capital, the<br>acquisition or replacement of fixed assets, and other reasonably foreseeable needs<br>of the business or activity, and the extent to which the remaining net cash receipts<br>are accounted for as principal or income in the trust's general accounting records. If<br>a trustee sells assets of the business or other activity, other than in the ordinary<br>course of the business or activity, the trustee shall account for the net amount<br>received as principal in the trust's general accounting records to the extent the<br>trustee determines that the amount received is no longer required in the conduct of<br>the business.3.Activities for which a trustee may maintain separate accounting records include<br>retail, manufacturing, service, and other traditional business activities; farming;<br>raising and selling livestock and other animals; management of rental properties;<br>extraction of minerals and other natural resources; timber operations; and activities<br>to which section 59-04.2-22 applies.59-04.2-12. (404) Principal receipts. A trustee shall allocate to principal:1.To the extent not allocated to income under this chapter, assets received from a<br>transferor during the transferor's lifetime, a decedent's estate, a trust with a<br>terminating income interest, or a payer under a contract naming the trust or its<br>trustee as beneficiary.2.Money or other property received from the sale, exchange, liquidation, or change in<br>form of a principal asset, including realized profit, subject to sections 59-04.2-09<br>through 59-04.2-23.3.Amounts recovered from third parties to reimburse the trust because of<br>disbursements described in subdivision g of subsection 1 of section 59-04.2-25 or<br>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<br>loss of income with respect to an accounting period during which a current income<br>beneficiary had a mandatory income interest is income.5.Net income received in an accounting period during which there is no beneficiary to<br>whom a trustee may or must distribute income.6.Other receipts as provided in sections 59-04.2-16 through 59-04.2-23.59-04.2-13. (405) Rental property. To the extent that a trustee accounts for receiptsfrom rental property pursuant to this section, the trustee shall allocate to income an amount<br>received as rent of real or personal property, including an amount received for cancellation orPage No. 6renewal of a lease. An amount received as a refundable deposit, including a security deposit or<br>a deposit that is to be applied as rent for future periods, must be added to principal and held<br>subject to the terms of the lease and is not available for distribution to a beneficiary until the<br>trustee's contractual obligations have been satisfied with respect to that amount.59-04.2-14. (406) Obligation to pay money.1.An amount received as interest, whether determined at a fixed, variable, or floating<br>rate, on an obligation to pay money to the trustee, including an amount received as<br>consideration for prepaying principal, must be allocated to income without any<br>provision for amortization of premium.2.A trustee shall allocate to principal an amount received from the sale, redemption, or<br>other disposition of an obligation to pay money to the trustee more than one year<br>after it is purchased or acquired by the trustee, including an obligation whose<br>purchase price or value when it is acquired is less than its value at maturity. If the<br>obligation matures within one year after it is purchased or acquired by the trustee, an<br>amount received in excess of its purchase price or its value when acquired by the<br>trust must be allocated to income.3.This section does not apply to an obligation to which section 59-04.2-17, 59-04.2-18,<br>59-04.2-19, 59-04.2-20, 59-04.2-22, or 59-04.2-23 applies.59-04.2-15. (407) Insurance policies and similar contracts.1.Except as otherwise provided in subsection 2, a trustee shall allocate to principal the<br>proceeds of a life insurance policy or other contract in which the trust or its trustee is<br>named as beneficiary, including a contract that insures the trust or its trustee against<br>loss for damage to, destruction of, or loss of title to a trust asset. The trustee shall<br>allocate dividends on an insurance policy to income if the premiums on the policy<br>are paid from income, and to principal if the premiums are paid from principal.2.A trustee shall allocate to income proceeds of a contract that insures the trustee<br>against loss of occupancy or other use by an income beneficiary, loss of income, or,<br>subject to section 59-04.2-11, loss of profits from a business.3.This section does not apply to a contract to which section 59-04.2-17 applies.59-04.2-16. (408) Insubstantial allocations not required. Reserved.59-04.2-17. (409) Deferred compensation, annuities, and similar payments.1.In this section, "payment" means a payment that a trustee may receive over a fixed<br>number of years or during the life of one or more individuals because of services<br>rendered or property transferred to the payer in exchange for future payments. The<br>term includes a payment made in money or property from the payer's general assets<br>or from a separate fund created by the payer. For purposes of subsections 4, 5, 6,<br>and 7, the term includes any payment from a separate fund, regardless of the<br>reason for the payment.In this section, "separate fund" includes a private orcommercial annuity, an individual retirement account, and a pension, profit-sharing,<br>stock-bonus, or stock-ownership plan.2.To the extent that a payment is characterized as interest, a dividend, or a payment<br>made in lieu of interest or a dividend, a trustee shall allocate the payment to income.<br>The trustee shall allocate to principal the balance of the payment and any other<br>payment received in the same accounting period that is not characterized as<br>interest, a dividend, or an equivalent payment.Page No. 73.If no part of a payment is characterized as interest, a dividend, or an equivalent<br>payment, and all or part of the payment is required to be made, a trustee shall<br>allocate to income ten percent of the part that is required to be made during the<br>accounting period and the balance to principal. If no part of a payment is required to<br>be made or the payment received is the entire amount to which the trustee is<br>entitled, the trustee shall allocate the entire payment to principal. For purposes of<br>this subsection, a payment is not required to be made to the extent that it is made<br>because the trustee exercises a right of withdrawal.4.Except as otherwise provided in subsection 5, subsections 6 and 7 apply, and<br>subsections 2 and 3 do not apply, in determining the allocation of a payment made<br>from a separate fund to a trust to which an election to qualify for marital deduction<br>under section 2056(b)(7) of the Internal Revenue Code of 1986, as amended, has<br>been made or to a trust that qualified for the marital deduction under section<br>2056(b)(5) of the Internal Revenue Code of 1986, as amended.5.Subsections 4, 6, and 7 do not apply if and to the extent that the series of payments<br>would, without application of subsection 4, qualify for the marital deduction under<br>section 2056(b)(7)(C) of the Internal Revenue Code of 1986, as amended.6.A trustee shall determine the internal income of each separate fund for the<br>accounting period as if the separate fund were a trust subject to this chapter. Upon<br>request of the surviving spouse, the trustee shall demand of the persons<br>administering the separate fund that this internal income be distributed to the trust.<br>The trustee shall allocate a payment from the separate fund to income to the extent<br>of the internal income of the separate fund and distribute that amount to the<br>surviving spouse. The trustee shall allocate the balance to principal. Upon request<br>of the surviving spouse, the trustee shall allocate principal to income to the extent<br>the internal income of the separate fund exceeds payments made from the separate<br>fund to the trust during the accounting period.7.If a trustee cannot determine the internal income of a separate fund but can<br>determine the value of a separate fund, the internal income of the separate fund is<br>deemed to equal four percent of the fund's value, according to the most recent<br>statement of value preceding the beginning of the accounting period. If the trustee<br>can determine neither the internal income of the separate fund nor the fund's value,<br>the internal income of the fund is deemed to equal the product of the interest rate<br>and the present value of the expected future payments, as determined under section<br>7520 of the Internal Revenue Code of 1986, as amended, for the month preceding<br>the accounting period for which the computation is made.8.This section does not apply to a payment to which section 59-04.2-18 applies.59-04.2-18. (410) Liquidating asset.1.In this section, "liquidating asset" means an asset whose value will diminish or<br>terminate because the asset is expected to produce receipts for a period of limited<br>duration. The term includes a leasehold, patent, copyright, royalty right, and right to<br>receive payments during a period of more than one year under an arrangement that<br>does not provide for the payment of interest on the unpaid balance. The term does<br>not include a payment subject to section 59-04.2-17, resources subject to section<br>59-04.2-19, timber subject to section 59-04.2-20, an activity subject to section<br>59-04.2-22, an asset subject to section 59-04.2-23, or any asset for which the<br>trustee establishes a reserve for depreciation under section 59-04.2-26.2.A trustee shall allocate to income ten percent of the receipts from a liquidating asset<br>and the balance to principal.59-04.2-19. (411) Minerals, water, and other natural resources.Page No. 81.To the extent that a trustee accounts for receipts from an interest in minerals or<br>other natural resources pursuant to this section, the trustee shall allocate them as<br>follows:a.If received as nominal delay rental or nominal annual rent on a lease, a receipt<br>must be allocated to income.b.If received from a production payment, a receipt must be allocated to income if<br>and to the extent that the agreement creating the production payment provides<br>a factor for interest or its equivalent.The balance must be allocated toprincipal.c.If an amount received as a royalty, shut-in-well payment, take-or-pay payment,<br>bonus, or delay rental is more than nominal, ninety percent must be allocated<br>to principal and the balance to income.d.If an amount is received from a working interest or any other interest not<br>provided for in subdivision a, b, or c, ninety percent of the net amount received<br>must be allocated to principal and the balance to income.2.An amount received on account of an interest in water that is renewable must be<br>allocated to income. If the water is not renewable, ninety percent of the amount<br>must be allocated to principal and the balance to income.3.This chapter applies whether or not a decedent or donor was extracting minerals,<br>water, or other natural resources before the interest became subject to the trust.4.If a trust owns an interest in minerals, water, or other natural resources on August 1,<br>1999, the trustee may allocate receipts from the interest as provided in this chapter<br>or in the manner used by the trustee before August 1, 1999. If the trust acquires an<br>interest in minerals, water, or other natural resources after August 1, 1999, the<br>trustee shall allocate receipts from the interest as provided in this chapter.59-04.2-20. (412) Timber.1.To the extent that a trustee accounts for receipts from the sale of timber and related<br>products pursuant to this section, the trustee shall allocate the net receipts:a.To income to the extent that the amount of timber removed from the land does<br>not exceed the rate of growth of the timber during the accounting periods in<br>which a beneficiary has a mandatory income interest;b.To principal to the extent that the amount of timber removed from the land<br>exceeds the rate of growth of the timber or the net receipts are from the sale of<br>standing timber;c.To or between income and principal if the net receipts are from the lease of<br>timberland or from a contract to cut timber from land owned by a trust, by<br>determining the amount of timber removed from the land under the lease or<br>contract and applying the rules in subdivisions a and b; ord.To principal to the extent that advance payments, bonuses, and other<br>payments are not allocated pursuant to subdivision a, b, or c.2.In determining net receipts to be allocated pursuant to subsection 1, a trustee shall<br>deduct and transfer to principal a reasonable amount for depletion.3.This chapter applies whether or not a decedent or transferor was harvesting timber<br>from the property before it became subject to the trust.Page No. 94.If a trust owns an interest in timberland on August 1, 1999, the trustee may allocate<br>net receipts from the sale of timber and related products as provided in this chapter<br>or in the manner used by the trustee before August 1, 1999. If the trust acquires an<br>interest in timberland after August 1, 1999, the trustee shall allocate net receipts<br>from the sale of timber and related products as provided in this chapter.59-04.2-21. (413) Property not productive of income. Reserved.59-04.2-22. (414) Derivatives and options.1.In this section, "derivative" means a contract or financial instrument or a combination<br>of contracts and financial instruments which gives a trust the right or obligation to<br>participate in some or all changes in the price of a tangible or intangible asset or<br>group of assets, or changes in a rate, an index of prices or rates, or other market<br>indicator for an asset or a group of assets.2.To the extent that a trustee does not account under section 59-04.2-11 for<br>transactions in derivatives, the trustee shall allocate to principal receipts from and<br>disbursements made in connection with those transactions.3.If a trustee grants an option to buy property from the trust, whether or not the trust<br>owns the property when the option is granted, grants an option that permits another<br>person to sell property to the trust, or acquires an option to buy property for the trust<br>or an option to sell an asset owned by the trust, and the trustee or other owner of the<br>asset is required to deliver the asset if the option is exercised, an amount received<br>for granting the option must be allocated to principal. An amount paid to acquire the<br>option must be paid from principal. A gain or loss realized upon the exercise of an<br>option, including an option granted to a settlor of the trust for services rendered,<br>must be allocated to principal.59-04.2-23. (415) Asset-backed securities.1.In this section, "asset-backed security" means an asset whose value is based upon<br>the right it gives the owner to receive distributions from the proceeds of financial<br>assets that provide collateral for the security. The term includes an asset that gives<br>the owner the right to receive from the collateral financial assets only the interest or<br>other current return or only the proceeds other than interest or current return. The<br>term does not include an asset to which section 59-04.2-09 or 59-04.2-17 applies.2.If a trust receives a payment from interest or other current return and from other<br>proceeds of the collateral financial assets, the trustee shall allocate to income the<br>portion of the payment which the payer identifies as being from interest or other<br>current return and shall allocate the balance of the payment to principal.3.If a trust receives one or more payments in exchange for the trust's entire interest in<br>an asset-backed security in one accounting period, the trustee shall allocate the<br>payments to principal. If a payment is one of a series of payments that will result in<br>the liquidation of the trust's interest in the security over more than one accounting<br>period, the trustee shall allocate ten percent of the payment to income and the<br>balance to principal.59-04.2-24. (501) Disbursements from income. A trustee shall make the followingdisbursements from income to the extent that they are not disbursements to which subdivision b<br>or c of subsection 2 of section 59-04.2-04 applies:1.One-half of the regular compensation of the trustee and of any person providing<br>investment advisory or custodial services to the trustee.Page No. 102.One-half of all expenses for accountings, judicial proceedings, or other matters that<br>involve both the income and remainder interests.3.All of the other ordinary expenses incurred in connection with the administration,<br>management, or preservation of trust property and the distribution of income,<br>including interest, ordinary repairs, regularly recurring taxes assessed against<br>principal, and expenses of a proceeding or other matter that concerns primarily the<br>income interest.4.Recurring premiums on insurance covering the loss of a principal asset or the loss of<br>income from or use of the asset.59-04.2-25. (502) Disbursements from principal.1.A trustee shall make the following disbursements from principal:a.The remaining one-half of the disbursements described in subsections 1 and 2<br>of section 59-04.2-24;b.All of the trustee's compensation calculated on principal as a fee for<br>acceptance, distribution, or termination, and disbursements made to prepare<br>property for sale;c.Payments on the principal of a trust debt;d.Expenses of a proceeding that concerns primarily principal, including a<br>proceeding to construe the trust or to protect the trust or its property;e.Premiums paid on a policy of insurance not described in subsection 4 of section<br>59-04.2-24 of which the trust is the owner and beneficiary;f.Estate, inheritance, and other transfer taxes, including penalties, apportioned to<br>the trust; andg.Disbursements related to environmental matters, including reclamation,<br>assessing environmental conditions, remedying and removing environmental<br>contamination, monitoring remedial activities and the release of substances,<br>preventing future releases of substances, collecting amounts from persons<br>liable or potentially liable for the costs of those activities, penalties imposed<br>under environmental laws or regulations and other payments made to comply<br>with those laws or regulations, statutory or common-law claims by third parties,<br>and defending claims based on environmental matters.2.If a principal asset is encumbered with an obligation that requires income from that<br>asset to be paid directly to the creditor, the trustee shall transfer from principal to<br>income an amount equal to the income paid to the creditor in reduction of the<br>principal balance of the obligation.59-04.2-26. (503) Transfers from income to principal for depreciation.1.In this section, "depreciation" means a reduction in value due to wear, tear, decay,<br>corrosion, or gradual obsolescence of a fixed asset having a useful life of more than<br>one year.2.A trustee may transfer to principal a reasonable amount of the net cash receipts<br>from a principal asset that is subject to depreciation, but may not transfer any<br>amount for depreciation:Page No. 11a.Of that portion of real property used or available for use by a beneficiary as a<br>residence or of tangible personal property held or made available for the<br>personal use or enjoyment of a beneficiary;b.During the administration of a decedent's estate; orc.Under this section if the trustee is accounting under section 59-04.2-11 for the<br>business or activity in which the asset is used.3.An amount transferred to principal need not be held as a separate fund.59-04.2-27. (504) Transfers from income to reimburse principal.1.If a trustee makes or expects to make a principal disbursement described in this<br>section, the trustee may transfer an appropriate amount from income to principal in<br>one or more accounting periods to reimburse principal or to provide a reserve for<br>future principal disbursements.2.Principal disbursements to which subsection 1 applies include the following, but only<br>to the extent that the trustee has not been and does not expect to be reimbursed by<br>a third party:a.An amount chargeable to income but paid from principal because it is unusually<br>large, including extraordinary repairs;b.A capital improvement to a principal asset, whether in the form of changes to<br>an existing asset or the construction of a new asset, including special<br>assessments;c.Disbursements made to prepare property for rental, including tenant<br>allowances, leasehold improvements, and broker's commissions;d.Periodic payments on an obligation secured by a principal asset to the extent<br>that the amount transferred from income to principal for depreciation is less<br>than the periodic payments; ande.Disbursementsdescribedinsubdivision gofsubsection 1ofsection59-04.2-25.3.If the asset whose ownership gives rise to the disbursements becomes subject to a<br>successive income interest after an income interest ends, a trustee may continue to<br>transfer amounts from income to principal as provided in subsection 1.59-04.2-28. (505) Income taxes.1.A tax required to be paid by a trustee based on receipts allocated to income must be<br>paid from income.2.A tax required to be paid by a trustee based on receipts allocated to principal must<br>be paid from principal, even if the tax is called an income tax by the taxing authority.3.A tax required to be paid by a trustee on the trust's share of an entity's taxable<br>income must be paid:a.From income to the extent that receipts from the entity are allocated to income;b.From principal to the extent that receipts from the entity are allocated only to<br>principal;Page No. 12c.Proportionately from principal and income to the extent that receipts from the<br>entity are allocated to both income and principal; andd.From principal to the extent that the tax exceeds the total receipts from the<br>entity.4.After applying subsections 1 through 3, the trustee shall adjust income or principal<br>receipts to the extent that the trust's taxes are reduced because the trust receives a<br>deduction for payments made to a beneficiary.59-04.2-29. (506) Adjustments between principal and income because of taxes.1.A fiduciary may make adjustments between principal and income to offset the<br>shifting of economic interests or tax benefits between income beneficiaries and<br>remainder beneficiaries which arise from:a.Elections and decisions, other than those described in subsection 2, that the<br>fiduciary makes from time to time regarding tax matters;b.An income tax or any other tax that is imposed upon the fiduciary or a<br>beneficiary as a result of a transaction involving or a distribution from the estate<br>or trust; orc.The ownership by an estate or trust of an interest in an entity whose taxable<br>income, whether or not distributed, is includable in the taxable income of the<br>estate, trust, or a beneficiary.2.If the amount of an estate tax marital deduction or charitable contribution deduction<br>is reduced because a fiduciary deducts an amount paid from principal for income tax<br>purposes instead of deducting it for estate tax purposes, and as a result estate taxes<br>paid from principal are increased and income taxes paid by an estate, trust, or<br>beneficiary are decreased, each estate, trust, or beneficiary that benefits from the<br>decrease in income tax shall reimburse the principal from which the increase in<br>estate tax is paid. The total reimbursement must equal the increase in the estate tax<br>to the extent that the principal used to pay the increase would have qualified for a<br>marital deduction or charitable contribution deduction but for the payment.Theproportionate share of the reimbursement for each estate, trust, or beneficiary<br>whose income taxes are reduced must be the same as its proportionate share of the<br>total decrease in income tax.An estate or trust shall reimburse principal fromincome.59-04.2-30. Certain charitable remainder unitrusts.1.Notwithstanding any other provision of this chapter, unless the trust instrument<br>directs otherwise, an increase in the value of the obligations described in this<br>subsection owned by a charitable remainder unitrust of the type authorized in<br>section 664(d)(3) of the Internal Revenue Code [26 U.S.C. 664(d)(3)] or its<br>successor provisions is distributable as income when it becomes available for<br>distribution:a.A zero coupon bond;b.An annuity contract before annuitization;c.A life insurance contract before the death of the insured;d.An interest in a common trust fund as defined in section 584 of the Internal<br>Revenue Code [26 U.S.C. 584] or its successor provisions;Page No. 13e.An interest in a partnership as defined in section 7701 of the Internal Revenue<br>Code [26 U.S.C. 7701] or its successor provisions; andf.Any other obligation for the payment of money that is payable at a future time in<br>accordance with a fixed, variable, or discretionary schedule of appreciation in<br>excess of the price at which it was issued.2.The increase in value of the obligations described in subsection 1 is distributable to<br>the beneficiary who was the income beneficiary at the time of the increase.3.For purposes of this section, the increase in value of an obligation described in<br>subsection 1 is available for distribution only when the trustee receives cash on<br>account of the obligation. If the obligation is surrendered or liquidated partially, the<br>cash available must be attributed first to the increase.Page No. 14Document Outlinechapter 59-04.2 uniform principal and income act
