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91_HB2875
LRB9100017WHmg
1 AN ACT in relation to principal and income.
2 Be it enacted by the People of the State of Illinois,
3 represented in the General Assembly:
4 ARTICLE 1. DEFINITIONS AND FIDUCIARY DUTIES
5 Section 101. Short title. This Act may be cited as the
6 Uniform Principal and Income Act (1997).
7 Section 102. Definitions. In this Act:
8 (1) "Accounting period" means a calendar year unless
9 another 12-month period is selected by a fiduciary. The term
10 includes a portion of a calendar year or other 12-month
11 period that begins when an income interest begins or ends
12 when an income interest ends.
13 (2) "Beneficiary" includes, in the case of a decedent's
14 estate, an heir, legatee, and devisee and, in the case of a
15 trust, an income beneficiary and a remainder beneficiary.
16 (3) "Fiduciary" means a personal representative or a
17 trustee. The term includes an executor, administrator,
18 successor personal representative, special administrator, and
19 a person performing substantially the same function.
20 (4) "Income" means money or property that a fiduciary
21 receives as current return from a principal asset. The term
22 includes a portion of receipts from a sale, exchange, or
23 liquidation of a principal asset, to the extent provided in
24 Article 4.
25 (5) "Income beneficiary" means a person to whom net
26 income of a trust is or may be payable.
27 (6) "Income interest" means the right of an income
28 beneficiary to receive all or part of net income, whether the
29 terms of the trust require it to be distributed or authorize
30 it to be distributed in the trustee's discretion.
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1 (7) "Mandatory income interest" means the right of an
2 income beneficiary to receive net income that the terms of
3 the trust require the fiduciary to distribute.
4 (8) "Net income" means the total receipts allocated to
5 income during an accounting period minus the disbursements
6 made from income during the period, plus or minus transfers
7 under this Act to or from income during the period.
8 (9) "Person" means an individual, corporation, business
9 trust, estate, trust, partnership, limited liability company,
10 association, joint venture, government; governmental
11 subdivision, agency, or instrumentality; public corporation,
12 or any other legal or commercial entity.
13 (10) "Principal" means property held in trust for
14 distribution to a remainder beneficiary when the trust
15 terminates.
16 (11) "Remainder beneficiary" means a person entitled to
17 receive principal when an income interest ends.
18 (12) "Terms of a trust" means the manifestation of the
19 intent of a settlor or decedent with respect to the trust,
20 expressed in a manner that admits of its proof in a judicial
21 proceeding, whether by written or spoken words or by conduct.
22 (13) "Trustee" includes an original, additional, or
23 successor trustee, whether or not appointed or confirmed by a
24 court.
25 Section 103. Fiduciary duties; general principles.
26 (a) In allocating receipts and disbursements to or
27 between principal and income, and with respect to any matter
28 within the scope of Articles 2 and 3, a fiduciary:
29 (1) shall administer a trust or estate in
30 accordance with the terms of the trust or the will, even
31 if there is a different provision in this Act;
32 (2) may administer a trust or estate by the
33 exercise of a discretionary power of administration given
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1 to the fiduciary by the terms of the trust or the will,
2 even if the exercise of the power produces a result
3 different from a result required or permitted by this
4 Act;
5 (3) shall administer a trust or estate in
6 accordance with this Act if the terms of the trust or the
7 will do not contain a different provision or do not give
8 the fiduciary a discretionary power of administration;
9 and
10 (4) shall add a receipt or charge a disbursement to
11 principal to the extent that the terms of the trust and
12 this Act do not provide a rule for allocating the receipt
13 or disbursement to or between principal and income.
14 (b) In exercising the power to adjust under Section
15 104(a) or a discretionary power of administration regarding
16 a matter within the scope of this Act, whether granted by the
17 terms of a trust, a will, or this Act, a fiduciary shall
18 administer a trust or estate impartially, based on what is
19 fair and reasonable to all of the beneficiaries, except to
20 the extent that the terms of the trust or the will clearly
21 manifest an intention that the fiduciary shall or may favor
22 one or more of the beneficiaries. A determination in
23 accordance with this Act is presumed to be fair and
24 reasonable to all of the beneficiaries.
25 Section 104. Trustee's power to adjust.
26 (a) A trustee may adjust between principal and income to
27 the extent the trustee considers necessary if the trustee
28 invests and manages trust assets as a prudent investor, the
29 terms of the trust describe the amount that may or must be
30 distributed to a beneficiary by referring to the trust's
31 income, and the trustee determines, after applying the rules
32 in Section 103(a), that the trustee is unable to comply with
33 Section 103(b).
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1 (b) In deciding whether and to what extent to exercise
2 the power conferred by subsection (a), a trustee shall
3 consider all factors relevant to the trust and its
4 beneficiaries, including the following factors to the extent
5 they are relevant:
6 (1) the nature, purpose, and expected duration of
7 the trust;
8 (2) the intent of the settlor;
9 (3) the identity and circumstances of the
10 beneficiaries;
11 (4) the needs for liquidity, regularity of income,
12 and preservation and appreciation of capital;
13 (5) the assets held in the trust; the extent to
14 which they consist of financial assets, interests in
15 closely held enterprises, tangible and intangible
16 personal property, or real property; the extent to which
17 an asset is used by a beneficiary; and whether an asset
18 was purchased by the trustee or received from the
19 settlor;
20 (6) the net amount allocated to income under the
21 other Sections of this Act and the increase or decrease
22 in the value of the principal assets, which the trustee
23 may estimate as to assets for which market values are not
24 readily available;
25 (7) whether and to what extent the terms of the
26 trust give the trustee the power to invade principal or
27 accumulate income or prohibit the trustee from invading
28 principal or accumulating income, and the extent to which
29 the trustee has exercised a power from time to time to
30 invade principal or accumulate income;
31 (8) the actual and anticipated effect of economic
32 conditions on principal and income and effects of
33 inflation and deflation; and
34 (9) the anticipated tax consequences of an
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1 adjustment.
2 (c) A trustee may not make an adjustment:
3 (1) that diminishes the income interest in a trust
4 that requires all of the income to be paid at least
5 annually to a spouse and for which an estate tax or gift
6 tax marital deduction would be allowed, in whole or in
7 part, if the trustee did not have the power to make the
8 adjustment;
9 (2) that reduces the actuarial value of the income
10 interest in a trust to which a person transfers property
11 with the intent to qualify for a gift tax exclusion;
12 (3) that changes the amount payable to a
13 beneficiary as a fixed annuity or a fixed fraction of the
14 value of the trust assets;
15 (4) from any amount that is permanently set aside
16 for charitable purposes under a will or the terms of a
17 trust unless both income and principal are so set aside;
18 (5) if possessing or exercising the power to make
19 an adjustment causes an individual to be treated as the
20 owner of all or part of the trust for income tax
21 purposes, and the individual would not be treated as the
22 owner if the trustee did not possess the power to make an
23 adjustment;
24 (6) if possessing or exercising the power to make
25 an adjustment causes all or part of the trust assets to
26 be included for estate tax purposes in the estate of an
27 individual who has the power to remove a trustee or
28 appoint a trustee, or both, and the assets would not be
29 included in the estate of the individual if the trustee
30 did not possess the power to make an adjustment;
31 (7) if the trustee is a beneficiary of the trust;
32 or
33 (8) if the trustee is not a beneficiary, but the
34 adjustment would benefit the trustee directly or
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1 indirectly.
2 (d) If subsection (c)(5), (6), (7), or (8) applies to a
3 trustee and there is more than one trustee, a cotrustee to
4 whom the provision does not apply may make the adjustment
5 unless the exercise of the power by the remaining trustee or
6 trustees is not permitted by the terms of the trust.
7 (e) A trustee may release the entire power conferred by
8 subsection (a) or may release only the power to adjust from
9 income to principal or the power to adjust from principal to
10 income if the trustee is uncertain about whether possessing
11 or exercising the power will cause a result described in
12 subsection (c)(1) through (6) or (c)(8) or if the trustee
13 determines that possessing or exercising the power will or
14 may deprive the trust of a tax benefit or impose a tax burden
15 not described in subsection (c). The release may be
16 permanent or for a specified period, including a period
17 measured by the life of an individual.
18 (f) Terms of a trust that limit the power of a trustee
19 to make an adjustment between principal and income do not
20 affect the application of this Section unless it is clear
21 from the terms of the trust that the terms are intended to
22 deny the trustee the power of adjustment conferred by
23 subsection (a).
24 ARTICLE 2. DECEDENT'S ESTATE OR TERMINATING INCOME INTEREST
25 Section 201. Determination and distribution of net
26 income. After a decedent dies, in the case of an estate, or
27 after an income interest in a trust ends, the following rules
28 apply:
29 (1) A fiduciary of an estate or of a terminating income
30 interest shall determine the amount of net income and net
31 principal receipts received from property specifically given
32 to a beneficiary under the rules in Articles 3 through 5
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1 which apply to trustees and the rules in paragraph (5). The
2 fiduciary shall distribute the net income and net principal
3 receipts to the beneficiary who is to receive the specific
4 property.
5 (2) A fiduciary shall determine the remaining net income
6 of a decedent's estate or a terminating income interest under
7 the rules in Articles 3 through 5 which apply to trustees and
8 by:
9 (A) including in net income all income from
10 property used to discharge liabilities;
11 (B) paying from income or principal, in the
12 fiduciary's discretion, fees of attorneys, accountants,
13 and fiduciaries; court costs and other expenses of
14 administration; and interest on death taxes, but the
15 fiduciary may pay those expenses from income of property
16 passing to a trust for which the fiduciary claims an
17 estate tax marital or charitable deduction only to the
18 extent that the payment of those expenses from income
19 will not cause the reduction or loss of the deduction;
20 and
21 (C) paying from principal all other disbursements
22 made or incurred in connection with the settlement of a
23 decedent's estate or the winding up of a terminating
24 income interest, including debts, funeral expenses,
25 disposition of remains, family allowances, and death
26 taxes and related penalties that are apportioned to the
27 estate or terminating income interest by the will, the
28 terms of the trust, or applicable law.
29 (3) A fiduciary shall distribute to a beneficiary who
30 receives a pecuniary amount outright the interest or any
31 other amount provided by the will, the terms of the trust, or
32 applicable law from net income determined under paragraph (2)
33 or from principal to the extent that net income is
34 insufficient. If a beneficiary is to receive a pecuniary
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1 amount outright from a trust after an income interest ends
2 and no interest or other amount is provided for by the terms
3 of the trust or applicable law, the fiduciary shall
4 distribute the interest or other amount to which the
5 beneficiary would be entitled under applicable law if the
6 pecuniary amount were required to be paid under a will.
7 (4) A fiduciary shall distribute the net income
8 remaining after distributions required by paragraph (3) in
9 the manner described in Section 202 to all other
10 beneficiaries, including a beneficiary who receives a
11 pecuniary amount in trust, even if the beneficiary holds an
12 unqualified power to withdraw assets from the trust or other
13 presently exercisable general power of appointment over the
14 trust.
15 (5) A fiduciary may not reduce principal or income
16 receipts from property described in paragraph (1) because of
17 a payment described in Section 501 or 502 to the extent that
18 the will, the terms of the trust, or applicable law requires
19 the fiduciary to make the payment from assets other than the
20 property or to the extent that the fiduciary recovers or
21 expects to recover the payment from a third party. The net
22 income and principal receipts from the property are
23 determined by including all of the amounts the fiduciary
24 receives or pays with respect to the property, whether those
25 amounts accrued or became due before, on, or after the date
26 of a decedent's death or an income interest's terminating
27 event, and by making a reasonable provision for amounts that
28 the fiduciary believes the estate or terminating income
29 interest may become obligated to pay after the property is
30 distributed.
31 Section 202. Distribution to residuary and remainder
32 beneficiaries.
33 (a) Each beneficiary described in Section 201(4) is
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1 entitled to receive a portion of the net income equal to the
2 beneficiary's fractional interest in undistributed principal
3 assets, using values as of the distribution date. If a
4 fiduciary makes more than one distribution of assets to
5 beneficiaries to whom this Section applies, each beneficiary,
6 including one who does not receive part of the distribution,
7 is entitled, as of each distribution date, to the net income
8 the fiduciary has received after the date of death or
9 terminating event or earlier distribution date but has not
10 distributed as of the current distribution date.
11 (b) In determining a beneficiary's share of net income,
12 the following rules apply:
13 (1) The beneficiary is entitled to receive a
14 portion of the net income equal to the beneficiary's
15 fractional interest in the undistributed principal assets
16 immediately before the distribution date, including
17 assets that later may be sold to meet principal
18 obligations.
19 (2) The beneficiary's fractional interest in the
20 undistributed principal assets must be calculated without
21 regard to property specifically given to a beneficiary
22 and property required to pay pecuniary amounts not in
23 trust.
24 (3) The beneficiary's fractional interest in the
25 undistributed principal assets must be calculated on the
26 basis of the aggregate value of those assets as of the
27 distribution date without reducing the value by any
28 unpaid principal obligation.
29 (4) The distribution date for purposes of this
30 Section may be the date as of which the fiduciary
31 calculates the value of the assets if that date is
32 reasonably near the date on which assets are actually
33 distributed.
34 (c) If a fiduciary does not distribute all of the
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1 collected but undistributed net income to each person as of a
2 distribution date, the fiduciary shall maintain appropriate
3 records showing the interest of each beneficiary in that net
4 income.
5 (d) A fiduciary may apply the rules in this Section, to
6 the extent that the fiduciary considers it appropriate, to
7 net gain or loss realized after the date of death or
8 terminating event or earlier distribution date from the
9 disposition of a principal asset if this Section applies to
10 the income from the asset.
11 ARTICLE 3. APPORTIONMENT AT BEGINNING AND END
12 OF INCOME INTEREST
13 Section 301. When right to income begins and ends.
14 (a) An income beneficiary is entitled to net income from
15 the date on which the income interest begins. An income
16 interest begins on the date specified in the terms of the
17 trust or, if no date is specified, on the date an asset
18 becomes subject to a trust or successive income interest.
19 (b) An asset becomes subject to a trust:
20 (1) on the date it is transferred to the trust in
21 the case of an asset that is transferred to a trust
22 during the transferor's life;
23 (2) on the date of a testator's death in the case
24 of an asset that becomes subject to a trust by reason of
25 a will, even if there is an intervening period of
26 administration of the testator's estate; or
27 (3) on the date of an individual's death in the
28 case of an asset that is transferred to a fiduciary by a
29 third party because of the individual's death.
30 (c) An asset becomes subject to a successive income
31 interest on the day after the preceding income interest ends,
32 as determined under subsection (d), even if there is an
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1 intervening period of administration to wind up the preceding
2 income interest.
3 (d) An income interest ends on the day before an income
4 beneficiary dies or another terminating event occurs, or on
5 the last day of a period during which there is no beneficiary
6 to whom a trustee may distribute income.
7 Section 302. Apportionment of receipts and disbursements
8 when decedent dies or income interest begins.
9 (a) A trustee shall allocate an income receipt or
10 disbursement other than one to which Section 201(1) applies
11 to principal if its due date occurs before a decedent dies in
12 the case of an estate or before an income interest begins in
13 the case of a trust or successive income interest.
14 (b) A trustee shall allocate an income receipt or
15 disbursement to income if its due date occurs on or after the
16 date on which a decedent dies or an income interest begins
17 and it is a periodic due date. An income receipt or
18 disbursement must be treated as accruing from day to day if
19 its due date is not periodic or it has no due date. The
20 portion of the receipt or disbursement accruing before the
21 date on which a decedent dies or an income interest begins
22 must be allocated to principal and the balance must be
23 allocated to income.
24 (c) An item of income or an obligation is due on the
25 date the payer is required to make a payment. If a payment
26 date is not stated, there is no due date for the purposes of
27 this Act. Distributions to shareholders or other owners from
28 an entity to which Section 401 applies are deemed to be due
29 on the date fixed by the entity for determining who is
30 entitled to receive the distribution or, if no date is fixed,
31 on the declaration date for the distribution. A due date is
32 periodic for receipts or disbursements that must be paid at
33 regular intervals under a lease or an obligation to pay
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1 interest or if an entity customarily makes distributions at
2 regular intervals.
3 Section 303. Apportionment when income interest ends.
4 (a) In this Section, "undistributed income" means net
5 income received before the date on which an income interest
6 ends. The term does not include an item of income or expense
7 that is due or accrued or net income that has been added or
8 is required to be added to principal under the terms of the
9 trust.
10 (b) When a mandatory income interest ends, the trustee
11 shall pay to a mandatory income beneficiary who survives that
12 date, or the estate of a deceased mandatory income
13 beneficiary whose death causes the interest to end, the
14 beneficiary's share of the undistributed income that is not
15 disposed of under the terms of the trust unless the
16 beneficiary has an unqualified power to revoke more than 5%
17 of the trust immediately before the income interest ends. In
18 the latter case, the undistributed income from the portion of
19 the trust that may be revoked must be added to principal.
20 (c) When a trustee's obligation to pay a fixed annuity
21 or a fixed fraction of the value of the trust's assets ends,
22 the trustee shall prorate the final payment if and to the
23 extent required by applicable law to accomplish a purpose of
24 the trust or its settlor relating to income, gift, estate, or
25 other tax requirements.
26 ARTICLE 4. ALLOCATION OF RECEIPTS DURING ADMINISTRATION
27 OF TRUST
28 PART 1. RECEIPTS FROM ENTITIES
29 Section 401. Character of receipts.
30 (a) In this Section, "entity" means a corporation,
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1 partnership, limited liability company, regulated investment
2 company, real estate investment trust, common trust fund, or
3 any other organization in which a trustee has an interest
4 other than a trust or estate to which Section 402 applies, a
5 business or activity to which Section 403 applies, or an
6 asset-backed security to which Section 415 applies.
7 (b) Except as otherwise provided in this Section, a
8 trustee shall allocate to income money received from an
9 entity.
10 (c) A trustee shall allocate the following receipts from
11 an entity to principal:
12 (1) property other than money;
13 (2) money received in one distribution or a series
14 of related distributions in exchange for part or all of a
15 trust's interest in the entity;
16 (3) money received in total or partial liquidation
17 of the entity; and
18 (4) money received from an entity that is a
19 regulated investment company or a real estate investment
20 trust if the money distributed is a capital gain dividend
21 for federal income tax purposes.
22 (d) Money is received in partial liquidation:
23 (1) to the extent that the entity, at or near the
24 time of a distribution, indicates that it is a
25 distribution in partial liquidation; or
26 (2) if the total amount of money and property
27 received in a distribution or series of related
28 distributions is greater than 20% of the entity's gross
29 assets, as shown by the entity's year-end financial
30 statements immediately preceding the initial receipt.
31 (e) Money is not received in partial liquidation, nor
32 may it be taken into account under subsection (d)(2), to the
33 extent that it does not exceed the amount of income tax that
34 a trustee or beneficiary must pay on taxable income of the
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1 entity that distributes the money.
2 (f) A trustee may rely upon a statement made by an
3 entity about the source or character of a distribution if the
4 statement is made at or near the time of distribution by the
5 entity's board of directors or other person or group of
6 persons authorized to exercise powers to pay money or
7 transfer property comparable to those of a corporation's
8 board of directors.
9 SECTION 402. Distribution from trust or estate. A
10 trustee shall allocate to income an amount received as a
11 distribution of income from a trust or an estate in which the
12 trust has an interest other than a purchased interest, and
13 shall allocate to principal an amount received as a
14 distribution of principal from such a trust or estate. If a
15 trustee purchases an interest in a trust that is an
16 investment entity, or a decedent or donor transfers an
17 interest in such a trust to a trustee, Section 401 or 415
18 applies to a receipt from the trust.
19 Section 403. Business and other activities conducted by
20 trustee.
21 (a) If a trustee who conducts a business or other
22 activity determines that it is in the best interest of all
23 the beneficiaries to account separately for the business or
24 activity instead of accounting for it as part of the trust's
25 general accounting records, the trustee may maintain separate
26 accounting records for its transactions, whether or not its
27 assets are segregated from other trust assets.
28 (b) A trustee who accounts separately for a business or
29 other activity may determine the extent to which its net cash
30 receipts must be retained for working capital, the
31 acquisition or replacement of fixed assets, and other
32 reasonably foreseeable needs of the business or activity, and
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1 the extent to which the remaining net cash receipts are
2 accounted for as principal or income in the trust's general
3 accounting records. If a trustee sells assets of the
4 business or other activity, other than in the ordinary course
5 of the business or activity, the trustee shall account for
6 the net amount received as principal in the trust's general
7 accounting records to the extent the trustee determines that
8 the amount received is no longer required in the conduct of
9 the business.
10 (c) Activities for which a trustee may maintain separate
11 accounting records include:
12 (1) retail, manufacturing, service, and other
13 traditional business activities;
14 (2) farming;
15 (3) raising and selling livestock and other
16 animals;
17 (4) management of rental properties;
18 (5) extraction of minerals and other natural
19 resources;
20 (6) timber operations; and
21 (7) activities to which Section 414 applies.
22 PART 2. RECEIPTS NOT NORMALLY APPORTIONED
23 Section 404. Principal receipts. A trustee shall
24 allocate to principal:
25 (1) to the extent not allocated to income under this
26 Act, assets received from a transferor during the
27 transferor's lifetime, a decedent's estate, a trust with a
28 terminating income interest, or a payer under a contract
29 naming the trust or its trustee as beneficiary;
30 (2) money or other property received from the sale,
31 exchange, liquidation, or change in form of a principal
32 asset, including realized profit, subject to this Article;
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1 (3) amounts recovered from third parties to reimburse
2 the trust because of disbursements described in Section
3 502(a)(7) or for other reasons to the extent not based on
4 the loss of income;
5 (4) proceeds of property taken by eminent domain, but a
6 separate award made for the loss of income with respect to an
7 accounting period during which a current income beneficiary
8 had a mandatory income interest is income;
9 (5) net income received in an accounting period during
10 which there is no beneficiary to whom a trustee may or must
11 distribute income; and
12 (6) other receipts as provided in Part 3.
13 Section 405. Rental property. To the extent that a
14 trustee accounts for receipts from rental property pursuant
15 to this Section, the trustee shall allocate to income an
16 amount received as rent of real or personal property,
17 including an amount received for cancellation or renewal of a
18 lease. An amount received as a refundable deposit, including
19 a security deposit or a deposit that is to be applied as rent
20 for future periods, must be added to principal and held
21 subject to the terms of the lease and is not available for
22 distribution to a beneficiary until the trustee's contractual
23 obligations have been satisfied with respect to that amount.
24 Section 406. Obligation to pay money.
25 (a) An amount received as interest, whether determined
26 at a fixed, variable, or floating rate, on an obligation to
27 pay money to the trustee, including an amount received as
28 consideration for prepaying principal, must be allocated to
29 income without any provision for amortization of premium.
30 (b) A trustee shall allocate to principal an amount
31 received from the sale, redemption, or other disposition of
32 an obligation to pay money to the trustee more than one year
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1 after it is purchased or acquired by the trustee, including
2 an obligation whose purchase price or value when it is
3 acquired is less than its value at maturity. If the
4 obligation matures within one year after it is purchased or
5 acquired by the trustee, an amount received in excess of its
6 purchase price or its value when acquired by the trust must
7 be allocated to income.
8 (c) This Section does not apply to an obligation to
9 which Section 409, 410, 411, 412, 414, or 415 applies.
10 Section 407. Insurance policies and similar contracts.
11 (a) Except as otherwise provided in subsection (b), a
12 trustee shall allocate to principal the proceeds of a life
13 insurance policy or other contract in which the trust or its
14 trustee is named as beneficiary, including a contract that
15 insures the trust or its trustee against loss for damage to,
16 destruction of, or loss of title to a trust asset. The
17 trustee shall allocate dividends on an insurance policy to
18 income if the premiums on the policy are paid from income,
19 and to principal if the premiums are paid from principal.
20 (b) A trustee shall allocate to income proceeds of a
21 contract that insures the trustee against loss of occupancy
22 or other use by an income beneficiary, loss of income, or,
23 subject to Section 403, loss of profits from a business.
24 (c) This Section does not apply to a contract to which
25 Section 409 applies.
26 PART 3. RECEIPTS NORMALLY APPORTIONED
27 Section 408. Insubstantial allocations not required. If
28 a trustee determines that an allocation between principal and
29 income required by Section 409, 410, 411, 412, or 415 is
30 insubstantial, the trustee may allocate the entire amount to
31 principal unless one of the circumstances described in
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1 Section 104(c) applies to the allocation. This power may be
2 exercised by a cotrustee in the circumstances described in
3 Section 104(d) and may be released for the reasons and in
4 the manner described in Section 104(e). An allocation is
5 presumed to be insubstantial if:
6 (1) the amount of the allocation would increase or
7 decrease net income in an accounting period, as determined
8 before the allocation, by less than 10%; or
9 (2) the value of the asset producing the receipt for
10 which the allocation would be made is less than 10% of the
11 total value of the trust's assets at the beginning of the
12 accounting period.
13 Section 409. Deferred compensation, annuities, and
14 similar payments.
15 (a) In this Section, "payment" means a payment that a
16 trustee may receive over a fixed number of years or during
17 the life of one or more individuals because of services
18 rendered or property transferred to the payer in exchange for
19 future payments. The term includes a payment made in money
20 or property from the payer's general assets or from a
21 separate fund created by the payer, including a private or
22 commercial annuity, an individual retirement account, and a
23 pension, profit-sharing, stock-bonus, or stock-ownership
24 plan.
25 (b) To the extent that a payment is characterized as
26 interest or a dividend or a payment made in lieu of interest
27 or a dividend, a trustee shall allocate it to income. The
28 trustee shall allocate to principal the balance of the
29 payment and any other payment received in the same accounting
30 period that is not characterized as interest, a dividend, or
31 an equivalent payment.
32 (c) If no part of a payment is characterized as
33 interest, a dividend, or an equivalent payment, and all or
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1 part of the payment is required to be made, a trustee shall
2 allocate to income 10% of the part that is required to be
3 made during the accounting period and the balance to
4 principal. If no part of a payment is required to be made or
5 the payment received is the entire amount to which the
6 trustee is entitled, the trustee shall allocate the entire
7 payment to principal. For purposes of this subsection, a
8 payment is not "required to be made" to the extent that it is
9 made because the trustee exercises a right of withdrawal.
10 (d) If, to obtain an estate tax marital deduction for a
11 trust, a trustee must allocate more of a payment to income
12 than provided for by this Section, the trustee shall allocate
13 to income the additional amount necessary to obtain the
14 marital deduction.
15 (e) This Section does not apply to payments to which
16 Section 410 applies.
17 Section 410. Liquidating asset.
18 (a) In this Section, "liquidating asset" means an asset
19 whose value will diminish or terminate because the asset is
20 expected to produce receipts for a period of limited
21 duration. The term includes a leasehold, patent, copyright,
22 royalty right, and right to receive payments during a period
23 of more than one year under an arrangement that does not
24 provide for the payment of interest on the unpaid balance.
25 The term does not include a payment subject to Section 409,
26 resources subject to Section 411, timber subject to Section
27 412, an activity subject to Section 414, an asset subject to
28 Section 415, or any asset for which the trustee establishes a
29 reserve for depreciation under Section 503.
30 (b) A trustee shall allocate to income 10% of the
31 receipts from a liquidating asset and the balance to
32 principal.
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1 Section 411. Minerals, water, and other natural
2 resources.
3 (a) To the extent that a trustee accounts for receipts
4 from an interest in minerals or other natural resources
5 pursuant to this Section, the trustee shall allocate them as
6 follows:
7 (1) If received as nominal delay rental or nominal
8 annual rent on a lease, a receipt must be allocated to
9 income.
10 (2) If received from a production payment, a
11 receipt must be allocated to income if and to the extent
12 that the agreement creating the production payment
13 provides a factor for interest or its equivalent. The
14 balance must be allocated to principal.
15 (3) If an amount received as a royalty,
16 shut-in-well payment, take-or-pay payment, bonus, or
17 delay rental is more than nominal, 90% must be allocated
18 to principal and the balance to income.
19 (4) If an amount is received from a working
20 interest or any other interest not provided for in
21 paragraph (1), (2), or (3), 90% of the net amount
22 received must be allocated to principal and the balance
23 to income.
24 (b) An amount received on account of an interest in
25 water that is renewable must be allocated to income. If the
26 water is not renewable, 90% of the amount must be allocated
27 to principal and the balance to income.
28 (c) This Act applies whether or not a decedent or donor
29 was extracting minerals, water, or other natural resources
30 before the interest became subject to the trust.
31 (d) If a trust owns an interest in minerals, water, or
32 other natural resources on the effective date of this Act,
33 the trustee may allocate receipts from the interest as
34 provided in this Act or in the manner used by the trustee
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1 before the effective date of this Act. If the trust acquires
2 an interest in minerals, water, or other natural resources
3 after the effective date of this Act, the trustee shall
4 allocate receipts from the interest as provided in this Act.
5 Section 412. Timber.
6 (a) To the extent that a trustee accounts for receipts
7 from the sale of timber and related products pursuant to this
8 Section, the trustee shall allocate the net receipts:
9 (1) to income to the extent that the amount of
10 timber removed from the land does not exceed the rate of
11 growth of the timber during the accounting periods in
12 which a beneficiary has a mandatory income interest;
13 (2) to principal to the extent that the amount of
14 timber removed from the land exceeds the rate of growth
15 of the timber or the net receipts are from the sale of
16 standing timber;
17 (3) to or between income and principal if the net
18 receipts are from the lease of timberland or from a
19 contract to cut timber from land owned by a trust, by
20 determining the amount of timber removed from the land
21 under the lease or contract and applying the rules in
22 paragraphs (1) and (2); or
23 (4) to principal to the extent that advance
24 payments, bonuses, and other payments are not allocated
25 pursuant to paragraph (1), (2), or (3).
26 (b) In determining net receipts to be allocated pursuant
27 to subsection (a), a trustee shall deduct and transfer to
28 principal a reasonable amount for depletion.
29 (c) This Act applies whether or not a decedent or
30 transferor was harvesting timber from the property before it
31 became subject to the trust.
32 (d) If a trust owns an interest in timberland on the
33 effective date of this Act, the trustee may allocate net
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1 receipts from the sale of timber and related products as
2 provided in this Act or in the manner used by the trustee
3 before the effective date of this Act. If the trust acquires
4 an interest in timberland after the effective date of this
5 Act, the trustee shall allocate net receipts from the sale of
6 timber and related products as provided in this Act.
7 Section 413. Property not productive of income.
8 (a) If a marital deduction is allowed for all or part of
9 a trust whose assets consist substantially of property that
10 does not provide the surviving spouse with sufficient income
11 from or use of the trust assets, and if the amounts that the
12 trustee transfers from principal to income under Section 104
13 and distributes to the spouse from principal pursuant to the
14 terms of the trust are insufficient to provide the spouse
15 with the beneficial enjoyment required to obtain the marital
16 deduction, the spouse may require the trustee to make
17 property productive of income, convert property within a
18 reasonable time, or exercise the power conferred by Section
19 104(a). The trustee may decide which action or combination
20 of actions to take.
21 (b) In cases not governed by subsection (a), proceeds
22 from the sale or other disposition of an asset are principal
23 without regard to the amount of income the asset produces
24 during any accounting period.
25 Section 414. Derivatives and options.
26 (a) In this Section, "derivative" means a contract or
27 financial instrument or a combination of contracts and
28 financial instruments which gives a trust the right or
29 obligation to participate in some or all changes in the price
30 of a tangible or intangible asset or group of assets, or
31 changes in a rate, an index of prices or rates, or other
32 market indicator for an asset or a group of assets.
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1 (b) To the extent that a trustee does not account under
2 Section 403 for transactions in derivatives, the trustee
3 shall allocate to principal receipts from and disbursements
4 made in connection with those transactions.
5 (c) If a trustee grants an option to buy property from
6 the trust, whether or not the trust owns the property when
7 the option is granted, grants an option that permits another
8 person to sell property to the trust, or acquires an option
9 to buy property for the trust or an option to sell an asset
10 owned by the trust, and the trustee or other owner of the
11 asset is required to deliver the asset if the option is
12 exercised, an amount received for granting the option must be
13 allocated to principal. An amount paid to acquire the option
14 must be paid from principal. A gain or loss realized upon
15 the exercise of an option, including an option granted to a
16 settlor of the trust for services rendered, must be allocated
17 to principal.
18 Section 415. Asset-backed securities.
19 (a) In this Section, "asset-backed security" means an
20 asset whose value is based upon the right it gives the owner
21 to receive distributions from the proceeds of financial
22 assets that provide collateral for the security. The term
23 includes an asset that gives the owner the right to receive
24 from the collateral financial assets only the interest or
25 other current return or only the proceeds other than interest
26 or current return. The term does not include an asset to
27 which Section 401 or 409 applies.
28 (b) If a trust receives a payment from interest or other
29 current return and from other proceeds of the collateral
30 financial assets, the trustee shall allocate to income the
31 portion of the payment which the payer identifies as being
32 from interest or other current return and shall allocate the
33 balance of the payment to principal.
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1 (c) If a trust receives one or more payments in exchange
2 for the trust's entire interest in an asset-backed security
3 in one accounting period, the trustee shall allocate the
4 payments to principal. If a payment is one of a series of
5 payments that will result in the liquidation of the trust's
6 interest in the security over more than one accounting
7 period, the trustee shall allocate 10% of the payment to
8 income and the balance to principal.
9 ARTICLE 5. ALLOCATION OF DISBURSEMENTS DURING
10 ADMINISTRATION OF TRUST
11 Section 501. Disbursements from income. A trustee shall
12 make the following disbursements from income to the extent
13 that they are not disbursements to which Section
14 201(2)(B) or (C) applies:
15 (1) one-half of the regular compensation of the trustee
16 and of any person providing investment advisory or custodial
17 services to the trustee;
18 (2) one-half of all expenses for accountings, judicial
19 proceedings, or other matters that involve both the income
20 and remainder interests;
21 (3) all of the other ordinary expenses incurred in
22 connection with the administration, management, or
23 preservation of trust property and the distribution of
24 income, including interest, ordinary repairs, regularly
25 recurring taxes assessed against principal, and expenses of a
26 proceeding or other matter that concerns primarily the income
27 interest; and
28 (4) recurring premiums on insurance covering the loss of
29 a principal asset or the loss of income from or use of the
30 asset.
31 Section 502. Disbursements from principal.
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1 (a) A trustee shall make the following disbursements
2 from principal:
3 (1) the remaining one-half of the disbursements
4 described in Section 501(1) and (2);
5 (2) all of the trustee's compensation calculated on
6 principal as a fee for acceptance, distribution, or
7 termination, and disbursements made to prepare property
8 for sale;
9 (3) payments on the principal of a trust debt;
10 (4) expenses of a proceeding that concerns
11 primarily principal, including a proceeding to construe
12 the trust or to protect the trust or its property;
13 (5) premiums paid on a policy of insurance not
14 described in Section 501(4) of which the trust is the
15 owner and beneficiary;
16 (6) estate, inheritance, and other transfer taxes,
17 including penalties, apportioned to the trust; and
18 (7) disbursements related to environmental matters,
19 including reclamation, assessing environmental
20 conditions, remedying and removing environmental
21 contamination, monitoring remedial activities and the
22 release of substances, preventing future releases of
23 substances, collecting amounts from persons liable or
24 potentially liable for the costs of those activities,
25 penalties imposed under environmental laws or regulations
26 and other payments made to comply with those laws or
27 regulations, statutory or common law claims by third
28 parties, and defending claims based on environmental
29 matters.
30 (b) If a principal asset is encumbered with an
31 obligation that requires income from that asset to be paid
32 directly to the creditor, the trustee shall transfer from
33 principal to income an amount equal to the income paid to the
34 creditor in reduction of the principal balance of the
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1 obligation.
2 Section 503. Transfers from income to principal for
3 depreciation.
4 (a) In this Section, "depreciation" means a reduction in
5 value due to wear, tear, decay, corrosion, or gradual
6 obsolescence of a fixed asset having a useful life of more
7 than one year.
8 (b) A trustee may transfer to principal a reasonable
9 amount of the net cash receipts from a principal asset that
10 is subject to depreciation, but may not transfer any amount
11 for depreciation:
12 (1) of that portion of real property used or
13 available for use by a beneficiary as a residence or of
14 tangible personal property held or made available for the
15 personal use or enjoyment of a beneficiary;
16 (2) during the administration of a decedent's
17 estate; or
18 (3) under this Section if the trustee is accounting
19 under Section 403 for the business or activity in which
20 the asset is used.
21 (c) An amount transferred to principal need not be held
22 as a separate fund.
23 Section 504. Transfers from income to reimburse
24 principal.
25 (a) If a trustee makes or expects to make a principal
26 disbursement described in this Section, the trustee may
27 transfer an appropriate amount from income to principal in
28 one or more accounting periods to reimburse principal or to
29 provide a reserve for future principal disbursements.
30 (b) Principal disbursements to which subsection
31 (a) applies include the following, but only to the extent
32 that the trustee has not been and does not expect to be
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1 reimbursed by a third party:
2 (1) an amount chargeable to income but paid from
3 principal because it is unusually large, including
4 extraordinary repairs;
5 (2) a capital improvement to a principal asset,
6 whether in the form of changes to an existing asset or
7 the construction of a new asset, including special
8 assessments;
9 (3) disbursements made to prepare property for
10 rental, including tenant allowances, leasehold
11 improvements, and broker's commissions;
12 (4) periodic payments on an obligation secured by a
13 principal asset to the extent that the amount transferred
14 from income to principal for depreciation is less than
15 the periodic payments; and
16 (5) disbursements described in Section 502(a)(7).
17 (c) If the asset whose ownership gives rise to the
18 disbursements becomes subject to a successive income interest
19 after an income interest ends, a trustee may continue to
20 transfer amounts from income to principal as provided in
21 subsection (a).
22 Section 505. Income taxes.
23 (a) A tax required to be paid by a trustee based on
24 receipts allocated to income must be paid from income.
25 (b) A tax required to be paid by a trustee based on
26 receipts allocated to principal must be paid from principal,
27 even if the tax is called an income tax by the taxing
28 authority.
29 (c) A tax required to be paid by a trustee on the
30 trust's share of an entity's taxable income must be paid
31 proportionately:
32 (1) from income to the extent that receipts from
33 the entity are allocated to income; and
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1 (2) from principal to the extent that:
2 (A) receipts from the entity are allocated to
3 principal; and
4 (B) the trust's share of the entity's taxable
5 income exceeds the total receipts described in
6 paragraphs (1) and (2)(A).
7 (d) For purposes of this Section, receipts allocated to
8 principal or income must be reduced by the amount distributed
9 to a beneficiary from principal or income for which the trust
10 receives a deduction in calculating the tax.
11 Section 506. Adjustments between principal and income
12 because of taxes.
13 (a) A fiduciary may make adjustments between principal
14 and income to offset the shifting of economic interests or
15 tax benefits between income beneficiaries and remainder
16 beneficiaries which arise from:
17 (1) elections and decisions, other than those
18 described in subsection (b), that the fiduciary makes
19 from time to time regarding tax matters;
20 (2) an income tax or any other tax that is imposed
21 upon the fiduciary or a beneficiary as a result of a
22 transaction involving or a distribution from the estate
23 or trust; or
24 (3) the ownership by an estate or trust of an
25 interest in an entity whose taxable income, whether or
26 not distributed, is includable in the taxable income of
27 the estate, trust, or a beneficiary.
28 (b) If the amount of an estate tax marital deduction or
29 charitable contribution deduction is reduced because a
30 fiduciary deducts an amount paid from principal for income
31 tax purposes instead of deducting it for estate tax purposes,
32 and as a result estate taxes paid from principal are
33 increased and income taxes paid by an estate, trust, or
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1 beneficiary are decreased, each estate, trust, or beneficiary
2 that benefits from the decrease in income tax shall reimburse
3 the principal from which the increase in estate tax is paid.
4 The total reimbursement must equal the increase in the estate
5 tax to the extent that the principal used to pay the increase
6 would have qualified for a marital deduction or charitable
7 contribution deduction but for the payment. The
8 proportionate share of the reimbursement for each estate,
9 trust, or beneficiary whose income taxes are reduced must be
10 the same as its proportionate share of the total decrease in
11 income tax. An estate or trust shall reimburse principal
12 from income.
13 ARTICLE 6. MISCELLANEOUS PROVISIONS
14 Section 601. Uniformity of application and construction.
15 In applying and construing this Uniform Act, consideration
16 must be given to the need to promote uniformity of the law
17 with respect to its subject matter among states that enact
18 it.
19 Section 602. Severability clause. If any provision of
20 this Act or its application to any person or circumstance is
21 held invalid, the invalidity does not affect other provisions
22 or applications of this Act which can be given effect without
23 the invalid provision or application, and to this end the
24 provisions of this Act are severable.
25 (760 ILCS 15/Act rep.)
26 Section 603. Repeal. The following Acts and parts of
27 Acts are repealed:
28 Principal and Income Act.
29 Section 604. Effective date. (Blank).
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1 Section 605. Application of Act to existing trusts and
2 estates. This Act applies to every trust or decedent's
3 estate existing on the effective date of this Act except as
4 otherwise expressly provided in the will or terms of the
5 trust or in this Act.