REPORT TITLE:
Uniform Principal & Income Act


DESCRIPTION:
Repeals the revised uniform principal and income act under
chapter 557, Hawaii Revised Statutes.  Establishes a new uniform
principal and income act under a new chapter. (HD1)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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THE SENATE                              S.B. NO.           S.D. 1
TWENTIETH LEGISLATURE, 2000                                H.D. 1
STATE OF HAWAII                                            
                                                             
________________________________________________________________
________________________________________________________________


                   A  BILL  FOR  AN  ACT

RELATING TO THE UNIFORM PRINCIPAL AND INCOME ACT.



BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

 1      SECTION 1.  The Hawaii Revised Statutes is amended by adding
 
 2 a new chapter to be appropriately designated and to read as
 
 3 follows:
 
 4                             "CHAPTER
 
 5                 UNIFORM PRINCIPAL AND INCOME ACT
 
 6                             ARTICLE 1
 
 7                 DEFINITIONS AND FIDUCIARY DUTIES
 
 8       -101  Short title.  This chapter may be cited as the
 
 9 Uniform Principal and Income Act.
 
10       -102  Definitions.  As used in this chapter, unless the
 
11 context otherwise requires:
 
12      "Accounting period" means a calendar year unless another
 
13 twelve-month period is selected by a fiduciary.  The term
 
14 includes a portion of a calendar year or other twelve-month
 
15 period that begins when an income interest begins or ends when an
 
16 income interest ends.
 
17      "Beneficiary" includes, in the case of a decedent's estate,
 
18 an heir and devisee and, in the case of a trust, an income
 
19 beneficiary and a remainder beneficiary.
 

 
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 1      "Fiduciary" means a personal representative or a trustee.
 
 2 The term includes an executor, administrator, successor personal
 
 3 representative, special administrator, and a person performing
 
 4 substantially the same function.
 
 5      "Income" means money or property a fiduciary receives as the
 
 6 current return from a principal asset.  The term includes a
 
 7 portion of the receipts from a sale, exchange, or liquidation of
 
 8 a principal asset, to the extent provided in article 4.
 
 9      "Income beneficiary" means a person to whom a trust's net
 
10 income is or may be payable.
 
11      "Income interest" means an income beneficiary's right to
 
12 receive all or part of the net income, whether the terms of the
 
13 trust require it to be distributed or authorize it to be
 
14 distributed in the trustee's discretion.
 
15      "Mandatory income interest" means an income beneficiary's
 
16 right to receive net income that the terms of the trust require
 
17 the fiduciary to distribute.
 
18      "Net income" means the total receipts allocated to income
 
19 during an accounting period minus the disbursements made from
 
20 income during the period.  Receipts and disbursements include
 
21 items transferred to or from income during the period under this
 
22 chapter.
 

 
 
 
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 1      "Person" means an individual, corporation, business trust,
 
 2 estate, trust, partnership, limited liability company,
 
 3 association, joint venture, or any other legal or commercial
 
 4 entity.  The term does not include a government or governmental
 
 5 subdivision, agency, or instrumentality.
 
 6      "Principal" means property held in trust for distribution to
 
 7 a remainder beneficiary when the trust terminates.
 
 8      "Remainder beneficiary" means a person, including another
 
 9 trust, entitled to receive principal when an income interest
 
10 ends.
 
11      "Terms of a trust" means the manifestation of the intent of
 
12 a settlor or decedent with respect to the trust, expressed in a
 
13 manner that admits of its proof in a judicial proceeding, whether
 
14 by written or spoken words or by conduct.
 
15      "Trustee" includes an original, additional, or successor
 
16 trustee, whether or not appointed or confirmed by a court.
 
17       -103  Fiduciary duties; general principles.(a)  In
 
18 allocating receipts and disbursements to or between principal and
 
19 income, and in any matter within the scope of articles 2 and 3, a
 
20 fiduciary:
 
21      (1)  Shall administer a trust or estate in accordance with
 
22           the terms of the trust or the will, even if there is a
 
23           different provision in this chapter;
 

 
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 1      (2)  May administer a trust or estate by the exercise of a
 
 2           discretionary power of administration given to the
 
 3           fiduciary by the terms of the trust or the will, even
 
 4           if the exercise of the power produces a result
 
 5           different from a result required or permitted by this
 
 6           chapter, and no inference that the fiduciary has
 
 7           improperly exercised the discretion arises from the
 
 8           fact that the fiduciary has made an alteration contrary
 
 9           to the provisions of this chapter;
 
10      (3)  Shall administer a trust or estate in accordance with
 
11           this chapter if the terms of the trust or the will do
 
12           not contain a different provision or do not give the
 
13           fiduciary a discretionary power of administration; and
 
14      (4)  Shall add a receipt or charge a disbursement to
 
15           principal to the extent that the terms of the trust and
 
16           this chapter do not provide a rule for allocating the
 
17           receipt or disbursement to or between principal and
 
18           income.
 
19      (b)  In exercising the power to adjust granted by section
 
20    -104(a) or a discretionary power of administration regarding a
 
21 matter within the scope of this chapter, whether granted by the
 
22 terms of a trust, a will, or this chapter, a fiduciary shall
 
23 administer a trust or estate impartially, based on what is fair
 

 
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 1 and reasonable to all of the beneficiaries, except to the extent
 
 2 that the terms of the trust or the will clearly manifest an
 
 3 intention that the fiduciary shall or may favor one or more of
 
 4 the beneficiaries.  The exercise of discretion in accordance with
 
 5 this chapter is presumed to be fair and reasonable to all of the
 
 6 beneficiaries.
 
 7         -104  Trustee's power to adjust.(a)  Subject to
 
 8 subsection (b), a trustee may adjust between principal and income
 
 9 to the extent the trustee considers necessary if all of the
 
10 following conditions are satisfied:
 
11      (1)  The trustee invests and manages trust assets as a
 
12           prudent investor;
 
13      (2)  The terms of the trust describe the amount that may or
 
14           must be distributed to a beneficiary by referring to
 
15           the trust's income; and
 
16      (3)  The trustee determines, after applying the rules in
 
17           section    -103(a), and considering any power the
 
18           trustee may have under the trust to invade principal or
 
19           accumulate income, either of the following conditions
 
20           exist:
 
21           (A)  The trustee is unable to administer a trust or
 
22                estate impartially based on what is fair and
 
23                reasonable to all beneficiaries if no clear
 

 
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 1                intention to favor one or more beneficiaries is
 
 2                manifested in the will or trust; or
 
 3           (B)  In the case of a will or trust that clearly
 
 4                manifests an intent to favor one or more
 
 5                beneficiaries, the trustee is unable to favor such
 
 6                beneficiaries without diminishing the rights of
 
 7                other beneficiaries.
 
 8      (b)  In deciding whether and to what extent to exercise the
 
 9 power conferred by subsection (a), a trustee shall consider all
 
10 of the factors relevant to the trust and its beneficiaries,
 
11 including the following factors to the extent they are relevant:
 
12      (1)  The nature, purpose, and expected duration of the
 
13           trust;
 
14      (2)  The intent of the settlor;
 
15      (3)  The identity and circumstances of the beneficiaries;
 
16      (4)  The needs for liquidity, regularity of income, and
 
17           preservation and appreciation of capital;
 
18      (5)  The assets held in the trust; the extent to which they
 
19           consist of financial assets, interests in closely held
 
20           enterprises, tangible and intangible personal property,
 
21           or real property; the extent to which an asset is used
 
22           by a beneficiary; and whether an asset was purchased by
 
23           the trustee or received from the settlor;
 

 
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 1      (6)  The net amount allocated to income under the other
 
 2           sections of this chapter and the increase or decrease
 
 3           in the value of the principal assets, which the trustee
 
 4           may estimate as to assets for which market values are
 
 5           not readily available;
 
 6      (7)  Whether and to what extent the terms of the trust give
 
 7           the trustee the power to invade principal or accumulate
 
 8           income or prohibit the trustee from invading principal
 
 9           or accumulating income, and the extent to which the
 
10           trustee has exercised a power from time to time to
 
11           invade principal or accumulate income;
 
12      (8)  The actual and anticipated effect of economic
 
13           conditions on principal and income and effects of
 
14           inflation and deflation; and
 
15      (9)  The anticipated tax consequences of an adjustment.
 
16      (c)  A trustee may not make an adjustment:
 
17      (1)  That diminishes the income interest in a trust that
 
18           requires all of the income to be paid at least annually
 
19           to a surviving spouse and for which an estate tax or
 
20           gift tax marital deduction would be allowed, in whole
 
21           or in part, if the trustee did not have the power to
 
22           make the adjustment;
 

 
 
 
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 1      (2)  That reduces the actuarial value of the income interest
 
 2           in a trust to which a person transfers property with
 
 3           the intent to qualify for a gift tax exclusion;
 
 4      (3)  That changes the amount payable to a beneficiary as a
 
 5           fixed annuity or a fixed fraction of the value of the
 
 6           trust's assets;
 
 7      (4)  From any amount that is permanently set aside for
 
 8           charitable purposes under a will or the terms of a
 
 9           trust, unless both income and principal are so set
 
10           aside; provided that a trustee may transfer income to
 
11           principal only upon a court order;
 
12      (5)  If possessing or exercising the power to make an
 
13           adjustment may cause an individual to be treated as the
 
14           owner of all or part of the trust for income tax
 
15           purposes, and the individual would not be treated as
 
16           the owner if the trustee did not possess the power to
 
17           make an adjustment;
 
18      (6)  If possessing or exercising the power to make an
 
19           adjustment causes all or part of the trust assets to be
 
20           included for estate tax purposes in the estate of an
 
21           individual who has the power to remove a trustee or
 
22           appoint a trustee, or both, and the assets would not be
 

 
 
 
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 1           included in the estate of the individual if the trustee
 
 2           did not have the power to make an adjustment; or
 
 3      (7)  If the trustee is a beneficiary of the trust.
 
 4      (d)  If subsection (c)(5), (6), or (7) applies to a trustee
 
 5 and there is more than one trustee, a co-trustee to whom the
 
 6 provision does not apply may make the adjustment, unless the
 
 7 exercise of the power by the remaining trustee or trustees is
 
 8 clearly not permitted by the terms of the trust.
 
 9      (e)  A trustee may release the entire power conferred by
 
10 subsection (a) or may release only the power to adjust from
 
11 income to principal or the power to adjust from principal to
 
12 income if the trustee is uncertain about whether possessing or
 
13 exercising the power will cause a result described in subsection
 
14 (c)(1) through (6) or if the trustee determines that possessing
 
15 or exercising the power will or may deprive the trust of a tax
 
16 benefit or impose a tax burden not described in subsection (c).
 
17 The release may be permanent or for a specified period, including
 
18 a period measured by the life of an individual.
 
19      (f)  Terms of a trust that limit the power of a trustee to
 
20 make an adjustment between principal and income are not contrary
 
21 to this section, unless it is clear from the terms of the trust
 
22 that the terms are intended to deny the trustee the power of
 
23 adjustment conferred by subsection (a).
 

 
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 1      (g)  Nothing in this section or in this chapter is intended
 
 2 to create or imply a duty to make an adjustment, and the trustee
 
 3 is not liable for not considering whether to make an adjustment
 
 4 or for choosing not to make an adjustment.
 
 5         -105  Notice of proposed action.(a)  A trustee may
 
 6 give a notice of proposed action regarding a matter governed by
 
 7 the chapter as provided in this section.  For the purpose of this
 
 8 section, a proposed action includes a course of action and a
 
 9 decision not to take action.
 
10      (b)  The trustee shall mail notice of the proposed action to
 
11 all adult beneficiaries who are receiving, or are entitled to
 
12 receive, income under this trust or to receive a distribution of
 
13 principal if the trust were terminated at the time the notice is
 
14 given.
 
15      (c)  Notice of proposed action need not be given to any
 
16 person who consents in writing to the proposed action.  The
 
17 consent may be executed at any time before or after the proposed
 
18 action is taken.
 
19      (d)  The notice of proposed action shall state that it is
 
20 given pursuant to this section and shall state all of the
 
21 following:
 
22      (1)  The name and mailing address of the trustee;
 

 
 
 
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 1      (2)  The name and telephone number of a person who may be
 
 2           contacted for additional information;
 
 3      (3)  A description of the action proposed to be taken and an
 
 4           explanation of the reasons for the action;
 
 5      (4)  The time within which objections to the proposed action
 
 6           can be made, which shall be at least thirty days from
 
 7           the mailing of the notice of proposed action; and
 
 8      (5)  The date on or after which the proposed action may be
 
 9           taken or is effective.
 
10      (e)  A beneficiary may object to the proposed action by
 
11 mailing a written objection to the trustee at the address stated
 
12 in the notice of proposed action within the time period specified
 
13 in the notice of proposed action.
 
14      (f)  A trustee is not liable to a beneficiary for an action
 
15 regarding a matter governed by this chapter if the trustee does
 
16 not receive a written objection to the proposed action from the
 
17 beneficiary within the applicable period and the other
 
18 requirements of this section are satisfied.  If no beneficiary
 
19 entitled to notice objects under this section, the trustee is not
 
20 liable to any current or future beneficiary with respect to the
 
21 proposed action.
 
22      (g)  If the trustee receives a written objection within the
 
23 applicable period, either the trustee or a beneficiary may
 

 
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 1 petition the court to have the proposed action taken as proposed,
 
 2 taken with modifications, or denied.  In the proceeding, a
 
 3 beneficiary objecting to the proposed action has the burden of
 
 4 proving that the trustee's proposed action constitutes an abuse
 
 5 of discretion.  A beneficiary who has not objected is not
 
 6 estopped from opposing the proposed action in the proceeding.  If
 
 7 the trustee decides not to implement the proposed action, the
 
 8 trustee shall notify the beneficiaries of the decision not to
 
 9 take the action and the reasons for the decision, and the
 
10 trustee's decision not to implement the proposed action does not
 
11 itself give rise to liability to any current or future
 
12 beneficiary.  A beneficiary may petition the court to have the
 
13 action taken, and has the burden of proving that not taking the
 
14 action is an abuse of discretion.
 
15         -106  Proceedings regarding trustee's power to adjust.
 
16 In a proceeding with respect to a trustee's exercise or
 
17 nonexercise of the power to make an adjustment under section
 
18    -104, the sole remedy shall be to direct, deny, or revise an
 
19 adjustment between principal and income.
 
20                             ARTICLE 2
 
21         DECEDENT'S ESTATE OR TERMINATING INCOME INTEREST
 
22         -201  Determination and distribution of net income.
 
23 After a decedent dies, in the case of an estate, or after an
 
24 income interest in a trust ends, the following rules apply:
 

 
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 1      (1)  A fiduciary of an estate or a terminating income
 
 2           interest shall determine the amount of net income and
 
 3           net principal receipts received from property
 
 4           specifically given to a beneficiary under the rules in
 
 5           articles 3 through 5 that apply to trustees and the
 
 6           rules in paragraph (5).  The fiduciary shall distribute
 
 7           the net income and net principal receipts to the
 
 8           beneficiary who is to receive the specific property.
 
 9      (2)  A fiduciary shall determine the remaining net income of
 
10           a decedent's estate or a terminating income interest
 
11           under the rules in articles 3 through 5 that apply to
 
12           trustees and by:
 
13           (A)  Including in net income all income from property
 
14                used to discharge liabilities;
 
15           (B)  Paying from income or principal, in the
 
16                fiduciary's discretion: fees of attorneys,
 
17                accountants, and fiduciaries; court costs and
 
18                other expenses of administration; and interest on
 
19                death taxes; provided that the fiduciary may pay
 
20                those expenses from income of property passing to
 
21                a trust for which the fiduciary claims an estate
 
22                tax marital or charitable deduction only to the
 
23                extent that the payment of those expenses from
 

 
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 1                income will not cause the loss of the deduction;
 
 2                and
 
 3           (C)  Paying from principal all other disbursements made
 
 4                or incurred in connection with the settlement of a
 
 5                decedent's estate or the winding up of a
 
 6                terminating income interest, including debts,
 
 7                funeral expenses, disposition of remains, family
 
 8                allowances, and death taxes and related penalties
 
 9                that are apportioned to the estate or terminating
 
10                income interest by the will, the terms of the
 
11                trust, or applicable law.
 
12      (3)  A fiduciary shall distribute to a beneficiary who
 
13           receives a pecuniary amount outright the interest or
 
14           other amount, provided by the will, the terms of the
 
15           trust, or applicable law, from net income determined
 
16           under paragraph (2) or from principal to the extent
 
17           that net income is insufficient.  If a beneficiary is
 
18           to receive a pecuniary amount outright from a trust
 
19           after an income interest ends and no interest or other
 
20           amount is provided for by the terms of the trust or
 
21           applicable law, the fiduciary shall distribute the
 
22           interest or other amount to which the beneficiary would
 

 
 
 
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 1           be entitled under applicable law if the pecuniary
 
 2           amount were required to be paid under a will.
 
 3      (4)  A fiduciary shall distribute the net income remaining
 
 4           after distributions required by paragraph (3) in the
 
 5           manner described in section    -202 to all other
 
 6           beneficiaries, including a beneficiary who receives a
 
 7           pecuniary amount in trust, even if the beneficiary
 
 8           holds an unqualified power to withdraw assets from the
 
 9           trust or other presently exercisable general power of
 
10           appointment over the trust.
 
11      (5)  A fiduciary may not reduce principal or income receipts
 
12           from property described in paragraph (1) because of a
 
13           payment described in section    -501 or    -502 to the
 
14           extent that the will, the terms of the trust, or
 
15           applicable law requires the fiduciary to make the
 
16           payment from assets other than the property or to the
 
17           extent that the fiduciary recovers or expects to
 
18           recover the payment from a third party.  The property's
 
19           net income and principal receipts are determined by
 
20           including all of the amounts the fiduciary receives or
 
21           pays with respect to the property, whether those
 
22           amounts accrued or became due before, on, or after the
 
23           date of a decedent's death or an income interest's
 

 
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 1           terminating event, and by making a reasonable provision
 
 2           for amounts that the fiduciary believes the estate or
 
 3           terminating income interest may become obligated to pay
 
 4           after the property is distributed.
 
 5         -202  Distribution to residuary and remainder
 
 6 beneficiaries.(a)  Each beneficiary described in section
 
 7    -201(4) is entitled to receive a portion of the net income
 
 8 equal to the beneficiary's fractional interest in undistributed
 
 9 principal assets, using values as of the distribution date.  If a
 
10 fiduciary makes more than one distribution of assets to
 
11 beneficiaries to whom this section applies, each beneficiary,
 
12 including one who does not receive part of the distribution, is
 
13 entitled, as of each distribution date, to the net income the
 
14 fiduciary has received after the date of death or terminating
 
15 event or earlier distribution date but has not distributed as of
 
16 the current distribution date.
 
17      (b)  In determining a beneficiary's share of net income, the
 
18 following rules apply:
 
19      (1)  The beneficiary is entitled to receive a portion of the
 
20           net income equal to the beneficiary's fractional
 
21           interest in the undistributed principal assets
 
22           immediately before the distribution date, including
 

 
 
 
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 1           assets that later may be sold to meet principal
 
 2           obligations;
 
 3      (2)  The beneficiary's fractional interest in the
 
 4           undistributed principal assets shall be calculated
 
 5           without regard to property specifically given to a
 
 6           beneficiary and property required to pay pecuniary
 
 7           amounts not in trust;
 
 8      (3)  The beneficiary's fractional interest in the
 
 9           undistributed principal assets shall be calculated on
 
10           the basis of the aggregate value of those assets as of
 
11           the distribution date without reducing the value by any
 
12           unpaid principal obligation; and
 
13      (4)  The distribution date for purposes of this section may
 
14           be the date as of which the fiduciary calculates the
 
15           value of the assets if that date is reasonably near the
 
16           date on which assets are actually distributed.
 
17      (c)  The rules in this section apply to net gain or loss
 
18 realized after the date of death or terminating event or earlier
 
19 distribution date from the disposition of a principal asset if
 
20 this section applies to the income from the asset.
 
21      (d)  If a fiduciary does not distribute all of the collected
 
22 but undistributed net income or gain to each person as of a
 
23 distribution date, the fiduciary shall maintain appropriate
 

 
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 1 records showing the interest of each beneficiary in that net
 
 2 income or gain.
 
 3                             ARTICLE 3
 
 4       APPORTIONMENT AT BEGINNING AND END OF INCOME INTEREST
 
 5         -301  When right to income begins and ends.(a)  An
 
 6 income beneficiary is entitled to net income from the date on
 
 7 which the income interest begins.  An income interest begins on
 
 8 the date specified in the terms of the trust or, if no date is
 
 9 specified, on the date an asset becomes subject to a trust or
 
10 successive income interest.
 
11      (b)  An asset becomes subject to a trust on the date:
 
12      (1)  It is transferred to the trust in the case of an asset
 
13           that is transferred to a trust during the transferor's
 
14           life;
 
15      (2)  Of a testator's death in the case of an asset that
 
16           becomes subject to a trust by reason of a will, even if
 
17           there is an intervening period of administration of the
 
18           testator's estate; or
 
19      (3)  Of an individual's death in the case of an asset that
 
20           is transferred to a fiduciary by a third party because
 
21           of the individual's death.
 
22      (c)  An asset becomes subject to a successive income
 
23 interest on the day after the preceding income interest ends, as
 

 
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 1 determined under subsection (d), even if there is an intervening
 
 2 period of administration to wind up the preceding income
 
 3 interest.
 
 4      (d)  An income interest ends on the day before an income
 
 5 beneficiary dies or another terminating event occurs.  For
 
 6 purposes of this chapter, an income interest also ends on the
 
 7 last day of a period during which there is no beneficiary to whom
 
 8 a trustee may distribute income.
 
 9         -302  Apportionment of receipts and disbursements when
 
10 decedent dies or income interest begins.(a)  An income receipt
 
11 or disbursement other than one to which section    -201(1)
 
12 applies shall be allocated to principal if its due date occurs
 
13 before a decedent dies in the case of an estate or before an
 
14 income interest begins in the case of a trust or successive
 
15 income interest.
 
16      (b)  An income receipt or disbursement shall be allocated to
 
17 income if its due date occurs on or after the date on which a
 
18 decedent dies or an income interest begins and it is a periodic
 
19 due date.  An income receipt or disbursement shall be treated as
 
20 accruing from day to day if its due date is not periodic or it
 
21 has no due date.  The portion of the receipt or disbursement
 
22 accruing before the date on which a decedent dies or an income
 

 
 
 
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 1 interest begins shall be allocated to principal and the balance
 
 2 shall be allocated to income.
 
 3      (c)  An item of income or an obligation is due on the date
 
 4 on which the payor is required to make a payment.  If there is no
 
 5 stated payment date, there is no due date for the purposes of
 
 6 this chapter.  Distributions to shareholders or other owners from
 
 7 an entity to which section    -401 applies are deemed to be due
 
 8 on the date fixed by the entity for determining who is entitled
 
 9 to receive the distribution or, if no date is fixed, on the
 
10 declaration date for the distribution.  A due date is periodic
 
11 for receipts or disbursements that shall be paid at regular
 
12 intervals under a lease or an obligation to pay interest or if an
 
13 entity customarily makes distributions at regular intervals.             
 
14         -303  Apportionment when income interest ends.(a)  As
 
15 used in this section, "undistributed income" means net income
 
16 received before the date on which an income interest ends.  The
 
17 term does not include an item of income or expense that is due or
 
18 accrued or net income that has been added or is required to be
 
19 added to principal pursuant to the terms of the trust.
 
20      (b)  When a mandatory income interest ends, the trustee
 
21 shall pay to a mandatory income beneficiary who survives that
 
22 date, or the estate of a deceased mandatory income beneficiary
 
23 whose death causes the interest to end, the beneficiary's share
 

 
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 1 of the undistributed income that is not disposed of pursuant to
 
 2 the terms of the trust, unless the beneficiary has an unqualified
 
 3 power to revoke more than five per cent of the trust immediately
 
 4 before the income interest ends.  In the latter case, the
 
 5 undistributed income from the portion of the trust that may be
 
 6 revoked shall be added to principal.
 
 7      (c)  When a trustee's obligation to pay a fixed annuity or a
 
 8 fixed fraction of the value of the trust's assets ends, the
 
 9 trustee shall prorate the final payment if and to the extent
 
10 required by applicable law to accomplish a purpose of the trust
 
11 or its settlor relating to income, gift, estate, or other tax
 
12 requirements.
 
13                             ARTICLE 4
 
14       ALLOCATION OF RECEIPTS DURING ADMINISTRATION OF TRUST
 
15                  PART I.  RECEIPTS FROM ENTITIES
 
16         -401  Character of receipts.(a)  As used in this
 
17 section, "entity" means a corporation, partnership, joint
 
18 venture, limited liability company, regulated investment company,
 
19 real estate investment trust, common trust fund, and any other
 
20 organization in which a trustee has an interest other than a
 
21 trust or estate to which section    -402 applies or a business or
 
22 activity to which section    -403 applies, or an asset backed
 
23 security to which section    -415 applies.
 

 
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 1      (b)  Except as otherwise provided in this section, money
 
 2 received by a trustee from an entity shall be allocated to
 
 3 income.
 
 4      (c)  Receipts from an entity that shall be allocated to
 
 5 principal include:
 
 6      (1)  Property other than money;
 
 7      (2)  Money received in one distribution or a series of
 
 8           related distributions in exchange for part or all of a
 
 9           trust's interest in the entity;
 
10      (3)  Money received in total or partial liquidation of the
 
11           entity; and
 
12      (4)  Money received from an entity that is a regulated
 
13           investment company or a real estate investment trust if
 
14           the money distributed is a capital gain dividend for
 
15           federal income tax purposes.
 
16      (d)  Money is received in partial liquidation:
 
17      (1)  To the extent that the entity, at or near the time of a
 
18           distribution, indicates that it is a distribution in
 
19           partial liquidation; or
 
20      (2)  If the total amount of money or property received in a
 
21           distribution or series of related distributions is
 
22           greater than twenty per cent of the entity's gross
 

 
 
 
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                                                        H.D. 1
                                                        

 
 1           assets, as shown by the entity's year-end financial
 
 2           statements immediately preceding the initial receipt.
 
 3      (e)  Money shall not be received in partial liquidation, nor
 
 4 shall it be taken into account under subsection (d)(2), to the
 
 5 extent that it does not exceed the amount of income tax that a
 
 6 trustee or beneficiary is required to pay on taxable income of
 
 7 the entity that distributes the money.
 
 8      (f)  A trustee may rely upon a statement made by an entity
 
 9 about the source or character of a distribution if the statement
 
10 is made at or near the time of distribution by the entity's board
 
11 of directors or other person or group of persons authorized to
 
12 exercise powers to pay money or transfer property comparable to
 
13 those of a corporation's board of directors.
 
14         -402  Distribution from trust or estate.  Subject to the
 
15 terms of a recipient trust, an amount received as a distribution
 
16 of income from a trust or an estate in which the trust has an
 
17 interest other than a purchased interest shall be allocated to
 
18 income.  An amount received as a distribution of principal from
 
19 such a trust or estate shall be allocated to principal.  If a
 
20 trustee purchases an interest in a trust that is an investment
 
21 entity, or a decedent or donor transfers an interest in such a
 
22 trust to a trustee, section    -401 or    -415 shall apply to a
 
23 receipt from the trust.
 

 
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                                     S.B. NO.           S.D. 1
                                                        H.D. 1
                                                        

 
 1         -403  Business and other activities conducted by
 
 2 trustee.(a)  If a trustee who conducts a business or other
 
 3 activity determines that it is in the best interest of all the
 
 4 beneficiaries to account separately for the business or activity
 
 5 instead of accounting for it as part of the trust's general
 
 6 accounting records, the trustee may maintain separate accounting
 
 7 records for its transactions, whether or not its assets are
 
 8 segregated from other trust assets.
 
 9      (b)  A trustee who accounts separately for a business or
 
10 other activity may determine the extent to which its net cash
 
11 receipts shall be retained for working capital, the acquisition
 
12 or replacement of fixed assets, or other reasonably foreseeable
 
13 needs of the business or activity, and the extent to which the
 
14 remaining net cash receipts are accounted for as principal or
 
15 income in the trust's general accounting records.  If a trustee
 
16 sells assets of the business or other activity, other than in the
 
17 ordinary course of the business or activity, the trustee shall
 
18 account for the net amount received as principal in the trust's
 
19 general accounting records to the extent the trustee determines
 
20 that the amount received is no longer required in the conduct of
 
21 the business.
 
22      (c)  Activities for which the trustee may maintain separate
 
23 accounting records include:
 

 
Page 25                                                    2536
                                     S.B. NO.           S.D. 1
                                                        H.D. 1
                                                        

 
 1      (1)  Retail, manufacturing, service, and other traditional
 
 2           business activities;
 
 3      (2)  Farming;
 
 4      (3)  Raising and selling livestock and other animals;
 
 5      (4)  Management of rental properties;
 
 6      (5)  Extraction of minerals and other natural resources;
 
 7      (6)  Timber operations; and
 
 8      (7)  Activities to which section    -415 applies.
 
 9            PART II.  RECEIPTS NOT NORMALLY APPORTIONED
 
10         -404  Principal receipts.  The following shall be
 
11 allocated to principal:
 
12      (1)  To the extent not allocated to income under this
 
13           chapter, assets received from a:
 
14           (A)  Transferor during the transferor's lifetime;
 
15           (B)  Decedent's estate;
 
16           (C)  Trust with a terminating income interest; or
 
17           (D)  Payor pursuant to a contract naming the trust or
 
18                its trustee as beneficiary;
 
19      (2)  Money or other property received from the sale,
 
20           exchange, liquidation, or change in form of a principal
 
21           asset, including realized profit, subject to this
 
22           article;
 

 
 
 
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                                     S.B. NO.           S.D. 1
                                                        H.D. 1
                                                        

 
 1      (3)  Amounts recovered from third parties to reimburse the
 
 2           trust because of disbursements described in section
 
 3              -502(a)(7) or for other reasons to the extent not
 
 4           based on 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
 
 7           to an accounting period during which a current income
 
 8           beneficiary had a mandatory income interest shall be
 
 9           classified as income;
 
10      (5)  Net income received in an accounting period during
 
11           which there is no beneficiary to whom a trustee may or
 
12           shall distribute income; and
 
13      (6)  Other receipts as provided in part III.
 
14         -405  Rental property.  To the extent that a trustee
 
15 accounts for receipts from rental property pursuant to this
 
16 section, an amount received as rent of real or personal property,
 
17 including an amount received for cancellation or renewal of a
 
18 lease, shall be allocated to income.  An amount received as a
 
19 refundable deposit, including a security deposit or a deposit
 
20 that is to be applied as rent for future periods, shall be added
 
21 to principal and held subject to the terms of the lease and shall
 
22 not be available for distribution to a beneficiary until the
 

 
 
 
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                                     S.B. NO.           S.D. 1
                                                        H.D. 1
                                                        

 
 1 trustee's contractual obligations have been satisfied with
 
 2 respect to that amount.
 
 3         -406  Obligation to pay money.(a)  An amount received
 
 4 as interest, whether determined at a fixed, variable, or floating
 
 5 rate, on an obligation to pay money to the trustee, including an
 
 6 amount received as consideration for prepaying principal, shall
 
 7 be allocated to income without any provision for amortization of
 
 8 premium.
 
 9      (b)  An amount received from the sale, redemption, or other
 
10 disposition of an obligation to pay money to the trustee more
 
11 than one year after it is purchased or acquired by the trustee,
 
12 including an obligation whose purchase price or value when it is
 
13 acquired is less than its value at maturity, shall be allocated
 
14 to principal.  If the obligation matures within one year after it
 
15 is purchased or acquired by the trustee, an amount received in
 
16 excess of its purchase price or its value when acquired by the
 
17 trust shall be allocated to income.
 
18      (c)  This section shall not apply to obligations to which
 
19 sections    -409 through    -412,    -414, and    -415 apply.
 
20         -407  Insurance policies and similar contracts.(a)
 
21 Except as provided in subsection (b), proceeds from a life
 
22 insurance policy or other contract whose beneficiary is the trust
 
23 or its trustee, including a contract that insures the trust or
 

 
Page 28                                                    2536
                                     S.B. NO.           S.D. 1
                                                        H.D. 1
                                                        

 
 1 its trustee against loss for the damage or destruction of, or
 
 2 loss of title to, a principal asset shall be allocated to
 
 3 principal.  The trustee shall allocate dividends on an insurance
 
 4 policy to income if the premiums on the policy are paid from
 
 5 income, and to principal if the premiums are paid from principal.
 
 6 This section shall not apply to a contract to which section
 
 7    -409 applies.
 
 8      (b)  Insurance proceeds shall be allocated to income if they
 
 9 are from a policy that insures the trustee against the loss of
 
10 occupancy or other use by an income beneficiary, the loss of
 
11 income, or, subject to section    -403, the loss of profits from
 
12 a business.
 
13             PART III.  RECEIPTS NORMALLY APPORTIONED
 
14         -408  Insubstantial allocations not required.  If a
 
15 trustee determines that an allocation between principal and
 
16 income required by sections    -409 through    -412 or section
 
17    -425 is insubstantial, the trustee may allocate the entire
 
18 amount to principal if one of the circumstances described in
 
19 section    -104(c) does not apply to such an allocation.  This
 
20 power may be exercised by a co-trustee in the circumstances
 
21 described in section    -104(d), and it may be released for the
 
22 reasons and in the manner described in section    -104(e).  An
 
23 allocation shall be presumed to be insubstantial if:
 

 
Page 29                                                    2536
                                     S.B. NO.           S.D. 1
                                                        H.D. 1
                                                        

 
 1      (1)  The amount of the allocation would increase or decrease
 
 2           an accounting period's net income, as determined before
 
 3           the allocation, by less than ten per cent; or
 
 4      (2)  The value of the asset producing the receipt for which
 
 5           the allocation would be made is less than ten per cent
 
 6           of the total value of the trust's assets at the
 
 7           beginning of the accounting period.
 
 8         -409  Deferred compensation, annuities, and similar
 
 9 payments.(a)  This section shall apply to payments that a
 
10 trustee may receive over a fixed number of years or during the
 
11 life of one or more individuals because of services rendered or
 
12 property transferred to the payor in exchange for future
 
13 payments.  The payments include those made in money or property
 
14 from the payor's general assets or from a separate fund created
 
15 by the payor, including a private or commercial annuity, an
 
16 individual retirement account, and a pension, profit sharing,
 
17 stock bonus, or stock ownership plan.  This section shall not
 
18 apply to payments to which section    -410 applies.
 
19      (b)  To the extent that a payment is characterized as
 
20 interest or a dividend or a payment made in lieu of interest or a
 
21 dividend, it shall be allocated to income.  The balance of the
 
22 payment and any other payment received in the same accounting
 

 
 
 
Page 30                                                    2536
                                     S.B. NO.           S.D. 1
                                                        H.D. 1
                                                        

 
 1 period that is not characterized as interest, a dividend, or an
 
 2 equivalent payment, shall be allocated to principal.
 
 3      (c)  If no part of a payment is characterized as interest, a
 
 4 dividend, or an equivalent payment, and all or part of the
 
 5 payment is required to be made, a trustee shall allocate to
 
 6 income ten per cent of the part that is required to be made
 
 7 during the accounting period and the balance to principal.  If no
 
 8 part of a payment is required to be made or the payment received
 
 9 is the entire amount to which the trustee is entitled, the entire
 
10 payment shall be allocated to principal.
 
11      For purposes of this subsection, a payment shall not be
 
12 "required to be made" to the extent that it is made because the
 
13 trustee exercises a right of withdrawal.
 
14      (d)  If, to obtain an estate tax marital deduction for a
 
15 trust, a trustee shall allocate more of a payment to income than
 
16 provided for by this section, the trustee shall allocate to
 
17 income the additional amount necessary to obtain the marital
 
18 deduction.
 
19         -410  Liquidating asset.(a)  As used in this section,
 
20 "liquidating asset" means an asset whose value will diminish or
 
21 terminate because the asset is expected to produce receipts for a
 
22 period of limited duration.  The term includes leaseholds,
 
23 patents, trademarks, copyrights, royalty rights, and rights to
 

 
Page 31                                                    2536
                                     S.B. NO.           S.D. 1
                                                        H.D. 1
                                                        

 
 1 receive payments during a period of more than one year under an
 
 2 arrangement that does not provide for the payment of interest on
 
 3 the unpaid balance.  The term does not include deferred
 
 4 compensation that is subject to section    -409, natural
 
 5 resources that are subject to section    -411, timber that is
 
 6 subject to section    -412, an activity that is subject to
 
 7 section    -414, an asset subject to section    -415, or any
 
 8 asset for which the trustee establishes a reserve for
 
 9 depreciation under section    -503.
 
10      (b)  A trustee shall allocate to income ten per cent of the
 
11 receipts from a liquidating asset and the balance to principal.
 
12         -411  Minerals, water, and other natural resources.(a)
 
13 Receipts from an interest in minerals or other natural resources
 
14 shall be allocated as follows:
 
15      (1)  If received as nominal delay rental or nominal annual
 
16           rent on a lease, a receipt shall be allocated to
 
17           income.
 
18      (2)  If received from a production payment, a receipt shall
 
19           be allocated to income if and to the extent that the
 
20           agreement creating the production payment provides a
 
21           factor for interest or its equivalent.  The balance
 
22           shall be allocated to principal.
 

 
 
 
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                                     S.B. NO.           S.D. 1
                                                        H.D. 1
                                                        

 
 1      (3)  If an amount received as a royalty, bonus, or delay
 
 2           rental is more than nominal, ninety per cent shall be
 
 3           allocated to principal and the balance to income.
 
 4      (4)  If an amount is received from a working interest or any
 
 5           other interest not provided for in paragraph (1), (2),
 
 6           or (3), ninety per cent of the net amount received
 
 7           shall be allocated to principal and the balance to
 
 8           income.
 
 9      (b)  An amount received on account of an interest in water
 
10 that is renewable shall be allocated to income.  If the water is
 
11 not renewable, ninety per cent of the amount shall be allocated
 
12 to principal and the balance to income.
 
13      (c)  This chapter applies without regard to whether a
 
14 decedent or donor was extracting minerals, water, or other
 
15 natural resources before the interest became subject to the
 
16 trust.
 
17      (d)  If a trust owns an interest in minerals, water, or
 
18 other natural resources on the effective date of this chapter,
 
19 the trustee may allocate receipts from the interest as provided
 
20 in this section or in the manner used by the trustee before the
 
21 effective date of this chapter.  If the trust acquires an
 
22 interest in minerals, water, or other natural resources after the
 

 
 
 
Page 33                                                    2536
                                     S.B. NO.           S.D. 1
                                                        H.D. 1
                                                        

 
 1 effective date of this chapter, the trustee shall allocate
 
 2 receipts from the interest as provided in this section.
 
 3         -412  Timber.(a)  A trustee may account for net
 
 4 receipts from the sale of timber and related products under
 
 5 subsection (b), unless the trustee determines that net receipts
 
 6 are insubstantial and allocates the net receipts to principal
 
 7 under section    -408.  If a trust owns more than one block of
 
 8 timber land, the trustee may use different methods to account for
 
 9 net receipts from different blocks.
 
10      (b)  If a trustee does not account under section    -408 for
 
11 net receipts from the sale of timber and related products or
 
12 allocate the net receipts to principal because they are
 
13 insubstantial, the trustee shall allocate the net receipts:
 
14      (1)  To income to the extent that the amount of timber
 
15           removed from the land does not exceed the rate of
 
16           growth of the block as a whole during the accounting
 
17           periods in which a beneficiary has a mandatory income
 
18           interest;
 
19      (2)  To principal to the extent that the amount of timber
 
20           removed from the land exceeds the block's rate of
 
21           growth or the net receipts are from the sale of
 
22           standing timber;
 

 
 
 
Page 34                                                    2536
                                     S.B. NO.           S.D. 1
                                                        H.D. 1
                                                        

 
 1      (3)  To or between income and principal if the net receipts
 
 2           are from the lease of timberland or from a contract to
 
 3           cut timber from land owned by a trust, by determining
 
 4           the amount of timber removed from the land under the
 
 5           lease or contract and applying the rules in paragraphs
 
 6           (1) and (2); or
 
 7      (4)  To principal to the extent that advance payments,
 
 8           bonuses, and other payments are not allocated pursuant
 
 9           to paragraph (1), (2), or (3).
 
10      (c)  In determining the net receipts from the sale of
 
11 timber, a trustee shall deduct and transfer to principal a
 
12 reasonable amount for depletion.
 
13      (d)  This chapter applies regardless of whether a decedent
 
14 or transferor was harvesting timber from the property before it
 
15 became subject to the trust.
 
16      (e)  If a trust owns an interest in timberland on the
 
17 effective date of this chapter, the trustee may allocate net
 
18 receipts from the sale of timber and related products as provided
 
19 in this section or in the manner used by the trustee before the
 
20 effective date of this chapter.  If the trust acquires an
 
21 interest in timberland after the effective date of this chapter,
 
22 the trustee shall allocate net receipts from the sale of timber
 
23 and related products as provided in this section.
 

 
Page 35                                                    2536
                                     S.B. NO.           S.D. 1
                                                        H.D. 1
                                                        

 
 1         -413  Property not productive of income.(a)  If a
 
 2 marital deduction is allowed for all or part of a trust whose
 
 3 assets consist substantially of property that does not provide
 
 4 the surviving spouse with sufficient income from or use of the
 
 5 trust assets, and if the amounts that the trustee transfers from
 
 6 principal to income under section    -104 and distributes to the
 
 7 spouse from principal pursuant to the terms of the trust are
 
 8 insufficient to provide the spouse with the beneficial enjoyment
 
 9 required to obtain the marital deduction, the spouse may require
 
10 the trustee to make property productive of income, convert
 
11 property within a reasonable time, or exercise the power
 
12 conferred by section    -104(a).  The trustee may decide which
 
13 action or combination of actions to take.
 
14      (b)  In all other cases, proceeds from the sale or other
 
15 disposition of an asset are principal without regard to the
 
16 amount of income the asset produces during any accounting period.
 
17         -414  Derivatives and options.(a)  As used in this
 
18 section, "derivative" means a contract or financial instrument or
 
19 a combination of contracts and financial instruments that gives a
 
20 trust the right or obligation to participate in some or all
 
21 changes in the price of a tangible or intangible asset or group
 
22 of assets, or changes in a rate, an index of prices or rates, or
 
23 other market indicator for an asset or a group of assets.
 

 
Page 36                                                    2536
                                     S.B. NO.           S.D. 1
                                                        H.D. 1
                                                        

 
 1      (b)  To the extent that a trustee does not account under
 
 2 section    -403 for transactions in derivatives, receipts from
 
 3 and disbursement made in connection with those transactions shall
 
 4 be allocated to principal.
 
 5      (c)  If a trustee grants an option to buy property from the
 
 6 trust, whether or not the trust owns the property when the option
 
 7 is granted, grants an option that permits another person to sell
 
 8 property to the trust, or acquires an option to buy property for
 
 9 the trust or an option to sell an asset owned by the trust, and
 
10 the trustee or other owner of the asset is required to deliver
 
11 the asset if the option is exercised, an amount received for
 
12 granting the option shall be allocated to principal, and an
 
13 amount paid to acquire the option shall be paid from principal.
 
14 A gain or loss realized upon the exercise of an option, including
 
15 an option granted to a settlor of the trust for services
 
16 rendered, shall be allocated to principal.
 
17         -415  Asset-backed securities.(a)  As used in this
 
18 section, "asset-backed security" means an asset whose value is
 
19 based upon the right it gives the owner to receive distributions
 
20 from the proceeds of financial assets that provide collateral for
 
21 the security.  The term includes an asset that gives the owner
 
22 the right to receive only the interest or other current return
 
23 from the collateral financial assets or only the proceeds from
 

 
Page 37                                                    2536
                                     S.B. NO.           S.D. 1
                                                        H.D. 1
                                                        

 
 1 the capital investment in the collateral financial assets.  It
 
 2 does not include an asset to which section    -401 or    -409
 
 3 applies.
 
 4      (b)  If a trust receives a payment from the interest or
 
 5 other current return and the capital investment of the collateral
 
 6 financial assets, the trustee shall allocate to income the
 
 7 portion of a payment that the payor identifies as being from the
 
 8 interest or other current return, and shall allocate the balance
 
 9 of the payment to principal.
 
10      (c)  If a trust receives one or more payments in exchange
 
11 for the trust's entire interest in an asset-backed security in
 
12 one accounting period, the trustee shall allocate the payments to
 
13 principal.  If a payment is one of a series of payments that will
 
14 result in the liquidation of the trust's interest in the security
 
15 over more than one accounting period, the trustee shall allocate
 
16 ten per cent of the payment to income and the balance to
 
17 principal.
 
18                             ARTICLE 5
 
19    ALLOCATION OF DISBURSEMENTS DURING ADMINISTRATION OF TRUST
 
20         -501  Disbursements from income.  Unless otherwise
 
21 governed by statutory fees or unless the instrument provides for
 
22 it, trustee shall make the following disbursements from income to
 

 
 
 
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                                     S.B. NO.           S.D. 1
                                                        H.D. 1
                                                        

 
 1 the extent that they are not disbursements to which section    -
 
 2 201(2)(B) or (C) applies:
 
 3      (1)  One-half of the regular compensation of the trustee and
 
 4           of any person providing investment advisory or
 
 5           custodial services to the trustee;
 
 6      (2)  One-half of all expenses for accountings, judicial
 
 7           proceedings, or other matters that involve both the
 
 8           income and remainder interests;
 
 9      (3)  All of the other ordinary expenses incurred in
 
10           connection with the administration, management, or
 
11           preservation of trust property and the distribution of
 
12           income, including interest, ordinary repairs, regularly
 
13           recurring taxes assessed against principal, and
 
14           expenses of a proceeding or other matter that concerns
 
15           primarily the income interest; and
 
16      (4)  Recurring premiums on insurance covering the loss of a
 
17           principal asset or the loss of income from or use of
 
18           the asset.
 
19         -502  Disbursements from principal.(a)  Unless
 
20 otherwise governed by statutory fees or unless the instrument
 
21 provides for it, a trustee shall make the following disbursements
 
22 from principal:
 

 
 
 
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                                     S.B. NO.           S.D. 1
                                                        H.D. 1
                                                        

 
 1      (1)  The remaining one-half of the disbursements described
 
 2           in section    -501(1) and (2);
 
 3      (2)  All of the trustee's compensation calculated on
 
 4           principal as an acceptance, distribution, or
 
 5           termination fee, and disbursements made to prepare
 
 6           property for sale;
 
 7      (3)  Payments on the principal of a trust debt;
 
 8      (4)  Expenses of a proceeding that concerns primarily
 
 9           principal, including a proceeding to construe the trust
 
10           or to protect the trust or its property;
 
11      (5)  Insurance premiums paid on a policy not described in
 
12           section    -501(4) of which the trust is the owner and
 
13           beneficiary;
 
14      (6)  Estate, inheritance, and other transfer taxes,
 
15           including penalties, apportioned to the trust; and
 
16      (7)  Disbursements related to environmental matters,
 
17           including reclamation, assessing environmental
 
18           conditions, remedying and removing environmental
 
19           contamination, monitoring remedial activities and the
 
20           release of substances, preventing future releases of
 
21           substances, collecting amounts from persons liable or
 
22           potentially liable for the costs of those activities,
 
23           penalties imposed under environmental laws, rules, or
 

 
Page 40                                                    2536
                                     S.B. NO.           S.D. 1
                                                        H.D. 1
                                                        

 
 1           regulations and other payments made to comply with
 
 2           those laws, rules, or regulations, statutory or common
 
 3           law claims by third parties, and defending claims based
 
 4           on environmental matters.
 
 5      (b)  If a principal asset is encumbered with an obligation
 
 6 that requires income from that asset to be paid directly to the
 
 7 creditor, the trustee shall transfer from principal to income an
 
 8 amount equal to the income paid to the creditor in reduction of
 
 9 the obligation's principal balance.
 
10         -503  Transfers from income to principal for
 
11 depreciation.(a)  As used in this section, "depreciation" means
 
12 a reduction in value of a fixed asset having a useful life of
 
13 more than one year, due to wear, tear, decay, corrosion, or
 
14 gradual obsolescence.
 
15      (b)  A trustee may transfer to principal a reasonable amount
 
16 of the net cash receipts from a principal asset that is subject
 
17 to depreciation, but a transfer may not be made for depreciation:
 
18      (1)  Of that portion of real property used or available for
 
19           use by a beneficiary as a residence or of tangible
 
20           personal property held or made available for the
 
21           personal use or enjoyment of a beneficiary;
 
22      (2)  During the administration of a decedent's estate; or
 

 
 
 
Page 41                                                    2536
                                     S.B. NO.           S.D. 1
                                                        H.D. 1
                                                        

 
 1      (3)  Under this section if the trustee is accounting under
 
 2           section    -403 for the business or activity in which
 
 3           the asset is used.
 
 4      (c)  An amount transferred to principal need not be held as
 
 5 a separate fund.
 
 6         -504  Transfers from income to reimburse principal.(a)
 
 7 If a trustee makes or expects to make a principal disbursement
 
 8 described in this section, the trustee may transfer an
 
 9 appropriate amount from income to principal in one or more
 
10 accounting periods to reimburse principal or to provide a reserve
 
11 for future principal disbursements.
 
12      (b)  Principal disbursements to which subsection (a) applies
 
13 include the following, but only to the extent that the trustee
 
14 has not been and does not expect to be reimbursed by a third
 
15 party:
 
16      (1)  An amount chargeable to income but paid from principal
 
17           because it is unusually large, including extraordinary
 
18           repairs;
 
19      (2)  A capital improvement to a principal asset, whether in
 
20           the form of changes to an existing asset or the
 
21           construction of a new asset, including special
 
22           assessments;
 

 
 
 
Page 42                                                    2536
                                     S.B. NO.           S.D. 1
                                                        H.D. 1
                                                        

 
 1      (3)  Disbursements made to prepare property for rental,
 
 2           including tenant allowances, leasehold improvements,
 
 3           and broker's commissions;
 
 4      (4)  Periodic payments on an obligation secured by a
 
 5           principal asset to the extent that the amount
 
 6           transferred from income to principal for depreciation
 
 7           is less than the periodic payments; and
 
 8      (5)  Disbursements described in section    -502(a)(7).
 
 9      (c)  If the asset whose ownership gives rise to the
 
10 disbursements becomes subject to a successive income interest
 
11 after an income interest ends, a trustee may continue to transfer
 
12 amounts from income to principal as provided in subsection (a).
 
13         -505  Income taxes.(a)  A tax required to be paid by a
 
14 trustee based on receipts allocated to income shall be paid from
 
15 income.
 
16      (b)  A tax required to be paid by a trustee based on
 
17 receipts allocated to principal shall be paid from principal,
 
18 even if the tax is called an income tax by the taxing authority.
 
19      (c)  A tax required to be paid by a trustee on the trust's
 
20 share of an entity's taxable income shall be paid proportionately
 
21 from:
 
22      (1)  Income to the extent that receipts from the entity are
 
23           allocated to income; and
 

 
Page 43                                                    2536
                                     S.B. NO.           S.D. 1
                                                        H.D. 1
                                                        

 
 1      (2)  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 income
 
 5                exceeds the total receipts in paragraphs (1) and
 
 6                (2)(A).
 
 7      (d)  For purposes of this section, receipts allocated to
 
 8 principal or income shall be reduced by the amount distributed to
 
 9 a beneficiary from principal or income for which the trust
 
10 receives a deduction in calculating the tax.
 
11         -506  Adjustments between principal and income because
 
12 of taxes.(a)  A fiduciary may make adjustments between
 
13 principal and income to offset the shifting of economic interests
 
14 or tax benefits between income beneficiaries and remainder
 
15 beneficiaries that arise from:
 
16      (1)  Elections and decisions, other than those described in
 
17           subsection (b), that the fiduciary makes from time to
 
18           time regarding tax matters;
 
19      (2)  An income tax or any other tax that is imposed upon the
 
20           fiduciary or a beneficiary as a result of a transaction
 
21           involving or a distribution from the estate or trust;
 
22           or
 

 
 
 
Page 44                                                    2536
                                     S.B. NO.           S.D. 1
                                                        H.D. 1
                                                        

 
 1      (3)  The ownership by an estate or trust of an interest in
 
 2           an entity whose taxable income, whether or not
 
 3           distributed, is includable in the taxable income of the
 
 4           estate, trust, or a beneficiary.
 
 5      (b)  If the amount of an estate tax marital deduction or
 
 6 charitable contributions deduction is reduced because a fiduciary
 
 7 deducts an amount that is paid from principal for income tax
 
 8 purposes instead of deducting it for estate tax purposes, and as
 
 9 a result, estate taxes paid from principal are increased and
 
10 income taxes paid by an estate, trust, or beneficiary are
 
11 decreased, each estate, trust, or beneficiary that benefits from
 
12 the decrease in income tax shall reimburse the principal from
 
13 which the increase in estate tax is paid.  The total
 
14 reimbursement shall equal the increase in the estate tax to the
 
15 extent that the principal used to pay the increase would have
 
16 qualified for a marital deduction or charitable contributions
 
17 deduction but for the payment.  The proportionate share of the
 
18 reimbursement for each estate, trust, or beneficiary whose income
 
19 taxes are reduced shall be the same as its proportionate share of
 
20 the total decrease in income tax.  An estate or trust shall
 
21 reimburse principal from income."
 
22      SECTION 2.  Section 554A-3, Hawaii Revised Statutes, is
 
23 amended by amending subsection (c) to read as follows:
 

 
Page 45                                                    2536
                                     S.B. NO.           S.D. 1
                                                        H.D. 1
                                                        

 
 1      "(c)  A trustee has the power, subject to subsections (a)
 
 2 and (b):
 
 3      (1)  To collect, hold, and retain trust assets received from
 
 4           a trustor until, in the judgment of the trustee,
 
 5           disposition of the assets should be made;
 
 6      (2)  To receive additions to the assets of the trust;
 
 7      (3)  To continue or participate in the operation of any
 
 8           business or other enterprise, and to effect
 
 9           incorporation, dissolution, or other change in the form
 
10           of the organization of the business or enterprise;
 
11      (4)  To invest and reinvest trust assets in accordance with
 
12           the provisions of the trust or as provided by law;
 
13      (5)  To deposit trust funds in a bank;
 
14      (6)  To acquire or dispose of an asset, for cash or on
 
15           credit, at public or private sale; and to manage,
 
16           develop, improve, exchange, partition, change the
 
17           character of, or abandon a trust asset or any interest
 
18           therein; and to encumber, mortgage, or pledge a trust
 
19           asset for a term within or extending beyond the term of
 
20           the trust, in connection with the exercise of any power
 
21           vested in the trustee;
 
22      (7)  To make ordinary or extraordinary repairs or
 
23           alterations in buildings or other structures, to
 

 
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 1           demolish any improvements, or to raze existing or erect
 
 2           new party walls or buildings;
 
 3      (8)  To subdivide, develop, or dedicate land to public use;
 
 4           or to make or obtain the vacation of plats and adjust
 
 5           boundaries; or to adjust differences in valuation on
 
 6           exchange or partition by giving or receiving
 
 7           consideration; or to dedicate easements to public use
 
 8           without consideration;
 
 9      (9)  To enter for any purpose into a lease as lessor or
 
10           lessee with or without option to purchase or renew for
 
11           a term within or extending beyond the term of the
 
12           trust;
 
13     (10)  To enter into a lease or arrangement for exploration
 
14           and removal of minerals or other natural resources or
 
15           enter into a pooling or unitization agreement;
 
16     (11)  To grant an option involving disposition of a trust
 
17           asset or to take an option for the acquisition of any
 
18           asset;
 
19     (12)  To vote a security, in person or by general or limited
 
20           proxy;
 
21     (13)  To pay calls, assessments, and any other sums
 
22           chargeable or accruing against or on account of
 
23           securities;
 

 
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 1     (14)  To sell or exercise stock subscription or conversion
 
 2           rights; to consent, directly or through a committee or
 
 3           other agent, to the reorganization, consolidation,
 
 4           merger, dissolution, or liquidation of a corporation or
 
 5           other business enterprise;
 
 6     (15)  To hold a security in the name of a nominee or in other
 
 7           form without disclosure of the trust, so that title to
 
 8           the security may pass by delivery, but the trustee is
 
 9           liable for any act of the nominee in connection with
 
10           the stock so held;
 
11     (16)  To insure the assets of the trust against damage or
 
12           loss, and the trustee against liability with respect to
 
13           third persons;
 
14     (17)  To borrow money to be repaid from trust assets or
 
15           otherwise; to advance money for the protection of the
 
16           trust, and for all expenses, losses, and liabilities
 
17           sustained in the administration of the trust or because
 
18           of the holding or ownership of any trust assets, for
 
19           which advances with any interest the trustee has a lien
 
20           on the trust assets as against the beneficiary;
 
21     (18)  To pay or contest any claim; to settle a claim by or
 
22           against the trust by compromise, arbitration, or
 
23           otherwise; and to release, in whole or in part, any
 

 
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 1           claim belonging to the trust to the extent that the
 
 2           claim is uncollectible;
 
 3     (19)  To pay taxes, assessments, compensation of the trustee,
 
 4           and other expenses incurred in the collection, care,
 
 5           administration, and protection of the trust;
 
 6     (20)  To allocate items of income or expense to either trust
 
 7           income or principal, as provided by chapter [557, the
 
 8           Revised]    , the Uniform Principal and Income Act,
 
 9           including creation of reserves out of income for
 
10           depreciation, obsolescence, or amortization, or for
 
11           depletion in mineral or timber properties;
 
12     (21)  To pay any sum distributable to a beneficiary under
 
13           legal disability, without liability to the trustee, by
 
14           paying the sum to the beneficiary or by paying the sum
 
15           for the use of the beneficiary either to a legal
 
16           representative appointed by the court, or if none, to a
 
17           relative;
 
18     (22)  To effect distribution of money and property (that may
 
19           be made in kind on a pro rata or non-pro rata basis),
 
20           in divided or undivided interests, and to adjust
 
21           resulting differences in valuation;
 
22     (23)  To employ persons, including attorneys, auditors,
 
23           investment advisors, or agents, even if they are
 

 
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 1           associated with the trustee, to advise or assist the
 
 2           trustee in performance of the trustee's administrative
 
 3           duties; to act without independent investigation upon
 
 4           their recommendations; and instead of acting
 
 5           personally, to employ one or more agents to perform any
 
 6           act of administration, whether or not discretionary;
 
 7     (24)  To prosecute or defend actions, claims, or proceedings
 
 8           for the protection of trust assets and of the trustee
 
 9           in the performance of trustee duties; and
 
10     (25)  To execute and deliver all instruments [which] that
 
11           will accomplish or facilitate the exercise of the
 
12           powers vested in the trustee."
 
13      SECTION 3.  Chapter 557, Hawaii Revised Statutes, is
 
14 repealed.
 
15      SECTION 4.  This Act applies to every trust or decedent's
 
16 estate as of the beginning of an accounting period of the trust
 
17 or estate following the effective date of this Act, except as
 
18 otherwise expressly provided in the will, terms of the trust, or
 
19 in this Act.
 
20      SECTION 5.  Statutory material to be repealed is bracketed.
 
21 New statutory material is underscored.
 
22      SECTION 6.  This Act shall take effect on July 1, 2000.