Allocation of Receipts + Expenses Between Income + Principal Accounts

Question 1

Uniform Principal and Income Act (UPAIA)

Answer 1

• enacted in majority of states
• gives trustee or personal representative an adjustment power to reallocate investment portfolio return
  -> authorizes trustee to characterize items such as capital gains, stock dividends, etc as income if trustee deems it appropriate or necessary to carry out the trust purposes

Question 2

UPAIA - Duty of Fairness

Answer 2

• trustee is under duty to administer the trust impartially, except to extent that the trust or will manifests an intent that one or more of the beneficiaries is to be favored

Question 3

Adjustment Power

Answer 3

• if trustee determines that by distributing only the trust’s income the trustee is unable to comply with the req that all beneficiaries be treated fairly, trustee may adjust between principal + income to extent necessary

Question 4

Factors Trustee Considers in Deciding Whether to Exercise Adjustment Power

Answer 4

• nature, purpose, and duration of expected trust
• intent of settlor
• identity + circumstances of the beneficiaries
• needs for liquidity, regularity of income, + preservation and appreciation of capital
• nature of the trust’s assets
• net amount allocated to income under other sections of the Act + tthe increase or decrease in the value of the principal assets
• whether + to what extent the trust gives or denies trustee power to invade principal or accumulate income
• actual and anticipated effect of econ conditions on principal and income and effects of inflation + deflation
• anticipated tax consequences of adjustment

Question 5

Circumstances Under Which Adjustment Can’t Be Made

Answer 5

• trustee can’t make adjustment if trustee = a beneficiary of the trust
• adjustment can’t be made if the adjustment power would disqualify the trust for a federal estate tax marital or charitable deduction

Question 6

Allocation of Receipts

Answer 6

• follow traditional accounting rules
  -> ex: net rental income is income + proceeds of sale of a trust asset are principal

Question 7

Receipts from Entity

Answer 7

• $ received from an entity such as a corporaton is characterized as income unless the money is characterized as a capital gain for fed income tax purposes, or is received in partial or total liquidation of the entity
• all property other than money received from an entity is characterized as principal

Question 8

Insurance Policies and Other Contracts

Answer 8

• proceeds from a life insurance policy in which trust or trustee is named beneficiary are allocated to the principal
• if contract insures the trustee against a type of loss, the proceeds are allocated to income
• dividends on insurance policy are allocated to the account from which the premiums are paid

Question 9

Deferred Compensation

Answer 9

• ten percent default rul
• for periodic receipts from a deferred compensation plan, the receipt is income to the extent that the payment is characterized by the payor as income
• balance is principal
• if no part of payment is characterized as income or a dividend, 10% of the payment is characterized as income + the balance is principal

Question 10

Liquidating Assets

Answer 10

• liquidating asset = asset whose value will diminish over time b/c the asset is expected to produce receipts over a limited period
• proceeds from such liquidating assets are allocated 10% to income and 90% to principal

Question 11

Mineral Interests

Answer 11

• 10% rule
• for most oil, gas, mineral lease + water right payments, receipts are allocated 10% to income + 90% to principal

Question 12

Unproductive Property

Answer 12

• under former law, if a particular trust asset produced little or no income, on the asset’s sale, the income beneficiary was entitled to a portion of the sale proceeds under the principle of “delayed income”
• b/c UPA looks to the total return from the overall portfolio, the unproductive property rule was repealed except for certain trusts intended to qualify for the estate tax marital deduction

Question 13

Expenses Charged to Income

Answer 13

• 50% of regular comp of trustee + any person providing investment services
• 50% of all expenses for accountings, judicial proceedings, + other matter affecting income or remainder interests
• ordinary expenses
• insurance premiums covering loss of a principal asset

Question 14

Expenses Charged to Principal

Answer 14

• 50% of regular comp of trustee + any person providing investment services
• 50% of all expenses for accountings, judicial proceedings, + other matter affecting income or remainder interests
• estate taxes
• expenses of a proceeding that concerns a principal interest
• payments on the principal of a trust debt
• disbursements related to environmental matters