Principal and Income Allocations

Question 1

How do you classify income and principal?

Answer 1

Old Rule: Classify based on nature of money.

• The life beneficiary was entitled to income.
• The holder of the remainder interest entitled to principal.

Modern Approach

• UPAIA - Trustee is to focus on total return of trust portfolio. Trustee can re-characterize and reallocate items as necessary, Must be reasonable.
• Factors trustee must balance: intent of settlor and language of instrument, nature, duration, and purpose of trust, identities and circumstances of beneficiaries, anticipated effect of economic conditions, anticipated tax consequences.