Trust Distribution & Allocation

Question 1

How should expenses be allocated?

Answer 1

Expenses charged to income:
- 1/2 trustee’s compensation
- 1/2 accounting / court costs
- Ordinary expenses
- Insurance Premiums

Expenses charged to principal:
- 1/2 trustee’s compensation
- 1/2 accounting / court costs
- Payments on the principal of trust debt
- Expenses for any proceeding concerning an interest in principal
- Estate taxes
- Payments related to environmental matters

Question 2

How should principal and income be allocated under the modern / UPAIA approach?

Answer 2

A trustee is empowered to re-characterize items and reallocate investment returns as necessary to fulfill the trust purposes, as long as the reallocations are reasonable and are in keeping with the trust instrument.

Question 3

In general, how should principal and income be allocated?

Answer 3

Life beneficiaries = trust income

Remaindermen = trust principal

In addition, the allocation must be balanced so as to treat present and future trust beneficiaries fairly, unless a different treatment is authorized by the trust instrument.

Question 4

How should receipts for the exchange or use of trust property be allocated?

Answer 4

An amount received in exchange for trust property is allocated to principal, and an amount received for the use of trust property is allocated to income.

Question 5

What happens to a predeceased beneficiary’s interest in a trust under the modern trend?

Answer 5

A predeceased beneficiary’s interest in a trust will not lapse; rather a substitute gift is created in the descendants of the deceased issue.