Uniform Principal & Income Act

Repeals the revised uniform principal and income act (chapter
557, HRS) and establishes a new uniform principal and income act.

THE SENATE                              S.B. NO.983
TWENTIETH LEGISLATURE, 1999                                
STATE OF HAWAII                                            

                   A  BILL  FOR  AN  ACT


 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
 6                             ARTICLE 1
 8       -101  Short title.  This chapter may be cited as the
 9 Uniform Principal and Income Act.
10       -102  Definitions.  In this chapter, unless the context
11 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.
20      "Fiduciary" means a personal representative or a trustee.

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

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

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 1           fiduciary by the terms of the trust or the will even if
 2           the fiduciary exercises that power in a manner
 3           different from a provision of this chapter;
 4      (3)  Shall administer a trust or estate in accordance with
 5           this chapter if the terms of the trust or the will do
 6           not contain a different provision or do not give the
 7           fiduciary a discretionary power of administration; and
 8      (4)  Shall add a receipt or charge a disbursement to
 9           principal to the extent that the terms of the trust and
10           this chapter do not provide a rule for allocating the
11           receipt or disbursement to or between principal and
12           income.
13      (b)  In exercising the power to adjust granted by section
14    -104(a), or a discretionary power of administration regarding
15 a matter within the scope of this chapter, whether granted by the
16 terms of a trust, a will, or this chapter, a fiduciary shall
17 administer a trust or estate impartially, based on what is fair
18 and reasonable to all of the beneficiaries, unless the terms of
19 the trust or the will clearly manifest an intention that the
20 fiduciary shall or may favor one or more of the beneficiaries.  A
21 determination in accordance with this chapter is presumed to be
22 fair and reasonable to all of the beneficiaries.
23         -104  Trustee's power to adjust.(a)  A trustee may

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 1 adjust between principal and income to the extent the trustee
 2 considers necessary if the trustee invests and manages trust
 3 assets as a prudent investor, the terms of the trust describe the
 4 amount that may or must be distributed to a beneficiary by
 5 referring to the trust's income, and the trustee determines that,
 6 after applying the rules in section    -103(a), the trustee is
 7 unable to comply with the rule in section    -103(b).
 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;
23      (2)  That reduces the actuarial value of the income interest

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

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

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 2         -201  Determination and distribution of net income.
 3 After a decedent dies, in the case of an estate, or after an
 4 income interest in a trust ends, the following rules apply:
 5      (1)  A fiduciary of an estate or a terminating income
 6           interest shall determine the amount of net income and
 7           net principal receipts received from property
 8           specifically given to a beneficiary under the rules in
 9           articles 3 through 5 which apply to trustees and the
10           rules in paragraph (5).  The fiduciary shall distribute
11           the net income and net principal receipts to the
12           beneficiary who is to receive the specific property.
13      (2)  A fiduciary shall determine the remaining net income of
14           a decedent's estate or a terminating income interest
15           under the rules in articles 3 through 5 which apply to
16           trustees and by:
17           (A)  Including in net income all income from property
18                used to discharge liabilities;
19           (B)  Paying from income or principal, in the
20                fiduciary's discretion, fees of attorneys,
21                accountants, and fiduciaries; court costs and
22                other expenses of administration; and interest on
23                death taxes, but the fiduciary may pay those

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

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

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 1           date of a decedent's death or an income interest's
 2           terminating event, and by making a reasonable provision
 3           for amounts that the fiduciary believes the estate or
 4           terminating income interest may become obligated to pay
 5           after the property is distributed.
 6         -202  Distribution to residuary and remainder
 7 beneficiaries.(a)  Each beneficiary described in section
 8    -201(4) is entitled to receive a portion of the net income
 9 equal to the beneficiary's fractional interest in undistributed
10 principal assets, using values as of the distribution date.  If a
11 fiduciary makes more than one distribution of assets to
12 beneficiaries to whom this section applies, each beneficiary,
13 including one who does not receive part of the distribution, is
14 entitled, as of each distribution date, to the net income the
15 fiduciary has received after the date of death or terminating
16 event or earlier distribution date but has not distributed as of
17 the current distribution date.
18      (b)  In determining a beneficiary's share of net income, the
19 following rules apply:
20      (1)  The beneficiary is entitled to receive a portion of the
21           net income equal to the beneficiary's fractional
22           interest in the undistributed principal assets
23           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 must 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 must 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.
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
 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:
12      (1)  On the date it is transferred to the trust in the case
13           of an asset that is transferred to a trust during the
14           transferor's life;
15      (2)  On the date of a testator's death in the case of an
16           asset that becomes subject to a trust by reason of a
17           will, even if there is an intervening period of
18           administration of the testator's estate; or
19      (3)  On the date of an individual's death in the case of an
20           asset that is transferred to a fiduciary by a third
21           party because 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 must 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 must 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 must 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
23 interest begins must be allocated to principal and the balance

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

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 1 the terms of the trust unless the beneficiary has an unqualified
 2 power to revoke more than five per cent of the trust immediately
 3 before the income interest ends.  In the latter case, the
 4 undistributed income from the portion of the trust that may be
 5 revoked must be added to principal.
 6      (c)  When a trustee's obligation to pay a fixed annuity or a
 7 fixed fraction of the value of the trust's assets ends, the
 8 trustee shall prorate the final payment if and to the extent
 9 required by applicable law to accomplish a purpose of the trust
10 or its settlor relating to income, gift, estate, or other tax
11 requirements.
12                             ARTICLE 4
14                  PART I.  RECEIPTS FROM ENTITIES
15         -401  Character of receipts.(a)  In this section,
16 "entity" means a corporation, partnership, joint venture, limited
17 liability company, regulated investment company, real estate
18 investment trust, common trust fund, and any other organization
19 in which a trustee has an interest other than a trust or estate
20 to which section    -402 applies or a business or activity to
21 which section    -403 applies.
22      (b)  Except as otherwise provided in this section, cash
23 received by a trustee from an entity must be allocated to income.

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 1      (c)  Receipts from an entity which must be allocated to
 2 principal include:
 3      (1)  Property other than cash, except as otherwise provided
 4           in paragraph (4);
 5      (2)  Cash or property received in one distribution or a
 6           series of related distributions in exchange for part or
 7           all of a trust's interest in the entity;
 8      (3)  Cash or property received in total or partial
 9           liquidation of the entity; and
10      (4)  Cash or property received from an entity that is a
11           regulated investment company or a real estate
12           investment trust if the distribution is a capital gain
13           dividend for federal income tax purposes.
14      (d)  Cash or property is received in partial liquidation:
15      (1)  To the extent that the entity, at or near the time of a
16           distribution, indicates that it is a distribution in
17           partial liquidation; or
18      (2)  If the total amount received in a distribution or
19           series of related distributions is greater than twenty
20           per cent of the entity's gross assets, as shown by the
21           entity's year-end financial statements immediately
22           preceding the initial receipt.
23      (e)  Cash is not received in partial liquidation, nor may it

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 1 be taken into account under subsection (d)(2), to the extent that
 2 it does not exceed the amount of income tax that a trustee or
 3 beneficiary must pay on taxable income of the entity that
 4 distributes the cash.
 5      (f)  A trustee may rely upon a statement made by an entity
 6 about the source or character of a distribution if the statement
 7 is made at or near the time of distribution by the entity's board
 8 of directors or other person or group of persons authorized to
 9 exercise powers to pay money or transfer property comparable to
10 those of a corporation's board of directors.
11         -402  Distribution from trust or estate.  Subject to the
12 terms of a recipient trust, an amount received as a distribution
13 of income from a trust or an estate in which the trust has an
14 interest other than a purchased interest must be allocated to
15 income.  An amount received as a distribution of principal from
16 such a trust or estate must be allocated to principal.  If a
17 trustee purchases an interest in a trust that is an investment
18 entity, or a decedent or donor transfers an interest in such a
19 trust to a trustee, section    -401 applies to a receipt from the
20 trust.
21         -403  Business and other activities conducted by
22 trustee.(a)  If a trustee who conducts a business or other
23 activity determines that it is in the best interest of all the

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

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 1      (3)  Raising and selling livestock and other animals;
 2      (4)  Management of rental properties;
 3      (5)  Extraction of minerals and other natural resources;
 4      (6)  Timber operations; and
 5      (7)  Activities to which section    -426 applies.
 7         -410  Principal receipts.  The following must be
 8 allocated to principal:
 9      (1)  To the extent not allocated to income under this
10           chapter, assets received from a:
11           (A)  Transferor during the transferor's lifetime;
12           (B)  Decedent's estate;
13           (C)  Trust with a terminating income interest; or
14           (D)  Payor pursuant to a contract naming the trust or
15                its trustee as beneficiary;
16      (2)  Cash or other property received from the sale,
17           exchange, liquidation, or change in form of a principal
18           asset, including realized profit, subject to this
19           article;
20      (3)  Amounts recovered from third parties to reimburse the
21           trust because of disbursements described in section
22              -502(a)(7) or for other reasons to the extent not
23           based on the loss of income;

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 1      (4)  Proceeds of property taken by eminent domain, but a
 2           separate award made for the loss of income with respect
 3           to an accounting period during which a current income
 4           beneficiary had a mandatory income interest is income;
 5      (5)  Net income received in a period during which there is
 6           no beneficiary to whom a trustee may or must distribute
 7           income; and
 8      (6)  Other receipts as provided in part III.
 9         -411  Rental property.  An amount received as rent of
10 real or personal property, including an amount received for
11 cancellation or renewal of a lease, must be allocated to income.
12 An amount received as a refundable deposit, including a security
13 deposit or a deposit that is to be applied as rent for future
14 periods, must be added to principal and held subject to the terms
15 of the lease and is not available for distribution to a
16 beneficiary until the trustee's contractual obligations have been
17 satisfied with respect to that amount.
18         -412  Obligation to pay money.(a)  An amount received
19 as interest, whether determined at a fixed, variable, or floating
20 rate, on an obligation to pay money to the trustee, including an
21 amount received as consideration for prepaying principal, must be
22 allocated to income without any provision for amortization of
23 premium.

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 1      (b)  An amount received from the sale, redemption, or other
 2 disposition of an obligation to pay money to the trustee more
 3 than one year after it is purchased or acquired by the trustee,
 4 including an obligation whose purchase price or value when it is
 5 acquired is less than its value at maturity, must be allocated to
 6 principal.  If the obligation matures within one year after it is
 7 purchased or acquired by the trustee, an amount received in
 8 excess of its purchase price or its value when acquired by the
 9 trust must be allocated to income.
10      (c)  This section does not apply to obligations to which
11 sections    -421 through    -424,    -426, and    -427 apply.
12         -413  Insurance policies and similar contracts.(a)
13 Proceeds from a life insurance policy whose beneficiary is the
14 trust or its trustee or a policy that insures the trust or its
15 trustee against loss for the damage or destruction of, or loss of
16 title to, a principal asset must be allocated to principal.
17 Dividends received from an insurance policy and the proceeds of
18 any other contract in which the trust or its trustee is named as
19 beneficiary must also be allocated to principal.  This section
20 does not apply to a contract to which section    -421 applies.
21      (b)  Insurance proceeds must be allocated to income if they
22 are from a policy that insures the trustee against the loss of
23 occupancy or other use by an income beneficiary, the loss of

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 1 income, or, subject to section    -403, the loss of profits from
 2 a business.
 4         -420  Insubstantial allocations not required.  If a
 5 trustee determines that an allocation between principal and
 6 income required by sections    -421 through    -424 or section
 7    -427 is insubstantial, the trustee may allocate the entire
 8 receipt to principal if one of the circumstances described in
 9 section    -104(c) does not apply to such an allocation.  This
10 power may be exercised by a cotrustee in the circumstances
11 described in section    -104(d), and it may be released for the
12 reasons and in the manner described in section    -104(e).  An
13 allocation is presumed to be insubstantial if:
14      (1)  The amount of the allocation would increase or decrease
15           an accounting period's net income, as determined before
16           the allocation, by less than ten per cent; or
17      (2)  The value of the asset producing the receipt for which
18           the allocation would be made is less than ten per cent
19           of the total value of the trust's assets at the
20           beginning of the accounting period.
21         -421  Deferred compensation, annuities, and similar
22 payments.(a)  This section applies to payments that a trustee
23 may receive over a fixed number of years or during the life of

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                                     S.B. NO.           983

 1 one or more individuals because of services rendered or property
 2 transferred to the payor in exchange for future payments.  The
 3 payments include those made in cash or property from the payor's
 4 general assets or from a separate fund created by the payor,
 5 including a private or commercial annuity, an individual
 6 retirement account, and a pension, profit sharing, stock bonus,
 7 or stock ownership plan.  This section does not apply to payments
 8 to which section    -422 applies.
 9      (b)  To the extent that a payment is characterized as
10 interest or a dividend or a payment made in lieu of interest or a
11 dividend, it must be allocated to income.  The balance of the
12 payment and any other payment received in the same accounting
13 period that is not characterized as interest, a dividend, or an
14 equivalent payment, must be allocated to principal.
15      (c)  If no part of a payment is characterized as interest, a
16 dividend, or an equivalent payment, and all or part of the
17 payment is required to be made, a trustee shall allocate to
18 income ten per cent of the part that is required to be made
19 during the accounting period and the balance to principal.  If no
20 part of a payment is required to be made or the payment received
21 is the entire amount to which the trustee is entitled, the entire
22 payment must be allocated to principal.
23      (d)  If, to obtain an estate tax marital deduction for a

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                                     S.B. NO.           983

 1 trust, a trustee must allocate more of a payment to income than
 2 provided for by this section, the trustee shall allocate to
 3 income the additional amount necessary to obtain the marital
 4 deduction.
 5         -422  Liquidating asset.(a)  In this section,
 6 "liquidating asset" means an asset whose value will diminish or
 7 terminate because the asset is expected to produce receipts for a
 8 period of limited duration.  The term includes leaseholds,
 9 patents, trademarks, copyrights, royalty rights, and rights to
10 receive payments during a period of more than one year under an
11 arrangement that does not provide for the payment of interest on
12 the unpaid balance.  The term does not include deferred
13 compensation that is subject to section    -421, natural
14 resources that are subject to section    -423, timber that is
15 subject to section    -424, an activity that is subject to
16 section    -426, or any asset for which the trustee establishes a
17 reserve for depreciation under section    -503.
18      (b)  A trustee shall allocate to income ten per cent of the
19 receipts from a liquidating asset and the balance to principal.
20         -423  Minerals, water, and other natural resources.(a)
21 Receipts from an interest in minerals or other natural resources
22 must be allocated as follows:
23      (1)  If received as nominal delay rental or annual rent on a

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                                     S.B. NO.           983

 1           lease, a receipt must be allocated to income.
 2      (2)  If received from a production payment, a receipt must
 3           be allocated to income to the extent that the agreement
 4           creating the production payment provides a factor for
 5           interest or its equivalent.  The balance must be
 6           allocated to principal.
 7      (3)  If an amount received as a royalty, bonus, or delay
 8           rental is more than nominal, ninety per cent must be
 9           allocated to principal and the balance to income.
10      (4)  If an amount is received from a working interest or any
11           other interest not provided for in paragraph (1), (2),
12           or (3), ninety per cent of the net amount received must
13           be allocated to principal and the balance to income.
14      (b)  An amount received on account of an interest in water
15 that is renewable must be allocated to income.  If the water is
16 not renewable, ninety per cent of the amount must be allocated to
17 principal and the balance to income.
18      (c)  This chapter applies without regard to whether a
19 decedent or donor was extracting minerals, water, or other
20 natural resources before the interest became subject to the
21 trust.
22      (d)  If a trust owns an interest in minerals, water, or
23 other natural resources on the effective date of this chapter,

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                                     S.B. NO.           983

 1 the trustee may allocate receipts from the interest as provided
 2 in this section or in the manner used by the trustee before the
 3 effective date of this chapter.  If the trust acquires an
 4 interest in minerals, water, or other natural resources after the
 5 effective date of this chapter, the trustee shall allocate
 6 receipts from the interest as provided in this section.
 7         -424  Timber.(a)  A trustee may account for net
 8 receipts from the sale of timber and related products under
 9 subsection (b) or section    -403 or, if the trustee determines
10 that net receipts are insubstantial, may allocate the net
11 receipts to principal.  The presumptions in section    -420 apply
12 in determining whether net receipts are insubstantial.  If a
13 trust owns more than one block of timber land, the trustee may
14 use different methods to account for net receipts from different
15 blocks.
16      (b)  If a trustee does not account under section    -403 for
17 net receipts from the sale of timber and related products or
18 allocate the net receipts to principal because they are
19 insubstantial, the trustee shall allocate the net receipts:
20      (1)  To income to the extent that the amount of timber
21           removed from the land does not exceed the rate of
22           growth of the block as a whole during the accounting
23           periods in which a beneficiary has a mandatory income

Page 29                                                    
                                     S.B. NO.           983

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

Page 30                                                    
                                     S.B. NO.           983

 1 in this section or in the manner used by the trustee before the
 2 effective date of this chapter.  If the trust acquires an
 3 interest in timber land after the effective date of this chapter,
 4 the trustee shall allocate net receipts from the sale of timber
 5 and related products as provided in this section.
 6         -425  Property not productive of income.(a)  If a
 7 marital deduction is allowed for all or part of a trust whose
 8 assets consist substantially of property that does not provide
 9 the surviving spouse with sufficient income from or use of the
10 trust assets, and if the amounts that the trustee transfers from
11 principal to income under section    -104 and distributes to the
12 spouse from principal pursuant to the terms of the trust are
13 insufficient to provide the spouse with the beneficial enjoyment
14 required to obtain the marital deduction, the spouse may require
15 the trustee to make property productive of income, convert
16 property within a reasonable time, or exercise the power
17 conferred by section    -104(a).  The trustee may decide which
18 action or combination of actions to take.
19      (b)  In all other cases, proceeds from the sale or other
20 disposition of an asset are principal without regard to the
21 amount of income the asset produces during any accounting period.
22         -426  Derivatives and options.(a)  In this section,
23 "derivative" means a contract or financial instrument or a

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                                     S.B. NO.           983

 1 combination of contracts and financial instruments which gives a
 2 trust the right or obligation to participate in some or all
 3 changes in the price of a tangible or intangible asset or group
 4 of assets, or changes in a rate, an index of prices or rates, or
 5 other market indicator for an asset or a group of assets.
 6      (b)  To the extent that a trustee does not account under
 7 section    -403 for transactions in derivatives, receipts from
 8 and disbursement made in connection with those transactions must
 9 be allocated to principal.
10      (c)  If a trustee grants an option to buy property from the
11 trust, whether or not the trust owns the property when the option
12 is granted, grants an option that permits another person to sell
13 property to the trust, or acquires an option to buy property for
14 the trust or an option to sell an asset owned by the trust, and
15 the trustee or other owner of the asset is required to deliver
16 the asset if the option is exercised, an amount received for
17 granting the option must be allocated to principal, and an amount
18 paid to acquire the option must be paid from principal.  A gain
19 or loss realized upon the exercise of an option, including an
20 option granted to a settlor of the trust for services rendered,
21 must be allocated to principal.
22         -427  Asset-backed securities.(a)  In this section,
23 "asset-backed security" means an asset whose value is based upon

Page 32                                                    
                                     S.B. NO.           983

 1 the right it gives the owner to receive distributions from the
 2 proceeds of financial assets that provide collateral for the
 3 security.  The term includes an asset that gives the owner the
 4 right to receive only the interest or other current return from
 5 the collateral financial assets or only the proceeds from the
 6 capital investment in the collateral financial assets.  It does
 7 not include an asset to which section    -401 or    -421 apply.
 8      (b)  If a trust receives a payment from the interest or
 9 other current return and the capital investment of the collateral
10 financial assets, the trustee shall allocate to income the
11 portion of a payment that the payor identifies as being from the
12 interest or other current return, and shall allocate the balance
13 of the payment to principal.
14      (c)  If a trust receives one or more payments in exchange
15 for the trust's entire interest in an asset-backed security in
16 one accounting period, the trustee shall allocate the payments to
17 principal.  If a payment is one of a series of payments that will
18 result in the liquidation of the trust's interest in the security
19 over more than one accounting period, the trustee shall allocate
20 ten per cent of the payment to income and the balance to
21 principal.
22                             ARTICLE 5

Page 33                                                    
                                     S.B. NO.           983

 1         -501  Disbursements from income.  A trustee shall make
 2 the following disbursements from income to the extent that they
 3 are not disbursements to which section    -201(2)(B) or (C)
 4 applies:
 5      (1)  One-half of the regular compensation of the trustee and
 6           of any person providing investment advisory or
 7           custodial services to the trustee;
 8      (2)  One-half of all expenses for accountings, judicial
 9           proceedings, or other matters that involve both the
10           income and remainder interests;
11      (3)  All of the other ordinary expenses incurred in
12           connection with the administration, management, or
13           preservation of trust property and the distribution of
14           income, including interest, ordinary repairs, regularly
15           recurring taxes assessed against principal, and
16           expenses of a proceeding or other matter that concerns
17           primarily the income interest; and
18      (4)  Recurring premiums on insurance covering the loss of a
19           principal asset or the loss of income from or use of
20           the asset.
21         -502  Disbursements from principal.(a)  A trustee
22 shall make the following disbursements from principal:
23      (1)  The remaining one-half of the disbursements described

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                                     S.B. NO.           983

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

Page 35                                                    
                                     S.B. NO.           983

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

Page 36                                                    
                                     S.B. NO.           983

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

Page 37                                                    
                                     S.B. NO.           983

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

Page 38                                                    
                                     S.B. NO.           983

 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 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 which 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
23      (3)  The ownership by an estate or trust of an interest in

Page 39                                                    
                                     S.B. NO.           983

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

Page 40                                                    
                                     S.B. NO.           983

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

Page 41                                                    
                                     S.B. NO.           983

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

Page 42                                                    
                                     S.B. NO.           983

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

Page 43                                                    
                                     S.B. NO.           983

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

Page 44                                                    
                                     S.B. NO.           983

 1           trustee in performance of the trustee's administrative
 2           duties; to act without independent investigation upon
 3           their recommendations; and instead of acting
 4           personally, to employ one or more agents to perform any
 5           act of administration, whether or not discretionary;
 6     (24)  To prosecute or defend actions, claims, or proceedings
 7           for the protection of trust assets and of the trustee
 8           in the performance of trustee duties; and
 9     (25)  To execute and deliver all instruments which will
10           accomplish or facilitate the exercise of the powers
11           vested in the trustee."
12      SECTION 3.  Chapter 557, Hawaii Revised Statutes, is
13 repealed.
14      SECTION 4.  This chapter applies to every trust or
15 decedent's estate on and after the effective date of this chapter
16 except as otherwise expressly provided in the will or terms of
17 the trust or in this chapter.
18      SECTION 5.  Statutory material to be repealed is bracketed.
19 New statutory material is underscored.
20      SECTION 6.  This Act shall take effect on July 1, 1999.
22                              INTRODUCED BY:______________________