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California Uniform Principal and Income Act

Chapter 3 of the California Probate Code
(the California Uniform Principal and Income Act)

Questions about the California Uniform Principal and Income Act can be directed to CalCPA member William Downs.

See below for corresponding links to the national UPIA
Table of Contents

Article 1.  Short Title and Definitions (16320-16328)

Article 2.  General Provisions and Fiduciary Duties (16335-16339) Article 3.  Decedent's Estate or Terminating Income Interest (16340-16341) Article 4.  Apportionment at Beginning and End of Income Interest (16345-16347) Article 5.1.  Allocation of Receipts During Administration of Trust:  Receipts From Entities (16350-16352) Article 5.2.  Allocation of Receipts During Administration of Trust:  Receipts Not Normally Apportioned (16355-16358) Article 5.3.  Allocation of Receipts During Administration of Trust:  Receipts Normally Apportioned (16360-16367) Article 6.  Allocation of Disbursements During Administration of Trust (16370-16375)
 
Article 1.  Short Title and Definitions 
Sections 16320-16328

16320.  This chapter may be cited as the Uniform Principal and Income Act.

16321. The definitions in this article govern the construction of this chapter.

16322.  "Accounting period" means a calendar year unless another 12-month period is selected by a fiduciary.  The term includes a portion of a calendar year or other 12-month period that begins when an income interest begins or ends when an income interest ends.

16323.  "Fiduciary" means a personal representative or a trustee.

16324. "Income" means money or property that a fiduciary receives as current return from a principal asset.  The term includes a portion of receipts from a sale, exchange, or liquidation of a principal asset, to the extent provided in Article 5.1 (commencing with Section 16350), 5.2 (commencing with Section 16355), or 5.3 (commencing with Section 16360).

16325. "Income beneficiary" means a person to whom net income of a trust is or may be payable.

16326.  "Income interest" means the right of an income beneficiary to receive all or part of net income, whether the trust requires it to be distributed or authorizes it to be distributed in the trustee's discretion.

16327. "Mandatory income interest" means the right of an income beneficiary to receive net income that the trust requires the fiduciary to distribute.

16328. "Net income" means the total receipts allocated to income during an accounting period minus the disbursements made from income during the accounting period, plus or minus transfers under this chapter to or from income during the accounting period. During any period in which the trust is being administered as a unitrust, either pursuant to the powers conferred by Sections 16336.4 to 16336.6, inclusive, or pursuant to the terms of the governing instrument, "net income" means the unitrust amount, if the unitrust amount is no less than 3 percent and no more than 5 percent of the fair market value of the trust assets, whether determined annually or averaged on a multiple year basis.

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National UPIA (with comments) Section 101

Section 102

Article 2.  General Provisions and Fiduciary Duties
Sections 16335-16339

16335.  (a) In allocating receipts and disbursements to or between principal and income, and with respect to any other matter within the scope of this chapter, a fiduciary: 

          (1) Shall administer a trust or decedent's estate in accordance with the trust or the will, even if there is a different provision in this chapter. 

          (2) May administer a trust or decedent's estate by the exercise of a discretionary power of administration given to the fiduciary by the trust or the will, even if the exercise of the power produces a result different from a result required or permitted by this chapter, and no inference that the fiduciary has improperly exercised the discretion arises from the fact that the fiduciary has made an allocation contrary to a provision of this chapter. 

          (3) Shall administer a trust or decedent's estate in accordance with this chapter if the trust or the will does not contain a different provision or does not give the fiduciary a discretionary power of administration. 

          (4) Shall add a receipt or charge a disbursement to principal to the extent that the trust or the will and this chapter do not provide a rule for allocating the receipt or disbursement to or between principal and income. 

     (b) In exercising a discretionary power of administration regarding a matter within the scope of this chapter, whether granted by a trust, a will, or this chapter, including the trustee's power to adjust under subdivision (a) of Section 16336, and the trustee's power to convert into a unitrust or reconvert or change the unitrust payout percentage pursuant to Sections 16336.4 to 16336.6, inclusive, the fiduciary shall administer the trust or decedent's estate impartially, except to the extent that the trust or the will expresses an intention that the fiduciary shall or may favor one or more of the beneficiaries. The exercise of discretion in accordance with this chapter is presumed to be fair and reasonable to all beneficiaries.

16336.  (a) Subject to subdivision (b), a trustee may make an adjustment between principal and income to the extent the trustee considers necessary if all of the following conditions are satisfied: 

          (1) The trustee invests and manages trust assets under the prudent investor rule. 

          (2) The trust describes the amount that shall or may be distributed to a beneficiary by referring to the trust's income. 

          (3) The trustee determines, after applying the rules in subdivision (a) of Section 16335, and considering any power the trustee may have under the trust to invade principal or accumulate income, that the trustee is unable to comply with subdivision (b) of Section 16335. 

     (b) A trustee may not make an adjustment between principal and income in any of the following circumstances: 

          (1) Where it would diminish the income interest in a trust (A) that requires all of the income to be paid at least annually to a spouse and (B) for which, if the trustee did not have the power to make the adjustment, an estate tax or gift tax marital deduction would be allowed, in whole or in part. 

          (2) Where it would reduce the actuarial value of the income interest in a trust to which a person transfers property with the intent to qualify for a gift tax exclusion. 

          (3) Where it would change the amount payable to a beneficiary as a fixed annuity or a fixed fraction of the value of the trust assets. 

          (4) Where it would be made from any amount that is permanently set aside for charitable purposes under a will or trust, unless both income and principal are so set aside. 

          (5) Where possessing or exercising the power to make an adjustment would cause an individual to be treated as the owner of all or part of the trust for income tax purposes, and the individual would not be treated as the owner if the trustee did not possess the power to make an adjustment. 

          (6) Where possessing or exercising the power to make an adjustment would cause all or part of the trust assets to be included for estate tax purposes in the estate of an individual who has the power to remove a trustee or appoint a trustee, or both, and the assets would not be included in the estate of the individual if the trustee did not possess the power to make an adjustment. 

          (7) Where the trustee is a beneficiary of the trust. 

          (8) During any period in which the trust is being administered as a unitrust pursuant to the trustee's exercise of the power to convert provided in Section 16336.4 or 16336.5, or pursuant to the terms of the governing instrument. 

     (c) Notwithstanding Section 15620, if paragraph (5), (6), or (7) of subdivision (b) applies to a trustee and there is more than one trustee, a cotrustee to whom the provision does not apply may make the adjustment unless the exercise of the power by the remaining trustee or trustees is not permitted by the trust. 

     (d) A trustee may release the entire power conferred by subdivision (a) or may release only the power to adjust from income to principal or the power to adjust from principal to income in either of the following circumstances: 

          (1) If the trustee is uncertain about whether possessing or exercising the power will cause a result described in paragraphs (1) to (6), inclusive, of subdivision (b). 

          (2) If the trustee determines that possessing or exercising the power will or may deprive the trust of a tax benefit or impose a tax burden not described in subdivision (b). 

     (e) A release under subdivision (d) may be permanent or for a specified period, including a period measured by the life of an individual. 

     (f) A trust that limits the power of a trustee to make an adjustment between principal and income does not affect the application of this section unless it is clear from the trust that it is intended to deny the trustee the power of adjustment provided by subdivision (a). 

     (g) In deciding whether and to what extent to exercise the power to make adjustments under this section, the trustee may consider, but is not limited to, any of the following: 

          (1) The nature, purpose, and expected duration of the trust. 

          (2) The intent of the settlor. 

          (3) The identity and circumstances of the beneficiaries. 

          (4) The needs for liquidity, regularity of income, and preservation and appreciation of capital. 

          (5) The assets held in the trust; the extent to which they consist of financial assets, interests in closely held enterprises, tangible and intangible personal property, or real property; the extent to which an asset is used by a beneficiary; and whether an asset was purchased by the trustee or received from the settlor. 

          (6) The net amount allocated to income under other statutes and the increase or decrease in the value of the principal assets, which the trustee may estimate as to assets for which market values are not readily available. 

          (7) Whether and to what extent the trust gives the trustee the power to invade principal or accumulate income or prohibit the trustee from invading principal or accumulating income, and the extent to which the trustee has exercised a power from time to time to invade principal or accumulate income. 

          (8) The actual and anticipated effect of economic conditions on principal and income and effects of inflation and deflation. 

          (9) The anticipated tax consequences of an adjustment. 

     (h) Nothing in this section or in this chapter is intended to create or imply a duty to make an adjustment, and a trustee is not liable for not considering whether to make an adjustment or for choosing not to make an adjustment.

16336.4.  (a) Unless expressly prohibited by the governing instrument, a trustee may convert a trust into a unitrust, as described in this section. A trust that limits the power of the trustee to make an adjustment between principal and income or modify the trust does not affect the application of this section unless it is clear from the governing instrument that it is intended to deny the trustee the power to convert into a unitrust. 

     (b) The trustee may convert a trust into a unitrust without a court order if all of the following apply: 

          (1) The conditions set forth in subdivision (a) of Section 16336 are satisfied. 

          (2) The unitrust proposed by the trustee conforms to the provisions of paragraphs (1) to (8), inclusive, of subdivision (e). 

          (3) The trustee gives written notice of the trustee's intention to convert the trust into a unitrust and furnishes the information required by subdivision (c). The notice shall comply with the requirements of Chapter 5 (commencing with Section 16500), including notice to a beneficiary who is a minor and to the minor's guardian, if any. 

          (4) No beneficiary objects to the proposed action in a writing delivered to the trustee within the period prescribed by subdivision (d) of Section 16502 or a longer period as is specified in the notice described in subdivision (c). 

     (c) The notice described in paragraph (3) of subdivision (b) shall include a copy of Sections 16336.4 to 16336.7, inclusive, and all of the following additional information: 

          (1) A statement that the trust shall be administered in accordance with the provisions of subdivision (e) and the effective date of the conversion. 

          (2) A description of the method to be used for determining the fair market value of trust assets. 

          (3) The amount actually distributed to the income beneficiary during the previous accounting year of the trust. 

          (4) The amount that would have been distributed to the income beneficiary during the previous accounting year of the trust had the trustee's proposed changes been in effect during that entire year. 

          (5)  The discretionary decisions the trustee proposes to make as of the conversion date pursuant to subdivision (f). 

     (d) In deciding whether to exercise the power conferred by this section, a trustee may consider, among other things, the factors set forth in subdivision (g) of Section 16336. 

     (e) Except to the extent that the court orders otherwise or the parties agree otherwise pursuant to Section 16336.5 after a trust is converted to a unitrust, all of the following shall apply: 

          (1) The trustee shall make regular distributions in accordance with the governing instrument construed in accordance with the provisions of this section. 

          (2) The term "income" in the governing instrument shall mean an annual distribution, the unitrust amount, equal to 4 percent, which is the payout percentage, of the net fair market value of the trust's assets, whether those assets would be considered income or principal under other provisions of this chapter, averaged over the lesser of: (A) the three preceding years, or (B) the period during which the trust has been in existence. 

          (3) During each accounting year of the trust following its conversion into a unitrust, the trustee shall, as early in the year as is practicable, furnish each income beneficiary with a statement describing the computation of the unitrust amount for that accounting year. 

          (4) The trustee shall determine the net fair market value of each asset held in the trust no less often than annually. However, the following property shall not be included in determining the unitrust amount: 

     (a) Any residential property or any tangible personal property that, as of the first business day of the current accounting year, one or more current beneficiaries of the trust have or have had the right to occupy, or have or have had the right to possess or control, other than in his or her capacity as trustee of the trust, which property shall be administered according to other provisions of this chapter as though no conversion to a unitrust had occurred. 

     (b) Any asset specifically devised to a beneficiary to the extent necessary, in the trustee's reasonable judgment, to avoid a material risk of exhausting other trust assets prior to termination of the trust. All net income generated by a specifically devised asset excluded from the unitrust computation pursuant to this subdivision shall be accumulated or distributed by the trustee according to the rules otherwise applicable to that net income pursuant to other provisions of this chapter. 

     (c) Any asset while held in a testator's estate or a terminating trust. 

          (5) The unitrust amount, as otherwise computed pursuant to this subdivision, shall be reduced proportionately for any material distribution made to accomplish a partial termination of the trust required by the governing instrument or made as a result of the exercise of a power of appointment or withdrawal, other than distributions of the unitrust amount, and shall be increased proportionately for the receipt of any material addition to the trust, other than a receipt that represents a return on investment, during the period considered in paragraph (2) in computing the unitrust amount. For the purpose of this paragraph, a distribution or an addition shall be "material" if the net value of the distribution or addition, when combined with all prior distributions made or additions received during the same accounting year, exceeds 10 percent of the value of the assets used to compute the unitrust amount as of the most recent prior valuation date. The trustee may, in the reasonable exercise of his or her discretion, adjust the unitrust amount pursuant to this subdivision even if the distributions or additions are not sufficient to meet the definition of materiality set forth in the preceding sentence. 

          (6) In the case of a short year in which a beneficiary's right to payments commences or ceases, the trustee shall prorate the unitrust amount on a daily basis. 

          (7) Unless otherwise provided by the governing instrument or determined by the trustee, the unitrust amount shall be considered paid in the following order from the following sources: 

     (a) From the net taxable income, determined as if the trust were other than a unitrust. 

     (b) From net realized short-term capital gains. 

     (c) From net realized long-term capital gains. 

     (d) From tax-exempt and other income. 

     (e) From principal of the trust. 

          (8) Expenses that would be deducted from income if the trust were not a unitrust may not be deducted from the unitrust amount. 

     (f) The trustee shall determine, in the trustee's discretion, all of the following matters relating to administration of a unitrust created pursuant to this section: 

          (1) The effective date of a conversion to a unitrust. 

          (2) The frequency of payments in satisfaction of the unitrust amount. 

          (3) Whether to value the trust's assets annually or more frequently. 

          (4) What valuation dates to use. 

          (5) How to value nonliquid assets. 

          (6) The characterization of the unitrust payout for income tax reporting purposes. However, the trustee's characterization shall be consistent. 

          (7) Any other matters that the trustee deems appropriate for the proper functioning of the unitrust. 

     (g) A conversion into a unitrust does not affect a provision in the governing instrument directing or authorizing the trustee to distribute principal or authorizing the exercise of a power of appointment over or withdrawal of all or a portion of the principal. 

     (h) A trustee may not convert a trust into a unitrust in any of the following circumstances: 

          (1) If payment of the unitrust amount would change the amount payable to a beneficiary as a fixed annuity or a fixed fraction of the value of the trust assets. 

          (2) If the unitrust distribution would be made from any amount that is permanently set aside for charitable purposes under the governing instrument and for which a federal estate or gift tax deduction has been taken, unless both income and principal are set aside. 

          (3) If possessing or exercising the power to convert would cause an individual to be treated as the owner of all or part of the trust for federal income tax purposes, and the individual would not be treated as the owner if the trustee did not possess the power to convert. 

          (4) If possessing or exercising the power to convert would cause all or part of the trust assets to be subject to federal estate or gift tax with respect to an individual, and the assets would not be subject to federal estate or gift tax with respect to the individual if the trustee did not possess the power to convert. 

          (5) If the conversion would result in the disallowance of a federal estate tax or gift tax marital deduction that would be allowed if the trustee did not have the power to convert. 

     (i) If paragraph (3) or (4) of subdivision (h) applies to a trustee and there is more than one trustee, a cotrustee to whom the provision does not apply may convert the trust unless the exercise of the power by the remaining trustee or trustees is prohibited by the governing instrument. If paragraph (3) or (4) of subdivision (h) applies to all of the trustees, the court may order the conversion as provided in subdivision (b) of Section 16336.5. 

     (j) A trustee may release the power conferred by this section to convert to a unitrust if (1) the trustee is uncertain about whether possessing or exercising the power will cause a result described in paragraph (3), (4), or (5) of subdivision (h), or (2) the trustee determines that possessing or exercising the power will or may deprive the trust of a tax benefit or impose a tax burden not described in subdivision (h). The release may be permanent or for a specified period, including a period measured by the life of an individual.

16336.5.  (a) The trustee may convert a trust into a unitrust upon terms other than those set forth in subdivision (e) of Section 16336.4, without court order, if all of the following apply: 

          (1) The conditions set forth in subdivision (a) of Section 16336 are satisfied. 

          (2) The trustee gives written notice of the trustee's intention to convert the trust into a unitrust and furnishes the information required by subdivision (c) of Section 16336.4. The notice shall comply with the requirements of Chapter 5 (commencing with Section 16500), including notice to a beneficiary who is a minor and to the minor's guardian, if any. 

          (3) The payout percentage to be adopted is at least 3 percent and no greater than 5 percent. 

          (4) All beneficiaries entitled to notice under Section 16501 consent in writing to the proposed action after having been furnished with the notice described in subdivision (c) of Section 16336.4. 

     (b) The court may order the conversion of a trust into a unitrust as provided in this subdivision. 

          (1) (A) The trustee may petition the court to approve the conversion to a unitrust for any one of the following reasons: 

     (i) A beneficiary timely objects to a proposed conversion to a unitrust. 

(ii) The trustee proposes to make the conversion upon terms other than those described in subdivision (e) of Section 16336.4. 

(iii) Paragraph (3) or (4) of subdivision (h) of Section 16336.4 applies to all currently acting trustees. 

(iv)  If the trustee determines, in its discretion, that a petition is advisable. 

     (b) In no event, however, may the court authorize conversion to a unitrust with a payout percentage of less than 3 percent or greater than 5 percent of the fair market value of the trust assets. 

          (2) A beneficiary may petition the court to order the conversion. 

          (3) The court shall approve the conversion proposed by the trustee or direct the conversion requested by the beneficiary if the conditions set forth in subdivision (a) of Section 16336 are satisfied and the court concludes that conversion of the trust on the terms proposed will enable the trustee to better comply with the provisions of subdivision (b) of Section 16335. 

          (4) In deciding whether to approve a proposed conversion or direct a requested conversion, the court may consider, among other factors, those described in subdivision (g) of Section 16336.

16336.6.  Unless expressly prohibited by the governing instrument, a trustee may reconvert the trust from a unitrust or change the payout percentage of a unitrust. 

     (a) The trustee may make the reconversion or change in payout percentage without a court order if all of the following conditions are satisfied: 

          (1) At least three years have elapsed since the most recent conversion to a unitrust. 

          (2) The trustee determines that reconversion or change in payout percentage would enable the trustee to better comply with the provisions of subdivision (b) of Section 16335. 

          (3) One of the following notice requirements is satisfied: 

     (a) In the case of a proposed reconversion, the trustee gives written notice of the trustee's intention to convert that complies with the requirements of Chapter 5 (commencing with Section 16500) and no beneficiary objects to the proposed action in a writing delivered to the trustee within the period prescribed by subdivision (d) of Section 16502. The trustee's notice shall include the information described in subdivision (3) and (4) of subdivision (c) of Section 16336.4. 

     (b) In the case of a proposed change in payout percentage, the trustee gives written notice stating the new payout percentage that the trustee proposes to adopt, which notice shall comply with the requirements of Chapter 5 (commencing with Section 16500), and no beneficiary objects to the proposed action in a writing delivered to the trustee within the period prescribed by subdivision (d) of Section 16502. 

     (b) The trustee may make the reconversion or change in payout percentage at any time pursuant to court order provided that: (1) the court determines that reconversion or change in payout percentage will enable the trustee to better comply with the provisions of subdivision (b) of Section 16335, and (2) in the case of a change in payout percentage, the new payout percentage is at least 3 percent and no greater than 5 percent. The court may enter an order pursuant to this subdivision upon the petition of the trustee or any beneficiary.

16336.7.  (a) Sections 16336.4 to 16336.6, inclusive, shall not impose any duty on the trustee to convert or reconvert a trust or to consider a conversion or reconversion. 

     (b) Subdivision (b) of Section 16503 applies to all actions pursuant to Sections 16336.4 to 16336.6, inclusive, for which notice of proposed action is given in compliance with Chapter 5 (commencing with Section 16500), including notice to a beneficiary who is a minor and to the minor's guardian, if any.

16337. A trustee may give a notice of proposed action regarding a matter governed by this chapter as provided in Chapter 5 (commencing with Section 16500).  For the purpose of this section, a proposed action includes a course of action and a decision not to take action.

16338.  In a proceeding with respect to a trustee's exercise or nonexercise of the power to make an adjustment under Section 16336, the sole remedy is to direct, deny, or revise an adjustment between principal and income. In a proceeding with respect to a trustee's exercise or nonexercise of a power conferred by Sections 16336.4 to 16336.6, inclusive, the sole remedy is to obtain an order directing the trustee to convert the trust to a unitrust, to reconvert from a unitrust, to change the distribution percentage, or to order any administrative procedures the court determines to be necessary or helpful for the proper functioning of the trust.

16339.  This chapter applies to every trust or decedent's estate existing on or after January 1, 2000, except as otherwise expressly provided in the trust or will or in this chapter.

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National UPIA (with comments) Section 103

Section 104

Section 105

Article 3.  Decedent's Estate or Terminating Income Interest 
Sections 16340-16341

16340.  After the decedent's death, in the case of a decedent's estate, or after an income interest in a trust ends, the following rules apply: 

     (a) If property is specifically given to a beneficiary, by will or trust, the fiduciary of the estate or of the terminating income interest shall distribute the net income and principal receipts to the beneficiary who is to receive the property, subject to the following rules: 

          (1) The net income and principal receipts from the specifically given property are determined by including all of the amounts the fiduciary receives or pays with respect to the property, whether the amounts accrued or became due before, on, or after the decedent's death or an income interest in a trust ends, and by making a reasonable provision for amounts the fiduciary believes the estate or terminating income interest may become obligated to pay after the property is distributed. 

          (2) The fiduciary may not reduce income and principal receipts from the specifically given property on account of a payment described in Section 16370 or 16371, to the extent that the will, the trust, or Section 12002 requires payment from other property or to the extent that the fiduciary recovers the payment from a third person. 

          (3) A specific gift distributable under a trust shall carry with it the same benefits and burdens as a specific devise under a will, as set forth in Chapter 8 (commencing with Section 12000) of Part 10 of Division 7. 

     (b) A general pecuniary gift, an annuity, or a gift of maintenance distributable under a trust carries with it income and bears interest in the same manner as a general pecuniary devise, an annuity, or a gift of maintenance under a will, as set forth in Chapter 8 (commencing with Section 12000) of Part 10 of Division 7. The fiduciary shall distribute to a beneficiary who receives a pecuniary amount, whether outright or in trust, the interest or any other amount provided by the will, the trust, this subdivision, or Chapter 8 (commencing with Section 12000) of Part 10 of Division 7, from the remaining net income determined under subdivision (c) or from principal to the extent that net income is insufficient. 

     (c) The fiduciary shall determine the remaining net income of the decedent's estate or terminating income interest as provided in this chapter and by doing the following: 

          (1) Including in net income all income from property used to discharge liabilities. 

          (2) Paying from income or principal, in the fiduciary's discretion, fees of attorneys, accountants, and fiduciaries, court costs and other expenses of administration, and interest on death taxes, except that the fiduciary may pay these expenses from income of property passing to a trust for which the fiduciary claims an estate tax marital or charitable deduction only to the extent that the payment of these expenses from income will not cause the reduction or loss of the deduction. 

          (3) Paying from principal all other disbursements made or incurred in connection with the settlement of a decedent's estate or the winding up of a terminating income interest, including debts, funeral expenses, disposition of remains, family allowances, and death taxes and related penalties that are apportioned to the estate or terminating income interest by the will, the trust, or Division 10 (commencing with Section 20100). 

     (d) After distributions required by subdivision (b), the fiduciary shall distribute the remaining net income determined under subdivision (c) in the manner provided in Section 16341 to all other beneficiaries. 

     (e) For purposes of this section, a reference in Chapter 8 (commencing with Section 12000) of Part 10 of Division 7 to the date of the testator's death means the date of the settlor's death or of the occurrence of some other event on which the distributee's right to receive the gift depends. 

     (f) If a trustee has distributed a specific gift or a general pecuniary gift before January 1, 2007, the trustee may allocate income and principal as set forth in this chapter or in any other manner permissible under the law in effect at the time of the distribution. If the trustee distributes a specific gift or a general pecuniary gift after December 31, 2006, then the trustee shall allocate income and principal as provided in this chapter.

16341.  (a) Each beneficiary described in subdivision (d) of Section 16340 is entitled to receive a portion of the net income equal to the beneficiary's fractional interest in undistributed principal assets, using values as of the distribution dates and without reducing the values by any unpaid principal obligations. 

     (b) If a fiduciary does not distribute all of the collected but undistributed net income to each beneficiary as of a distribution date, the fiduciary shall maintain appropriate records showing the interest of each beneficiary in that net income. 

     (c) The distribution date for purposes of this section may be the date as of which the fiduciary calculates the value of the assets if that date is reasonably near the date on which assets are actually distributed.

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National UPIA (with comments) Section 201

Section 202

 

Article 4.  Apportionment at Beginning and End of Income Interest
Sections 16345-16347

16345.  (a) An income beneficiary is entitled to net income from the date on which the income interest begins.  An income interest begins on the date specified in the trust or, if no date is specified, on the date an asset becomes subject to a trust or successive income interest. 

     (b) An asset becomes subject to a trust at the following times: 

          (1) In the case of an asset that is transferred to a trust during the transferor's life, on the date it is transferred to the trust. 

          (2) In the case of an asset that becomes subject to a trust by reason of a will, even if there is an intervening period of administration of the testator's estate, on the date of the testator' s death. 

          (3) In the case of an asset that is transferred to a fiduciary by a third party because of the individual's death, on the date of the individual's death. 

     (c) An asset becomes subject to a successive income interest on the day after the preceding income interest ends, as determined under subdivision (d), even if there is an intervening period of administration to wind up the preceding income interest. 

     (d) An income interest ends on the day before an income beneficiary dies, or another terminating event occurs, or on the last day of a period during which there is no beneficiary to whom a trustee may distribute income.

16346.  (a) A trustee shall allocate an income receipt or disbursement other than one to which subdivision (a) of Section 16340 applies to principal if its due date occurs before a decedent dies in the case of an estate or before an income interest begins in the case of a trust or successive income interest. 

     (b) A trustee shall allocate an income receipt or disbursement to income if its due date occurs on or after the date on which a decedent dies or an income interest begins and it is a periodic due date.  An income receipt or disbursement shall be treated as accruing from day to day if its due date is not periodic or it has no due date.  The portion of the receipt or disbursement accruing before the date on which a decedent dies or an income interest begins shall be allocated to principal and the balance shall be allocated to income. 

     (c) An item of income or an obligation is due on the date the payer is required to make a payment.  If a payment date is not stated, there is no due date for the purposes of this chapter. Distributions to shareholders or other owners from an entity to which Section 16350 applies are deemed to be due on the date fixed by the entity for determining who is entitled to receive the distribution or, if no date is fixed, on the declaration date for the distribution.  A due date is periodic for receipts or disbursements that must be paid at regular intervals under a lease or an obligation to pay interest or if an entity customarily makes distributions at regular intervals.

16347.  (a) For the purposes of this section, "undistributed income" means net income received before the date on which an income interest ends.  The term does not include an item of income or expense that is due or accrued or net income that has been added or is required to be added to principal by the trust. 

     (b) Except as provided in subdivision (c), on the date when a mandatory income interest ends, the trustee shall pay to a mandatory income beneficiary who survives that date, or to the estate of a deceased mandatory income beneficiary whose death causes the interest to end, the beneficiary's share of the undistributed income that is not disposed of under the trust. 

     (c) If immediately before the income interest ends, the beneficiary under subdivision (b) has an unqualified power to revoke more than 5 percent of the trust, the undistributed income from the portion of the trust that may be revoked shall be added to principal. 

     (d) When a trustee's obligation to pay a fixed annuity or a fixed fraction of the value of the trust's assets ends, the trustee shall prorate the final payment.

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National UPIA (with comments) Section 301

Section 302

Section 303

Article 5.1.  Allocation of Receipts During Administration of Trust:  Receipts From Entities
Sections 16350-16352

16350.  (a) For the purposes of this section, "entity" means a corporation, partnership, limited liability company, regulated investment company, real estate investment trust, common trust fund, or any other organization in which a trustee has an interest other than a trust or decedent's estate to which Section 16351 applies, a business or activity to which Section 16352 applies, or an asset-backed security to which Section 16367 applies. 

     (b) Except as otherwise provided in this section, a trustee shall allocate to income money received from an entity. 

     (c) A trustee shall allocate to principal the following receipts from an entity: 

          (1) Property other than money. 

          (2) Money received in one distribution or a series of related distributions in exchange for part or all of a trust's interest in the entity. 

          (3) Money received in total or partial liquidation of the entity. 

          (4) Money received from an entity that is a regulated investment company or a real estate investment trust if the money distributed is a capital gain dividend for federal income tax purposes. 

     (d) For purposes of paragraph (3) of subdivision (c): 

          (1) Money is received in partial liquidation (A) to the extent that the entity, at or near the time of a distribution, indicates that it is a distribution in partial liquidation, or (B) if the total amount of money and property received by all owners, collectively, in a distribution or series of related distributions is greater than 20 percent of the entity's gross assets, as shown by the entity's yearend financial statements immediately preceding the initial receipt. If that receipt is allocated between December 2, 2004, and the operative date of the act adding this sentence, a trustee shall not be liable for allocating the receipt to income if the amount received by the trustee, when considered together with the amount received by all owners, collectively, exceeds 20 percent of the entity's gross assets, but the amount received by the trustee does not exceed 20 percent of the entity's gross assets. 

          (2) Money is not received in partial liquidation, nor may it be taken into account under clause (B) of paragraph (1), to the extent that it does not exceed the amount of income tax that a trustee or beneficiary is required to pay on taxable income of the entity that distributes the money. 

     (e) A trustee may rely on a statement made by an entity about the source or character of a distribution if the statement is made at or near the time of distribution by the entity's board of directors or other person or group of persons authorized to exercise powers to pay money or transfer property comparable to those of a corporation's board of directors.

16351.  A trustee shall allocate to income an amount received as a distribution of income from a trust or a decedent's estate (other than an interest in an investment entity) in which the trust has an interest other than a purchased interest, and shall allocate to principal an amount received as a distribution of principal from the trust or estate.

16352.  (a) If a trustee who conducts a business or other activity determines that it is in the best interest of all the beneficiaries to account separately for the business or other activity instead of accounting for it as part of the trust's general accounting records, the trustee may maintain separate accounting records for its transactions, whether or not its assets are segregated from other trust assets. 

     (b) A trustee who accounts separately for a business or other activity may determine the extent to which its net cash receipts must be retained for working capital, the acquisition or replacement of fixed assets, and its other reasonably foreseeable needs, and the extent to which the remaining net cash receipts are accounted for as principal or income in the trust's general accounting records.  If a trustee sells assets of the business or other activity, other than in the ordinary course of the business or other activity, the trustee shall account for the net amount received as principal in the trust's general accounting records to the extent the trustee determines that the amount received is no longer required in the conduct of the business or other activity. 

     (c) Businesses and other activities for which a trustee may maintain separate accounting records include the following: 

          (1) Retail, manufacturing, service, and other traditional business activities. 

          (2) Farming. 

          (3) Raising and selling livestock and other animals. 

          (4) Managing rental properties. 

          (5) Extracting minerals and other natural resources. 

          (6) Timber operations. 

          (7) Activities to which Section 16366 applies.

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National UPIA (with comments) Section 401

Section 402

Section 403

Article 5.2.  Allocation of Receipts During Administration of Trust:  Receipts Not Normally Apportioned  
Sections 16355-16358

16355.  A trustee shall allocate to principal: 

     (a) To the extent not allocated to income under this chapter, assets received from a transferor during the transferor's lifetime, a decedent's estate, a trust with a terminating income interest, or a payer under a contract naming the trust or its trustee as beneficiary. 

     (b) Subject to any contrary rules in this article and in Articles 5.1 (commencing with Section 16350) and 5.3 (commencing with Section 16360), money or other property received from the sale, exchange, liquidation, or change in form of a principal asset, including realized profit. 

     (c) Amounts recovered from third parties to reimburse the trust because of disbursements described in paragraph (7) of subdivision (a) of Section 16371 or for other reasons to the extent not based on the loss of income. 

     (d) Proceeds of property taken by eminent domain, but a separate award made for the loss of income with respect to an accounting period during which a current income beneficiary had a mandatory income interest is income. 

     (e) Net income received in an accounting period during which there is no beneficiary to whom a trustee may or must distribute income. 

     (f) Other receipts allocated to principal as provided in Article 5.3 (commencing with Section 16360).

16356.  Unless the trustee accounts for receipts from rental property pursuant to Section 16352, the trustee shall allocate to income an amount received as rent of real or personal property, including an amount received for cancellation or renewal of a lease. An amount received as a refundable deposit, including a security deposit or a deposit that is to be applied as rent for future periods, shall be added to principal and held subject to the terms of the lease, and is not available for distribution to a beneficiary until the trustee's contractual obligations have been satisfied with respect to that amount.

16357.  (a) An amount received as interest, whether determined at a fixed, variable, or floating rate, on an obligation to pay money to the trustee, including an amount received as consideration for prepaying principal, shall be allocated to income without any provision for amortization of premium. 

     (b) An amount received from the sale, redemption, or other disposition of an obligation to pay money to the trustee more than one year after it is purchased or acquired by the trustee, including an obligation whose purchase price, or its value when it is otherwise acquired, is less than its value at maturity, shall be allocated to principal.  If the obligation matures within one year after it is purchased or acquired by the trustee, an amount received in excess of its purchase price, or its value when it is otherwise acquired, shall be allocated to income. 

     (c) This section does not apply to an obligation to which Section 16361, 16362, 16363, 16364, 16366, or 16367 applies.

16358.  (a) Except as otherwise provided in subdivision (b), a trustee shall allocate to principal the proceeds of a life insurance policy or other contract in which the trust or its trustee is named as beneficiary, including a contract that insures the trust or its trustee against loss for damage to, destruction of, or loss of title to a trust asset.  The trustee shall allocate dividends on an insurance policy to income if the premiums on the policy are paid from income, and to principal if the premiums are paid from principal. 

     (b) A trustee shall allocate to income proceeds of a contract that insures the trustee against loss of occupancy or other use by an income beneficiary, loss of income, or, subject to Section 16352, loss of profits from a business. 

     (c) This section does not apply to a contract to which Section 16361 applies.

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National UPIA (with comments) Section 404

Section 405

Section 406

Section 407

Section 408

Article 5.3.  Allocation of Receipts During Administration of Trust:  Receipts Normally Apportioned  
Sections 16360-16367

16360.  (a) If a trustee determines that an allocation between principal and income required by Section 16361, 16362, 16363, 16364, or 16367 is insubstantial, the trustee may allocate the entire amount to principal unless one of the circumstances described in subdivision (b) of Section 16336 applies to the allocation.  This power may be exercised by a cotrustee in the circumstances described in subdivision (c) of Section 16336 and may be released for the reasons and in the manner provided in subdivisions (d) and (e) of Section 16336. 

     (b) An allocation is presumed to be insubstantial in either of the following cases: 

          (1) Where the amount of the allocation would increase or decrease net income in an accounting period, as determined before the allocation, by less than 10 percent. 

          (2) Where the value of the asset producing the receipt for which the allocation would be made is less than 10 percent of the total value of the trust's assets at the beginning of the accounting period. 

     (c) Nothing in this section imposes a duty on the trustee to make an allocation under this section, and the trustee is not liable for failure to make an allocation under this section.

16361.  (a) For purposes of this section, "payment" means either of the following: 

          (1) A payment that a trustee may receive over a fixed number of years or during the life of an individual because of services rendered or property transferred to the payer in exchange for future payments. 

          (2) A payment that a trustee may receive pursuant to an income tax advantaged contractual, custodial, or trust arrangement, including, but not limited to, a private or commercial annuity, a pension or profit-sharing plan, an individual retirement account, Roth IRA, or any similar arrangement, regardless of whether the payment is made from an "entity" as defined in Section 16350. 

     (b) To the extent that a payment is characterized by the payer as interest or a dividend or a payment made in lieu of interest or a dividend, a trustee shall allocate it to income. The trustee shall allocate to principal the balance of the payment and any other payment received in the same accounting period that is not characterized as interest, a dividend, or an equivalent payment. 

     (c) If no part of a payment is characterized as interest, a dividend, or an equivalent payment, the trustee shall allocate the payment as follows: 

          (1) If the payment is received from an individual account, the trustee shall allocate the payment to income to the extent that the payment, when combined with all other payments received from the individual account during that same accounting period, which may be referred to as the "cumulative amount received," does not exceed 4 percent of the account value, which may be referred to as the "income allocation amount." To the extent that any portion of a payment causes the cumulative amount received to exceed the income allocation amount, that portion, together with all further amounts received from the individual account during that accounting period, shall be allocated to principal. 

     (a) As used in this section, the term "individual account" means an individual account plan as defined in the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1001 et seq.), as amended from time to time, and any other plan, account, or arrangement whose terms enable the trustee to identify the fair market value of the participant's or owner's interest therein. 

     (b) As used in this section, the term "account value" means the fair market value of the individual account as of the later of the last day of the trust's preceding accounting period and the date when the right to receive payments from the individual account first became subject to the trust. 

     (c) If an accounts period consists of less than 365 days, the income allocation amount shall be prorated on a daily basis. 

          (2) If the payment is received from a plan, account or other arrangement that is not an individual account, the trustee shall allocate the payment as follows: 

     (a) If all or part of the payment is required to be made to the trustee, the trustee shall allocate to income 10 percent of the part that is required to be made during the accounting period and the balance to principal. 

     (b) If no part of a payment is required to be made to the trustee or the payment received is the entire amount to which the trustee is entitled, the trustee shall allocate the entire payment to principal. 

     (c) A payment is not "required to be made" to the extent that it is made because the trustee exercises a right of withdrawal. 

     (d) If, to obtain an estate tax marital deduction for a trust, a trustee must allocate more of a payment to income than provided by this section, the trustee shall allocate to income the additional amount necessary to obtain the marital deduction.

16362. (a) In this section, "liquidating asset" means an asset whose value will diminish or terminate because the asset is expected to produce receipts for a period of limited duration.  The term includes a leasehold, patent, copyright, royalty right, and right to receive payments under an arrangement that does not provide for the payment of interest on the unpaid balance.  The term does not include a payment subject to Section 16361, resources subject to Section 16363, timber subject to Section 16364, an activity subject to Section 16366, an asset subject to Section 16367, or any asset for which the trustee establishes a reserve for depreciation under Section 16372. 

     (b) A trustee shall allocate to income 10 percent of the receipts from a liquidating asset and the balance to principal.

16363.  (a) To the extent that a trustee accounts for receipts from an interest in minerals, water, or other natural resources pursuant to this section, the trustee shall allocate them as follows: 

          (1) If received as a nominal bonus, nominal delay rental, or nominal annual rent on a lease, a receipt shall be allocated to income. 

          (2) If received from a production payment, a receipt shall be allocated to income if and to the extent that the agreement creating the production payment provides a factor for interest or its equivalent. The balance shall be allocated to principal. 

          (3) If an amount received as a royalty, shut-in-well payment, take-or-pay payment, bonus, or delay rental is more than nominal, 90 percent shall be allocated to principal and the balance to income. 

          (4) If an amount is received from a working interest or any other interest in mineral or other natural resources not described in paragraph (1), (2), or (3), 90 percent of the net amount received shall be allocated to principal and the balance to income. 

     (b) An amount received on account of an interest in water that is renewable shall be allocated to income. If the water is not renewable, 90 percent of the amount shall be allocated to principal and the balance to income. 

     (c) This chapter applies whether or not a decedent or donor was extracting minerals, water, or other natural resources before the interest became subject to the trust. 

     (d) If a trust owned an interest in minerals, water, or other natural resources on January 1, 2000, the trustee may at all times allocate receipts from the interest as provided in this chapter or in the manner reasonably used by the trustee prior to that date. Receipts from an interest in minerals, water, or other natural resources acquired after January 1, 2000, shall be allocated by the trustee as provided in this chapter. If the interest was owned by the trust on January 1, 2000, a trustee that allocated receipts from the interest between January 1, 2000, and December 31, 2006, as provided in this chapter shall not have a duty to review that allocation and shall not have liability arising from the allocation. Nothing in this section is intended to create or imply a duty to allocate in a manner used by the trustee prior to January 1, 2000, and a trustee is not liable for not considering whether to make such an allocation or for choosing not to make such an allocation.

16364.  (a) To the extent that a trustee accounts for receipts from the sale of timber and related products pursuant to this section, the trustee shall allocate the net receipts as follows: 

          (1) To income to the extent that the amount of timber removed from the land does not exceed the rate of growth of the timber during the accounting periods in which a beneficiary has a mandatory income interest. 

          (2) To principal to the extent that the amount of timber removed from the land exceeds the rate of growth of the timber or the net receipts are from the sale of standing timber. 

          (3) To or between income and principal if the net receipts are from the lease of timberland or from a contract to cut timber from land owned by a trust, by determining the amount of timber removed from the land under the lease or contract and applying the rules in paragraphs (1) and (2). 

          (4) To principal to the extent that advance payments, bonuses, and other payments are not allocated pursuant to paragraph (1), (2), or (3). 

     (b) In determining net receipts to be allocated under subdivision (a), a trustee shall deduct and transfer to principal a reasonable amount for depletion. 

     (c) This chapter applies whether or not a decedent or transferor was harvesting timber from the property before it became subject to the trust. 

     (d) If a trust owned an interest in timberland on January 1, 2000, the trustee may at all times allocate net receipts from the sale of timber and related products as provided in this chapter or in the manner reasonably used by the trustee prior to that date. Net receipts from an interest in timberland acquired after January 1, 2000, shall be allocated by the trustee as provided in this chapter. If the interest was owned by the trust on January 1, 2000, a trustee that allocated net receipts from the interest between January 1, 2000, and December 31, 2006, as provided in this chapter shall not have a duty to review that allocation and shall not have liability arising from the allocation.  Nothing in this section is intended to create or imply a duty to allocate in a manner used by the trustee prior to January 1, 2000, and a trustee is not liable for not considering whether to make such an allocation or for choosing not to make such an allocation.

16365. (a) If a marital deduction is allowed for all or part of a trust whose assets consist substantially of property that does not provide the spouse with sufficient income from or use of the trust assets, and if the amounts that the trustee transfers from principal to income under Section 16336 and distributes to the spouse from principal pursuant to the terms of the trust are insufficient to provide the spouse with the beneficial enjoyment required to obtain the marital deduction, the spouse may require the trustee to make property productive of income or convert it into productive property or exercise the power under subdivision (a) of Section 16336 within a reasonable time.  The trustee may decide which action or combination of actions to take. 

     (b) In cases not governed by subdivision (a), proceeds from the sale or other disposition of a trust asset are principal without regard to the amount of income the asset produces during any accounting period.

16366.  (a) In this section, "derivative" means a contract or financial instrument or a combination of contracts and financial instruments that gives a trust the right or obligation to participate in some or all changes in the price of a tangible or intangible asset or group of assets, or changes in a rate, an index of prices or rates, or other market indicator for an asset or a group of assets. 

     (b) To the extent that a trustee does not account under Section 16352 for transactions in derivatives, the trustee shall allocate to principal receipts from and disbursements made in connection with those transactions. 

     (c) If a trustee grants an option to buy property from the trust, whether or not the trust owns the property when the option is granted, grants an option that permits another person to sell property to the trust, or acquires an option to buy property for the trust or an option to sell an asset owned by the trust, and the trustee or other owner of the asset is required to deliver the asset if the option is exercised, an amount received for granting the option shall be allocated to principal.  An amount paid to acquire the option shall be paid from principal.  A gain or loss realized upon the exercise of an option, including an option granted to a settlor of the trust for services rendered, shall be allocated to principal.

16367.  (a) In this section, "asset-backed security" means an asset whose value is based upon the right it gives the owner to receive distributions from the proceeds of financial assets that provide collateral for the security.  The term includes an asset that gives the owner the right to receive from the collateral financial assets only the interest or other current return or only the proceeds other than interest or current return.  The term does not include an asset to which Section 16350 or 16361 applies. 

     (b) If a trust receives a payment from interest or other current return and from other proceeds of the collateral financial assets, the trustee shall allocate to income the portion of the payment which the payer identifies as being from interest or other current return and shall allocate the balance of the payment to principal. 

     (c) If a trust receives one or more payments in exchange for the trust's entire interest in an asset-backed security in one accounting period, the trustee shall allocate the payments to principal.  If a payment is one of a series of payments that will result in the liquidation of the trust's interest in the security over more than one accounting period, the trustee shall allocate 10 percent of the payment to income and the balance to principal.

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National UPIA (with comments)
Section 409

Section 410

Section 411

Section 412

Section 413

Section 414

Section 415

 

Article 6.  Allocation of Disbursements During Administration of Trust 
Sections 16370-16375

16370.  A trustee shall make the following disbursements from income to the extent that they are not disbursements to which paragraph (2) or (3) of subdivision (c) of Section 16340 applies: 

     (a) Except as otherwise ordered by the court, one-half of the regular compensation of the trustee and of any person providing investment advisory or custodial services to the trustee. 

     (b) Except as otherwise ordered by the court, one-half of all expenses for accountings, judicial proceedings, or other matters that involve both the income and remainder interests. 

     (c) All of the other ordinary expenses incurred in connection with the administration, management, or preservation of trust property and the distribution of income, including interest, ordinary repairs, regularly recurring taxes assessed against principal, and expenses of a proceeding or other matter that concerns primarily the income interest. 

     (d) All recurring premiums on insurance covering the loss of a principal asset or the loss of income from or use of the asset.

16371.  (a) A trustee shall make the following disbursements from principal: 

          (1) Except as otherwise ordered by the court, the remaining one-half of the disbursements described in subdivisions (a) and (b) of Section 16370. 

          (2) Except as otherwise ordered by the court, all of the trustee's compensation calculated on principal as a fee for acceptance, distribution, or termination, and disbursements made to prepare property for sale. 

          (3) Payments on the principal of a trust debt. 

          (4) Expenses of a proceeding that concerns primarily principal, including a proceeding to construe the trust or to protect the trust or its property. 

          (5) Premiums paid on a policy of insurance not described in subdivision (d) of Section 16370 of which the trust is the owner and beneficiary. 

          (6) Estate, inheritance, and other transfer taxes, including penalties, apportioned to the trust. 

          (7) Disbursements related to environmental matters, including reclamation, assessing environmental conditions, remedying and removing environmental contamination, monitoring remedial activities and the release of substances, preventing future releases of substances, collecting amounts from persons liable or potentially liable for the costs of those activities, penalties imposed under environmental laws or regulations and other payments made to comply with those laws or regulations, statutory or common law claims by third parties, and defending claims based on environmental matters. 

     (b) If a principal asset is encumbered with an obligation that requires income from that asset to be paid directly to the creditor, the trustee shall transfer from principal to income an amount equal to the income paid to the creditor in reduction of the principal balance of the obligation.

16372.  (a) For purposes of this section, "depreciation" means a reduction in value due to wear, tear, decay, corrosion, or gradual obsolescence of a fixed asset having a useful life of more than one year. 

     (b) A trustee may transfer from income to principal a reasonable amount of the net cash receipts from a principal asset that is subject to depreciation, under generally accepted accounting principles, but may not transfer any amount for depreciation under this section in any of the following circumstances: 

          (1) As to the portion of real property used or available for use by a beneficiary as a residence or of tangible personal property held or made available for the personal use or enjoyment of a beneficiary. 

          (2) During the administration of a decedent's estate. 

          (3) If the trustee is accounting under Section 16352 for the business or activity in which the asset is used. 

     (c) An amount transferred from income to principal need not be held as a separate fund.

16373.  (a) If a trustee makes or expects to make a principal disbursement described in this section, the trustee may transfer an appropriate amount from income to principal in one or more accounting periods to reimburse principal or to provide a reserve for future principal disbursements. 

     (b) Principal disbursements to which subdivision (a) applies include the following, but only to the extent that the trustee has not been and does not expect to be reimbursed by a third party: 

          (1) An amount chargeable to income but paid from principal because it is unusually large, including extraordinary repairs. 

          (2) A capital improvement to a principal asset, whether in the form of changes to an existing asset or the construction of a new asset, including special assessments. 

          (3) Disbursements made to prepare property for rental, including tenant allowances, leasehold improvements, and broker's commissions. 

          (4) Periodic payments on an obligation secured by a principal asset to the extent that the amount transferred from income to principal for depreciation is less than the periodic payments. 

          (5) Disbursements described in paragraph (7) of subdivision (a) of Section 16371. 

     (c) If the asset whose ownership gives rise to the disbursements becomes subject to a successive income interest after an income interest ends, a trustee may continue to transfer amounts from income to principal as provided in subdivision (a).

16374.  (a) A tax required to be paid by a trustee based on receipts allocated to income shall be paid from income. 

     (b) A tax required to be paid by a trustee based on receipts allocated to principal shall be paid from principal, even if the tax is called an income tax by the taxing authority. 

     (c) A tax required to be paid by a trustee on the trust's share of an entity's taxable income shall be paid proportionately as follows: 

          (1) From income to the extent that receipts from the entity are allocated to income. 

          (2) From principal to the extent that both of the following apply: 

     (a) Receipts from the entity are allocated to principal. 

     (b) The trust's share of the entity's taxable income exceeds the total receipts described in paragraph (1) and subparagraph (A). 

     (d) For purposes of this section, receipts allocated to principal or income shall be reduced by the amount distributed to a beneficiary from principal or income for which the trust receives a deduction in calculating the tax.

16374.5. Unless otherwise provided by the governing instrument, determined by the trustee, or ordered by the court, distributions to beneficiaries shall be considered paid in the following order from the following sources: 

     (a) From net taxable income other than capital gains. 

     (b) From net realized short-term capital gains. 

     (c) From net realized long-term capitalized gains. 

     (d) From tax-exempt and other income. 

     (e) From principal of the trust.

16375.  (a) A fiduciary may make adjustments between principal and income to offset the shifting of economic interests or tax benefits between income beneficiaries and remainder beneficiaries that arise from any of the following: 

          (1) Elections and decisions, other than those described in subdivision (b), that the fiduciary makes from time to time regarding tax matters. 

          (2) An income tax or any other tax that is imposed upon the fiduciary or a beneficiary as a result of a transaction involving or a distribution from the estate or trust. 

          (3) The ownership by a decedent's estate or trust of an interest in an entity whose taxable income, whether or not distributed, is includable in the taxable income of the estate, trust, or a beneficiary. 

     (b) If the amount of an estate tax marital deduction or charitable contribution deduction is reduced because a fiduciary deducts an amount paid from principal for income tax purposes instead of deducting it for estate tax purposes, and as a result estate taxes paid from principal are increased and income taxes paid by a decedent' s estate, trust, or beneficiary are decreased, each estate, trust, or beneficiary that benefits from the decrease in income tax shall reimburse the principal from which the increase in estate tax is paid.  The total reimbursement must equal the increase in the estate tax to the extent that the principal used to pay the increase would have qualified for a marital deduction or charitable contribution deduction but for the payment.  The proportionate share of the reimbursement for each estate, trust, or beneficiary whose income taxes are reduced must be the same as its proportionate share of the total decrease in income tax.  An estate or trust shall reimburse principal from income.

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National UPIA (with comments)
Section 501

Section 502

Section 503

Section 504