PROPERTY CODE
CHAPTER 116. UNIFORM PRINCIPAL AND INCOME ACT
SUBCHAPTER A. DEFINITIONS, FIDUCIARY DUTIES, AND OTHER
MISCELLANEOUS PROVISIONS
§ 116.001. SHORT TITLE.
Text of section effective January 1, 2004
This chapter may be cited as the Uniform Principal and Income
Act.
Added by Acts 2003, 78th Leg., ch. 659, § 1, eff. Jan. 1, 2004.
§ 116.002. DEFINITIONS.
Text of section effective January 1, 2004
In this chapter:
(1) "Accounting period" means a calendar year unless
another 12-month period is selected by a fiduciary. The term
includes a portion of a calendar year or other 12-month period that
begins when an income interest begins or ends when an income
interest ends.
(2) "Beneficiary" includes, in the case of a
decedent's estate, an heir, legatee, and devisee and, in the case of
a trust, an income beneficiary and a remainder beneficiary.
(3) "Fiduciary" means a personal representative or a
trustee. The term includes an executor, administrator, successor
personal representative, special administrator, and a person
performing substantially the same function.
(4) "Income" means money or property that a fiduciary
receives as current return from a principal asset. The term
includes a portion of receipts from a sale, exchange, or
liquidation of a principal asset, to the extent provided in
Subchapter D.
(5) "Income beneficiary" means a person to whom net
income of a trust is or may be payable.
(6) "Income interest" means the right of an income
beneficiary to receive all or part of net income, whether the terms
of the trust require it to be distributed or authorize it to be
distributed in the trustee's discretion.
(7) "Mandatory income interest" means the right of an
income beneficiary to receive net income that the terms of the trust
require the fiduciary to distribute.
(8) "Net income" means the total receipts allocated to
income during an accounting period minus the disbursements made
from income during the period, plus or minus transfers under this
chapter to or from income during the period.
(9) "Person" means an individual, corporation,
business trust, estate, trust, partnership, limited liability
company, association, joint venture, government; governmental
subdivision, agency, or instrumentality; public corporation, or
any other legal or commercial entity.
(10) "Principal" means property held in trust for
distribution to a remainder beneficiary when the trust terminates.
(11) "Remainder beneficiary" means a person entitled
to receive principal when an income interest ends.
(12) "Terms of a trust" means the manifestation of the
intent of a settlor or decedent with respect to the trust, expressed
in a manner that admits of its proof in a judicial proceeding,
whether by written or spoken words or by conduct.
(13) "Trustee" includes an original, additional, or
successor trustee, whether or not appointed or confirmed by a
court.
Added by Acts 2003, 78th Leg., ch. 659, § 1, eff. Jan. 1, 2004.
§ 116.003. UNIFORMITY OF APPLICATION AND
CONSTRUCTION.
Text of section effective January 1, 2004
In applying and construing this Uniform Act, consideration
must be given to the need to promote uniformity of the law with
respect to its subject matter among states that enact it.
Added by Acts 2003, 78th Leg., ch. 659, § 1, eff. Jan. 1, 2004.
§ 116.004. FIDUCIARY DUTIES; GENERAL PRINCIPLES.
Text of section effective January 1, 2004
(a) In allocating receipts and disbursements to or between
principal and income, and with respect to any matter within the
scope of Subchapters B and C, a fiduciary:
(1) shall administer a trust or estate in accordance
with the terms of the trust or the will, even if there is a different
provision in this chapter;
(2) may administer a trust or estate by the exercise of
a discretionary power of administration given to the fiduciary by
the terms of the trust or the will, even if the exercise of the power
produces a result different from a result required or permitted by
this chapter;
(3) shall administer a trust or estate in accordance
with this chapter if the terms of the trust or the will do not
contain a different provision or do not give the fiduciary a
discretionary power of administration; and
(4) shall add a receipt or charge a disbursement to
principal to the extent that the terms of the trust and this chapter
do not provide a rule for allocating the receipt or disbursement to
or between principal and income.
(b) In exercising the power to adjust under Section
116.005(a) or a discretionary power of administration regarding a
matter within the scope of this chapter, whether granted by the
terms of a trust, a will, or this chapter, a fiduciary shall
administer a trust or estate impartially, based on what is fair and
reasonable to all of the beneficiaries, except to the extent that
the terms of the trust or the will clearly manifest an intention
that the fiduciary shall or may favor one or more of the
beneficiaries. A determination in accordance with this chapter is
presumed to be fair and reasonable to all of the beneficiaries.
Added by Acts 2003, 78th Leg., ch. 659, § 1, eff. Jan. 1, 2004.
§ 116.005. TRUSTEE'S POWER TO ADJUST.
Text of section effective January 1, 2004
(a) A trustee may adjust between principal and income to the
extent the trustee considers necessary if the trustee invests and
manages trust assets as a prudent investor, the terms of the trust
describe the amount that may or must be distributed to a beneficiary
by referring to the trust's income, and the trustee determines,
after applying the rules in Section 116.004(a), that the trustee is
unable to comply with Section 116.004(b). The power to adjust
conferred by this subsection includes the power to allocate all or
part of a capital gain to trust income.
(b) In deciding whether and to what extent to exercise the
power conferred by Subsection (a), a trustee shall consider all
factors relevant to the trust and its beneficiaries, including the
following factors to the extent they are relevant:
(1) the nature, purpose, and expected duration of the
trust;
(2) the intent of the settlor;
(3) the identity and circumstances of the
beneficiaries;
(4) the needs for liquidity, regularity of income, and
preservation and appreciation of capital;
(5) the assets held in the trust; the extent to which
they consist of financial assets, interests in closely held
enterprises, tangible and intangible personal property, or real
property; the extent to which an asset is used by a beneficiary;
and whether an asset was purchased by the trustee or received from
the settlor;
(6) the net amount allocated to income under the other
sections of this chapter and the increase or decrease in the value
of the principal assets, which the trustee may estimate as to assets
for which market values are not readily available;
(7) whether and to what extent the terms of the trust
give the trustee the power to invade principal or accumulate income
or prohibit the trustee from invading principal or accumulating
income, and the extent to which the trustee has exercised a power
from time to time to invade principal or accumulate income;
(8) the actual and anticipated effect of economic
conditions on principal and income and effects of inflation and
deflation; and
(9) the anticipated tax consequences of an adjustment.
(c) A trustee may not make an adjustment:
(1) that diminishes the income interest in a trust
that requires all of the income to be paid at least annually to a
spouse and for which an estate tax or gift tax marital deduction
would be allowed, in whole or in part, if the trustee did not have
the power to make the adjustment;
(2) that reduces the actuarial value of the income
interest in a trust to which a person transfers property with the
intent to qualify for a gift tax exclusion;
(3) that changes the amount payable to a beneficiary
as a fixed annuity or a fixed fraction of the value of the trust
assets;
(4) from any amount that is permanently set aside for
charitable purposes under a will or the terms of a trust unless both
income and principal are so set aside;
(5) if possessing or exercising the power to make an
adjustment causes an individual to be treated as the owner of all or
part of the trust for income tax purposes, and the individual would
not be treated as the owner if the trustee did not possess the power
to make an adjustment;
(6) if possessing or exercising the power to make an
adjustment causes all or part of the trust assets to be included for
estate tax purposes in the estate of an individual who has the power
to remove a trustee or appoint a trustee, or both, and the assets
would not be included in the estate of the individual if the trustee
did not possess the power to make an adjustment;
(7) if the trustee is a beneficiary of the trust; or
(8) if the trustee is not a beneficiary, but the
adjustment would benefit the trustee directly or indirectly.
(d) If Subsection (c)(5), (6), (7), or (8) applies to a
trustee and there is more than one trustee, a cotrustee to whom the
provision does not apply may make the adjustment unless the
exercise of the power by the remaining trustee or trustees is not
permitted by the terms of the trust.
(e) A trustee may release the entire power conferred by
Subsection (a) or may release only the power to adjust from income
to principal or the power to adjust from principal to income if the
trustee is uncertain about whether possessing or exercising the
power will cause a result described in Subsection (c)(1)-(6) or
(c)(8) or if the trustee determines that possessing or exercising
the power will or may deprive the trust of a tax benefit or impose a
tax burden not described in Subsection (c). The release may be
permanent or for a specified period, including a period measured by
the life of an individual.
(f) Terms of a trust that limit the power of a trustee to
make an adjustment between principal and income do not affect the
application of this section unless it is clear from the terms of the
trust that the terms are intended to deny the trustee the power of
adjustment conferred by Subsection (a).
Added by Acts 2003, 78th Leg., ch. 659, § 1, eff. Jan. 1, 2004.
§ 116.006. JUDICIAL CONTROL OF DISCRETIONARY POWER.
Text of section effective January 1, 2004
(a) The court may not order a trustee to change a decision to
exercise or not to exercise a discretionary power conferred by
Section 116.005 of this chapter unless the court determines that
the decision was an abuse of the trustee's discretion. A trustee's
decision is not an abuse of discretion merely because the court
would have exercised the power in a different manner or would not
have exercised the power.
(b) The decisions to which Subsection (a) applies include:
(1) a decision under Section 116.005(a) as to whether
and to what extent an amount should be transferred from principal to
income or from income to principal; and
(2) a decision regarding the factors that are relevant
to the trust and its beneficiaries, the extent to which the factors
are relevant, and the weight, if any, to be given to those factors
in deciding whether and to what extent to exercise the
discretionary power conferred by Section 116.005(a).
(c) If the court determines that a trustee has abused the
trustee's discretion, the court may place the income and remainder
beneficiaries in the positions they would have occupied if the
discretion had not been abused, according to the following rules:
(1) to the extent that the abuse of discretion has
resulted in no distribution to a beneficiary or in a distribution
that is too small, the court shall order the trustee to distribute
from the trust to the beneficiary an amount that the court
determines will restore the beneficiary, in whole or in part, to the
beneficiary's appropriate position;
(2) to the extent that the abuse of discretion has
resulted in a distribution to a beneficiary which is too large, the
court shall place the beneficiaries, the trust, or both, in whole or
in part, in their appropriate positions by ordering the trustee to
withhold an amount from one or more future distributions to the
beneficiary who received the distribution that was too large or
ordering that beneficiary to return some or all of the distribution
to the trust; and
(3) to the extent that the court is unable, after
applying Subdivisions (1) and (2), to place the beneficiaries, the
trust, or both, in the positions they would have occupied if the
discretion had not been abused, the court may order the trustee to
pay an appropriate amount from its own funds to one or more of the
beneficiaries or the trust or both.
(d) If the trustee of a trust reasonably believes that one
or more beneficiaries of such trust will object to the manner in
which the trustee intends to exercise or not exercise a
discretionary power conferred by Section 116.005 of this chapter,
the trustee may petition the court having jurisdiction over the
trust, and the court shall determine whether the proposed exercise
or nonexercise by the trustee of such discretionary power will
result in an abuse of the trustee's discretion. The trustee shall
state in such petition the basis for its belief that a beneficiary
would object. The failure or refusal of a beneficiary to sign a
waiver or release is not reasonable grounds for a trustee to believe
the beneficiary will object. The court may appoint one or more
guardians ad litem pursuant to Section 115.014 of this subtitle. If
the petition describes the proposed exercise or nonexercise of the
power and contains sufficient information to inform the
beneficiaries of the reasons for the proposal, the facts upon which
the trustee relies, and an explanation of how the income and
remainder beneficiaries will be affected by the proposed exercise
or nonexercise of the power, a beneficiary who challenges the
proposed exercise or nonexercise has the burden of establishing
that it will result in an abuse of discretion. The trustee shall
advance from the trust principal all costs incident to the judicial
determination, including the reasonable attorney's fees and costs
of the trustee, any beneficiary or beneficiaries who are parties to
the action and who retain counsel, and any guardian ad litem. At
the conclusion of the proceeding, the court may award costs and
reasonable and necessary attorney's fees as provided in Section
114.064 of this subtitle, including, if the court considers it
appropriate, awarding part or all of such costs against the trust
principal or income, awarding part or all of such costs against one
or more beneficiaries or such beneficiary's or beneficiaries' share
of the trust, or awarding part or all of such costs against the
trustee in the trustee's individual capacity, if the court
determines that the trustee's exercise or nonexercise of
discretionary power would have resulted in an abuse of discretion
or that the trustee did not have reasonable grounds for believing
one or more beneficiaries would object to the proposed exercise or
nonexercise of the discretionary power.
Added by Acts 2003, 78th Leg., ch. 659, § 1, eff. Jan. 1, 2004.
§ 116.007. PROVISIONS REGARDING NONCHARITABLE
UNITRUSTS.
Text of section effective January 1, 2004
(a) This section does not apply to a charitable remainder
unitrust as defined by Section 664(d), Internal Revenue Code of
1986 (26 U.S.C. Section 664), as amended.
(b) In this section:
(1) "Unitrust" means a trust the terms of which
require distribution of a unitrust amount.
(2) "Unitrust amount" means a distribution mandated by
the terms of a trust in an amount equal to a fixed percentage of not
less than three or more than five percent per year of the net fair
market value of the trust's assets, valued at least annually. The
unitrust amount may be determined by reference to the net fair
market value of the trust's assets in one year or more than one
year.
(c) Distribution of the unitrust amount is considered a
distribution of all of the income of the unitrust and shall not be
considered a fundamental departure from applicable state law. A
distribution of the unitrust amount reasonably apportions the total
return of a unitrust.
(d) Unless the terms of the trust specifically provide
otherwise, a distribution of the unitrust amount shall be treated
as first being made from the following sources in order of priority:
(1) from net accounting income determined as if the
trust were not a unitrust;
(2) from ordinary accounting income not allocable to
net accounting income;
(3) from net realized short-term capital gains;
(4) from net realized long-term capital gains; and
(5) from the principal of the trust estate.
Added by Acts 2003, 78th Leg., ch. 659, § 1, eff. Jan. 1, 2004.
SUBCHAPTER B. DECEDENT'S ESTATE OR TERMINATING INCOME INTEREST
§ 116.051. DETERMINATION AND DISTRIBUTION OF NET
INCOME.
Text of section effective January 1, 2004
After a decedent dies, in the case of an estate, or after an
income interest in a trust ends, the following rules apply:
(1) A fiduciary of an estate or of a terminating income
interest shall determine the amount of net income and net principal
receipts received from property specifically given to a beneficiary
under the rules in Subchapters C, D, and E which apply to trustees
and the rules in Subdivision (5). The fiduciary shall distribute
the net income and net principal receipts to the beneficiary who is
to receive the specific property.
(2) A fiduciary shall determine the remaining net
income of a decedent's estate or a terminating income interest
under the rules in Subchapters C, D, and E which apply to trustees
and by:
(A) including in net income all income from
property used to discharge liabilities;
(B) paying from income or principal, in the
fiduciary's discretion, fees of attorneys, accountants, and
fiduciaries; court costs and other expenses of administration;
and interest on death taxes, but the fiduciary may pay those
expenses from income of property passing to a trust for which the
fiduciary claims an estate tax marital or charitable deduction only
to the extent that the payment of those expenses from income will
not cause the reduction or loss of the deduction; and
(C) paying from principal all other
disbursements made or incurred in connection with the settlement of
a decedent's estate or the winding up of a terminating income
interest, including debts, funeral expenses, disposition of
remains, family allowances, and death taxes and related penalties
that are apportioned to the estate or terminating income interest
by the will, the terms of the trust, or applicable law.
(3) A fiduciary shall distribute to a beneficiary who
receives a pecuniary amount outright the interest or any other
amount provided by the will, the terms of the trust, or applicable
law from net income determined under Subdivision (2) or from
principal to the extent that net income is insufficient. If a
beneficiary is to receive a pecuniary amount outright from a trust
after an income interest ends and no interest or other amount is
provided for by the terms of the trust or applicable law, the
fiduciary shall distribute the interest or other amount to which
the beneficiary would be entitled under applicable law if the
pecuniary amount were required to be paid under a will. Unless
otherwise provided by the will or the terms of the trust, a
beneficiary who receives a pecuniary amount, regardless of whether
in trust, shall be paid interest on the pecuniary amount at the
legal rate of interest as provided by Section 302.002, Finance
Code. Interest on the pecuniary amount is payable:
(A) under a will, beginning on the first
anniversary of the date of the decedent's death; or
(B) under a trust, beginning on the first
anniversary of the date on which an income interest ends.
(4) A fiduciary shall distribute the net income
remaining after distributions required by Subdivision (3) in the
manner described in Section 116.052 to all other beneficiaries even
if the beneficiary holds an unqualified power to withdraw assets
from the trust or other presently exercisable general power of
appointment over the trust.
(5) A fiduciary may not reduce principal or income
receipts from property described in Subdivision (1) because of a
payment described in Section 116.201 or 116.202 to the extent that
the will, the terms of the trust, or applicable law requires the
fiduciary to make the payment from assets other than the property or
to the extent that the fiduciary recovers or expects to recover the
payment from a third party. The net income and principal receipts
from the property are determined by including all of the amounts the
fiduciary receives or pays with respect to the property, whether
those amounts accrued or became due before, on, or after the date of
a decedent's death or an income interest's terminating event, and by
making a reasonable provision for amounts that the fiduciary
believes the estate or terminating income interest may become
obligated to pay after the property is distributed.
(6) A fiduciary, without reduction for taxes, shall
pay to a charitable organization that is entitled to receive income
under Subdivision (4) any amount allowed as a tax deduction to the
estate or trust for income payable to the charitable organization.
Added by Acts 2003, 78th Leg., ch. 659, § 1, eff. Jan. 1, 2004.
§ 116.052. DISTRIBUTION TO RESIDUARY AND REMAINDER
BENEFICIARIES.
Text of section effective January 1, 2004
(a) Each beneficiary described in Section 116.051(4) is
entitled to receive a portion of the net income equal to the
beneficiary's fractional interest in undistributed principal
assets, using values as of the distribution date. If a fiduciary
makes more than one distribution of assets to beneficiaries to whom
this section applies, each beneficiary, including one who does not
receive part of the distribution, is entitled, as of each
distribution date, to the net income the fiduciary has received
after the date of death or terminating event or earlier
distribution date but has not distributed as of the current
distribution date.
(b) In determining a beneficiary's share of net income, the
following rules apply:
(1) The beneficiary is entitled to receive a portion
of the net income equal to the beneficiary's fractional interest in
the undistributed principal assets immediately before the
distribution date, including assets that later may be sold to meet
principal obligations.
(2) The beneficiary's fractional interest in the
undistributed principal assets must be calculated without regard to
property specifically given to a beneficiary and property required
to pay pecuniary amounts not in trust.
(3) The beneficiary's fractional interest in the
undistributed principal assets must be calculated on the basis of
the aggregate value of those assets as of the distribution date
without reducing the value by any unpaid principal obligation.
(4) The distribution date for purposes of this section
may be the date as of which the fiduciary calculates the value of
the assets if that date is reasonably near the date on which assets
are actually distributed.
(c) If a fiduciary does not distribute all of the collected
but undistributed net income to each person as of a distribution
date, the fiduciary shall maintain appropriate records showing the
interest of each beneficiary in that net income.
(d) A fiduciary may apply the rules in this section, to the
extent that the fiduciary considers it appropriate, to net gain or
loss realized after the date of death or terminating event or
earlier distribution date from the disposition of a principal asset
if this section applies to the income from the asset.
Added by Acts 2003, 78th Leg., ch. 659, § 1, eff. Jan. 1, 2004.
SUBCHAPTER C. APPORTIONMENT AT BEGINNING AND END OF INCOME INTEREST
§ 116.101. WHEN RIGHT TO INCOME BEGINS AND ENDS.
Text of section effective January 1, 2004
(a) An income beneficiary is entitled to net income from the
date on which the income interest begins. An income interest begins
on the date specified in the terms of the trust or, if no date is
specified, on the date an asset becomes subject to a trust or
successive income interest.
(b) An asset becomes subject to a trust:
(1) on the date it is transferred to the trust in the
case of an asset that is transferred to a trust during the
transferor's life;
(2) on the date of a testator's death in the case of an
asset that becomes subject to a trust by reason of a will, even if
there is an intervening period of administration of the testator's
estate; or
(3) on the date of an individual's death in the case of
an asset that is transferred to a fiduciary by a third party because
of the individual's death.
(c) An asset becomes subject to a successive income interest
on the day after the preceding income interest ends, as determined
under Subsection (d), even if there is an intervening period of
administration to wind up the preceding income interest.
(d) An income interest ends on the day before an income
beneficiary dies or another terminating event occurs, or on the
last day of a period during which there is no beneficiary to whom a
trustee may distribute income.
Added by Acts 2003, 78th Leg., ch. 659, § 1, eff. Jan. 1, 2004.
§ 116.102. APPORTIONMENT OF RECEIPTS AND DISBURSEMENTS
WHEN DECEDENT DIES OR INCOME INTEREST BEGINS.
Text of section effective January 1, 2004
(a) A trustee shall allocate an income receipt or
disbursement other than one to which Section 116.051(1) applies to
principal if its due date occurs before a decedent dies in the case
of an estate or before an income interest begins in the case of a
trust or successive income interest.
(b) A trustee shall allocate an income receipt or
disbursement to income if its due date occurs on or after the date
on which a decedent dies or an income interest begins and it is a
periodic due date. An income receipt or disbursement must be
treated as accruing from day to day if its due date is not periodic
or it has no due date. The portion of the receipt or disbursement
accruing before the date on which a decedent dies or an income
interest begins must be allocated to principal and the balance must
be allocated to income.
(c) An item of income or an obligation is due on the date the
payer is required to make a payment. If a payment date is not
stated, there is no due date for the purposes of this chapter.
Distributions to shareholders or other owners from an entity to
which Section 116.151 applies are deemed to be due on the date fixed
by the entity for determining who is entitled to receive the
distribution or, if no date is fixed, on the declaration date for
the distribution. A due date is periodic for receipts or
disbursements that must be paid at regular intervals under a lease
or an obligation to pay interest or if an entity customarily makes
distributions at regular intervals.
Added by Acts 2003, 78th Leg., ch. 659, § 1, eff. Jan. 1, 2004.
§ 116.103. APPORTIONMENT WHEN INCOME INTEREST ENDS.
Text of section effective January 1, 2004
(a) In this section, "undistributed income" means net
income received before the date on which an income interest ends.
The term does not include an item of income or expense that is due or
accrued or net income that has been added or is required to be added
to principal under the terms of the trust.
(b) When a mandatory income interest ends, the trustee shall
pay to a mandatory income beneficiary who survives that date, or the
estate of a deceased mandatory income beneficiary whose death
causes the interest to end, the beneficiary's share of the
undistributed income that is not disposed of under the terms of the
trust unless the beneficiary has an unqualified power to revoke
more than five percent of the trust immediately before the income
interest ends. In the latter case, the undistributed income from
the portion of the trust that may be revoked must be added to
principal.
(c) When a trustee's obligation to pay a fixed annuity or a
fixed fraction of the value of the trust's assets ends, the trustee
shall prorate the final payment if and to the extent required by
applicable law to accomplish a purpose of the trust or its settlor
relating to income, gift, estate, or other tax requirements.
Added by Acts 2003, 78th Leg., ch. 659, § 1, eff. Jan. 1, 2004.
§ 116.151. CHARACTER OF RECEIPTS.
Text of section effective January 1, 2004
(a) In this section, "entity" means a corporation,
partnership, limited liability company, regulated investment
company, real estate investment trust, common trust fund, or any
other organization in which a trustee has an interest other than a
trust or estate to which Section 116.152 applies, a business or
activity to which Section 116.153 applies, or an asset-backed
security to which Section 116.178 applies.
(b) Except as otherwise provided in this section, a trustee
shall allocate to income money received from an entity.
(c) A trustee shall allocate the following receipts from an
entity to principal:
(1) property other than money;
(2) money received in one distribution or a series of
related distributions in exchange for part or all of a trust's
interest in the entity;
(3) money received in total or partial liquidation of
the entity; and
(4) money received from an entity that is a regulated
investment company or a real estate investment trust if the money
distributed is a capital gain dividend for federal income tax
purposes.
(d) Money is received in partial liquidation:
(1) to the extent that the entity, at or near the time
of a distribution, indicates that it is a distribution in partial
liquidation; or
(2) if the total amount of money and property received
in a distribution or series of related distributions is greater
than 20 percent of the entity's gross assets, as shown by the
entity's year-end financial statements immediately preceding the
initial receipt.
(e) Money is not received in partial liquidation, nor may it
be taken into account under Subsection (d)(2), to the extent that it
does not exceed the amount of income tax that a trustee or
beneficiary must pay on taxable income of the entity that
distributes the money.
(f) A trustee may rely upon a statement made by an entity
about the source or character of a distribution if the statement is
made at or near the time of distribution by the entity's board of
directors or other person or group of persons authorized to
exercise powers to pay money or transfer property comparable to
those of a corporation's board of directors.
Added by Acts 2003, 78th Leg., ch. 659, § 1, eff. Jan. 1, 2004.
§ 116.152. DISTRIBUTION FROM TRUST OR ESTATE.
Text of section effective January 1, 2004
A trustee shall allocate to income an amount received as a
distribution of income from a trust or an estate in which the trust
has an interest other than a purchased interest, and shall allocate
to principal an amount received as a distribution of principal from
such a trust or estate. If a trustee purchases an interest in a
trust that is an investment entity, or a decedent or donor transfers
an interest in such a trust to a trustee, Section 116.151 or 116.178
applies to a receipt from the trust.
Added by Acts 2003, 78th Leg., ch. 659, § 1, eff. Jan. 1, 2004.
§ 116.153. BUSINESS AND OTHER ACTIVITIES CONDUCTED BY
TRUSTEE.
Text of section effective January 1, 2004
(a) If a trustee who conducts a business or other activity
determines that it is in the best interest of all the beneficiaries
to account separately for the business or activity instead of
accounting for it as part of the trust's general accounting
records, the trustee may maintain separate accounting records for
its transactions, whether or not its assets are segregated from
other trust assets.
(b) A trustee who accounts separately for a business or
other activity may determine the extent to which its net cash
receipts must be retained for working capital, the acquisition or
replacement of fixed assets, and other reasonably foreseeable needs
of the business or activity, and the extent to which the remaining
net cash receipts are accounted for as principal or income in the
trust's general accounting records. If a trustee sells assets of
the business or other activity, other than in the ordinary course of
the business or activity, the trustee shall account for the net
amount received as principal in the trust's general accounting
records to the extent the trustee determines that the amount
received is no longer required in the conduct of the business.
(c) Activities for which a trustee may maintain separate
accounting records include:
(1) retail, manufacturing, service, and other
traditional business activities;
(2) farming;
(3) raising and selling livestock and other animals;
(4) management of rental properties;
(5) extraction of minerals and other natural
resources;
(6) timber operations; and
(7) activities to which Section 116.177 applies.
Added by Acts 2003, 78th Leg., ch. 659, § 1, eff. Jan. 1, 2004.
§ 116.161. PRINCIPAL RECEIPTS.
Text of section effective January 1, 2004
A trustee shall allocate to principal:
(1) to the extent not allocated to income under this
chapter, assets received from a transferor during the transferor's
lifetime, a decedent's estate, a trust with a terminating income
interest, or a payer under a contract naming the trust or its
trustee as beneficiary;
(2) money or other property received from the sale,
exchange, liquidation, or change in form of a principal asset,
including realized profit, subject to this subchapter;
(3) amounts recovered from third parties to reimburse
the trust because of disbursements described in Section
116.202(a)(7) or for other reasons to the extent not based on the
loss of income;
(4) proceeds of property taken by eminent domain, but
a separate award made for the loss of income with respect to an
accounting period during which a current income beneficiary had a
mandatory income interest is income;
(5) net income received in an accounting period during
which there is no beneficiary to whom a trustee may or must
distribute income; and
(6) other receipts as provided in Part 3.
Added by Acts 2003, 78th Leg., ch. 659, § 1, eff. Jan. 1, 2004.
§ 116.162. RENTAL PROPERTY.
Text of section effective January 1, 2004
To the extent that a trustee accounts for receipts from
rental property pursuant to this section, the trustee shall
allocate to income an amount received as rent of real or personal
property, including an amount received for cancellation or renewal
of a lease. An amount received as a refundable deposit, including a
security deposit or a deposit that is to be applied as rent for
future periods, must be added to principal and held subject to the
terms of the lease and is not available for distribution to a
beneficiary until the trustee's contractual obligations have been
satisfied with respect to that amount.
Added by Acts 2003, 78th Leg., ch. 659, § 1, eff. Jan. 1, 2004.
§ 116.163. OBLIGATION TO PAY MONEY.
Text of section effective January 1, 2004
(a) An amount received as interest, whether determined at a
fixed, variable, or floating rate, on an obligation to pay money to
the trustee, including an amount received as consideration for
prepaying principal, must be allocated to income without any
provision for amortization of premium.
(b) A trustee shall allocate to principal an amount received
from the sale, redemption, or other disposition of an obligation to
pay money to the trustee more than one year after it is purchased or
acquired by the trustee, including an obligation whose purchase
price or value when it is acquired is less than its value at
maturity. If the obligation matures within one year after it is
purchased or acquired by the trustee, an amount received in excess
of its purchase price or its value when acquired by the trust must
be allocated to income.
(c) This section does not apply to an obligation to which
Section 116.172, 116.173, 116.174, 116.175, 116.177, or 116.178
applies.
Added by Acts 2003, 78th Leg., ch. 659, § 1, eff. Jan. 1, 2004.
§ 116.164. INSURANCE POLICIES AND SIMILAR CONTRACTS.
Text of section effective January 1, 2004
(a) Except as otherwise provided in Subsection (b), a
trustee shall allocate to principal the proceeds of a life
insurance policy or other contract in which the trust or its trustee
is named as beneficiary, including a contract that insures the
trust or its trustee against loss for damage to, destruction of, or
loss of title to a trust asset. The trustee shall allocate
dividends on an insurance policy to income if the premiums on the
policy are paid from income, and to principal if the premiums are
paid from principal.
(b) A trustee shall allocate to income proceeds of a
contract that insures the trustee against loss of occupancy or
other use by an income beneficiary, loss of income, or, subject to
Section 116.153, loss of profits from a business.
(c) This section does not apply to a contract to which
Section 116.172 applies.
Added by Acts 2003, 78th Leg., ch. 659, § 1, eff. Jan. 1, 2004.
§ 116.171. INSUBSTANTIAL ALLOCATIONS NOT REQUIRED.
Text of section effective January 1, 2004
If a trustee determines that an allocation between principal
and income required by Section 116.172, 116.173, 116.174, 116.175,
or 116.178 is insubstantial, the trustee may allocate the entire
amount to principal unless one of the circumstances described in
Section 116.005(c) applies to the allocation. This power may be
exercised by a cotrustee in the circumstances described in Section
116.005(d) and may be released for the reasons and in the manner
described in Section 116.005(e).
Added by Acts 2003, 78th Leg., ch. 659, § 1, eff. Jan. 1, 2004.
§ 116.172. DEFERRED COMPENSATION, ANNUITIES, AND
SIMILAR PAYMENTS.
Text of section effective January 1, 2004
(a) In this section:
(1) "Future payment asset" means the asset from which
a payment is derived.
(2) "Payment" means a payment that a trustee may
receive over a fixed number of years or during the life of one or
more individuals because of services rendered or property
transferred to the payer in exchange for future payments. The term
includes a payment made in money or property from the payer's
general assets or from a separate fund created by the payer,
including a private or commercial annuity, an individual retirement
account, and a pension, profit-sharing, stock-bonus, or
stock-ownership plan.
(b) To the extent that the payer characterizes a payment as
interest or a dividend or a payment made in lieu of interest or a
dividend, a trustee shall allocate it to income. The trustee shall
allocate to principal the balance of the payment and any other
payment received in the same accounting period that is not
characterized as interest, a dividend, or an equivalent payment.
(c) If no part of a payment is characterized as interest, a
dividend, or an equivalent payment, and all or part of the payment
is required to be made, a trustee shall allocate to income the part
of the payment that does not exceed an amount equal to:
(1) four percent of the fair market value of the future
payment asset as determined under Subsection (d); less
(2) the total amount that the trustee has allocated to
income for a previous payment received from the future payment
asset during the accounting period prescribed by Subsection (d).
(d) For purposes of Subsection (c)(1), the determination of
a future payment asset is made on the later of:
(1) the date on which the future payment right first
becomes subject to the trust; or
(2) the first day of the trust's accounting period
during which the future payment asset is received.
(e) For each year a future payment asset is made, the amount
determined under Subsection (c) must be prorated on a daily basis
unless the determination of a future payment asset is made under
Subsection (d)(2) and is for an accounting period of 365 days or
more.
(f) A trustee shall allocate to principal the part of the
payment described by Subsection (c) that is not allocated to
income.
(g) If no part of a payment is required to be made or the
payment received is the entire amount to which the trustee is
entitled, the trustee shall allocate the entire payment to
principal. For purposes of Subsection (c) and this subsection, a
payment is not "required to be made" to the extent that it is made
only because the trustee exercises a right of withdrawal.
(h) If, to obtain an estate tax marital deduction for a
trust, a trustee must allocate more of a payment to income than
provided for by this section, the trustee shall allocate to income
the additional amount necessary to obtain the marital deduction.
Added by Acts 2003, 78th Leg., ch. 659, § 1, eff. Jan. 1, 2004.
§ 116.173. LIQUIDATING ASSET.
Text of section effective January 1, 2004
(a) In this section, "liquidating asset" means an asset
whose value will diminish or terminate because the asset is
expected to produce receipts for a period of limited duration. The
term includes a leasehold, patent, copyright, royalty right, and
right to receive payments during a period of more than one year
under an arrangement that does not provide for the payment of
interest on the unpaid balance. The term does not include a payment
subject to Section 116.172, resources subject to Section 116.174,
timber subject to Section 116.175, an activity subject to Section
116.177, an asset subject to Section 116.178, or any asset for which
the trustee establishes a reserve for depreciation under Section
116.203.
(b) A trustee shall allocate to income 10 percent of the
receipts from a liquidating asset and the balance to principal.
(c) The trustee may allocate a receipt from any interest in
a liquidating asset the trust owns on January 1, 2004, in the manner
provided by this chapter or in any lawful manner used by the trustee
before January 1, 2004, to make the same allocation.
Added by Acts 2003, 78th Leg., ch. 659, § 1, eff. Jan. 1, 2004.
§ 116.174. MINERALS, WATER, AND OTHER NATURAL
RESOURCES.
Text of section effective January 1, 2004
(a) To the extent that a trustee accounts for receipts from
an interest in minerals or other natural resources pursuant to this
section, the trustee shall allocate them as follows:
(1) If received as nominal delay rental or nominal
annual rent on a lease, a receipt must be allocated to income.
(2) If received from a production payment, a receipt
must be allocated to income if and to the extent that the agreement
creating the production payment provides a factor for interest or
its equivalent. The balance must be allocated to principal.
(3) If an amount received as a royalty, shut-in-well
payment, take-or-pay payment, bonus, or delay rental is more than
nominal, the trustee shall allocate the receipt equitably.
(4) If an amount is received from a working interest or
any other interest not provided for in Subdivision (1), (2), or (3),
the trustee must allocate the receipt equitably.
(b) An amount received on account of an interest in water
that is renewable must be allocated to income. If the water is not
renewable, the trustee must allocate the receipt equitably.
(c) This chapter applies whether or not a decedent or donor
was extracting minerals, water, or other natural resources before
the interest became subject to the trust.
(d) The trustee may allocate a receipt from any interest in
minerals, water, or other natural resources the trust owns on
January 1, 2004, in the manner provided by this chapter or in any
lawful manner used by the trustee before January 1, 2004, to make
the same allocation. The trustee shall allocate a receipt from any
interest in minerals, water, or other natural resources acquired by
the trust after January 1, 2004, in the manner provided by this
chapter.
(e) An allocation of a receipt under this section is
presumed to be equitable if the amount allocated to principal is
equal to the amount allowed by the Internal Revenue Code of 1986 as
a deduction for depletion of the interest.
Added by Acts 2003, 78th Leg., ch. 659, § 1, eff. Jan. 1, 2004.
§ 116.175. TIMBER.
Text of section effective January 1, 2004
(a) To the extent that a trustee accounts for receipts from
the sale of timber and related products pursuant to this section,
the trustee shall allocate the net receipts:
(1) to income to the extent that the amount of timber
removed from the land does not exceed the rate of growth of the
timber during the accounting periods in which a beneficiary has a
mandatory income interest;
(2) to principal to the extent that the amount of
timber removed from the land exceeds the rate of growth of the
timber or the net receipts are from the sale of standing timber;
(3) to or between income and principal if the net
receipts are from the lease of timberland or from a contract to cut
timber from land owned by a trust, by determining the amount of
timber removed from the land under the lease or contract and
applying the rules in Subdivisions (1) and (2); or
(4) to principal to the extent that advance payments,
bonuses, and other payments are not allocated pursuant to
Subdivision (1), (2), or (3).
(b) In determining net receipts to be allocated pursuant to
Subsection (a), a trustee shall deduct and transfer to principal a
reasonable amount for depletion.
(c) This chapter applies whether or not a decedent or
transferor was harvesting timber from the property before it became
subject to the trust.
(d) If a trust owns an interest in timberland on January 1,
2004, the trustee may allocate a net receipt from the sale of timber
and related products in the manner provided by this chapter or in
any lawful manner used by the trustee before January 1, 2004, to
make the same allocation. If the trust acquires an interest in
timberland after January 1, 2004, the trustee shall allocate net
receipts from the sale of timber and related products in the manner
provided by this chapter.
Added by Acts 2003, 78th Leg., ch. 659, § 1, eff. Jan. 1, 2004.
§ 116.176. PROPERTY NOT PRODUCTIVE OF INCOME.
Text of section effective January 1, 2004
(a) If a marital deduction is allowed for all or part of a
trust whose assets consist substantially of property that does not
provide the spouse with sufficient income from or use of the trust
assets, and if the amounts that the trustee transfers from
principal to income under Section 116.005 and distributes to the
spouse from principal pursuant to the terms of the trust are
insufficient to provide the spouse with the beneficial enjoyment
required to obtain the marital deduction, the spouse may require
the trustee to make property productive of income, convert property
within a reasonable time, or exercise the power conferred by
Section 116.005(a). The trustee may decide which action or
combination of actions to take.
(b) In cases not governed by Subsection (a), proceeds from
the sale or other disposition of an asset are principal without
regard to the amount of income the asset produces during any
accounting period.
Added by Acts 2003, 78th Leg., ch. 659, § 1, eff. Jan. 1, 2004.
§ 116.177. DERIVATIVES AND OPTIONS.
Text of section effective January 1, 2004
(a) In this section, "derivative" means a contract or
financial instrument or a combination of contracts and financial
instruments which gives a trust the right or obligation to
participate in some or all changes in the price of a tangible or
intangible asset or group of assets, or changes in a rate, an index
of prices or rates, or other market indicator for an asset or a
group of assets.
(b) To the extent that a trustee does not account under
Section 116.153 for transactions in derivatives, the trustee shall
allocate to principal receipts from and disbursements made in
connection with those transactions.
(c) If a trustee grants an option to buy property from the
trust, whether or not the trust owns the property when the option is
granted, grants an option that permits another person to sell
property to the trust, or acquires an option to buy property for the
trust or an option to sell an asset owned by the trust, and the
trustee or other owner of the asset is required to deliver the asset
if the option is exercised, an amount received for granting the
option must be allocated to principal. An amount paid to acquire
the option must be paid from principal. A gain or loss realized
upon the exercise of an option, including an option granted to a
settlor of the trust for services rendered, must be allocated to
principal.
Added by Acts 2003, 78th Leg., ch. 659, § 1, eff. Jan. 1, 2004.
§ 116.178. ASSET-BACKED SECURITIES.
Text of section effective January 1, 2004
(a) In this section, "asset-backed security" means an asset
whose value is based upon the right it gives the owner to receive
distributions from the proceeds of financial assets that provide
collateral for the security. The term includes an asset that gives
the owner the right to receive from the collateral financial assets
only the interest or other current return or only the proceeds other
than interest or current return. The term does not include an asset
to which Section 116.151 or 116.172 applies.
(b) If a trust receives a payment from interest or other
current return and from other proceeds of the collateral financial
assets, the trustee shall allocate to income the portion of the
payment which the payer identifies as being from interest or other
current return and shall allocate the balance of the payment to
principal.
(c) If a trust receives one or more payments in exchange for
the trust's entire interest in an asset-backed security in one
accounting period, the trustee shall allocate the payments to
principal. If a payment is one of a series of payments that will
result in the liquidation of the trust's interest in the security
over more than one accounting period, the trustee shall allocate 10
percent of the payment to income and the balance to principal.
Added by Acts 2003, 78th Leg., ch. 659, § 1, eff. Jan. 1, 2004.
SUBCHAPTER E. ALLOCATION OF DISBURSEMENTS DURING ADMINISTRATION OF
TRUST
§ 116.201. DISBURSEMENTS FROM INCOME.
Text of section effective January 1, 2004
A trustee shall make the following disbursements from income
to the extent that they are not disbursements to which Section
116.051(2)(B) or (C) applies:
(1) one-half of the regular compensation of the
trustee and of any person providing investment advisory or
custodial services to the trustee;
(2) one-half of all expenses for accountings, judicial
proceedings, or other matters that involve both the income and
remainder interests;
(3) all of the other ordinary expenses incurred in
connection with the administration, management, or preservation of
trust property and the distribution of income, including interest,
ordinary repairs, regularly recurring taxes assessed against
principal, and expenses of a proceeding or other matter that
concerns primarily the income interest; and
(4) recurring premiums on insurance covering the loss
of a principal asset or the loss of income from or use of the asset.
Added by Acts 2003, 78th Leg., ch. 659, § 1, eff. Jan. 1, 2004.
§ 116.202. DISBURSEMENTS FROM PRINCIPAL.
Text of section effective January 1, 2004
(a) A trustee shall make the following disbursements from
principal:
(1) the remaining one-half of the disbursements
described in Sections 116.201(1) and (2);
(2) all of the trustee's compensation calculated on
principal as a fee for acceptance, distribution, or termination,
and disbursements made to prepare property for sale;
(3) payments on the principal of a trust debt;
(4) expenses of a proceeding that concerns primarily
principal, including a proceeding to construe the trust or to
protect the trust or its property;
(5) premiums paid on a policy of insurance not
described in Section 116.201(4) of which the trust is the owner and
beneficiary;
(6) estate, inheritance, and other transfer taxes,
including penalties, apportioned to the trust; and
(7) disbursements related to environmental matters,
including reclamation, assessing environmental conditions,
remedying and removing environmental contamination, monitoring
remedial activities and the release of substances, preventing
future releases of substances, collecting amounts from persons
liable or potentially liable for the costs of those activities,
penalties imposed under environmental laws or regulations and other
payments made to comply with those laws or regulations, statutory
or common law claims by third parties, and defending claims based on
environmental matters.
(b) If a principal asset is encumbered with an obligation
that requires income from that asset to be paid directly to the
creditor, the trustee shall transfer from principal to income an
amount equal to the income paid to the creditor in reduction of the
principal balance of the obligation.
Added by Acts 2003, 78th Leg., ch. 659, § 1, eff. Jan. 1, 2004.
§ 116.203. TRANSFERS FROM INCOME TO PRINCIPAL FOR
DEPRECIATION.
Text of section effective January 1, 2004
(a) In this section, "depreciation" means a reduction in
value due to wear, tear, decay, corrosion, or gradual obsolescence
of a fixed asset having a useful life of more than one year.
(b) A trustee may transfer to principal a reasonable amount
of the net cash receipts from a principal asset that is subject to
depreciation, but may not transfer any amount for depreciation:
(1) of that portion of real property used or available
for use by a beneficiary as a residence or of tangible personal
property held or made available for the personal use or enjoyment of
a beneficiary;
(2) during the administration of a decedent's estate;
or
(3) under this section if the trustee is accounting
under Section 116.153 for the business or activity in which the
asset is used.
(c) An amount transferred to principal need not be held as a
separate fund.
Added by Acts 2003, 78th Leg., ch. 659, § 1, eff. Jan. 1, 2004.
§ 116.204. TRANSFERS FROM INCOME TO REIMBURSE
PRINCIPAL.
Text of section effective January 1, 2004
(a) If a trustee makes or expects to make a principal
disbursement described in this section, the trustee may transfer an
appropriate amount from income to principal in one or more
accounting periods to reimburse principal or to provide a reserve
for future principal disbursements.
(b) Principal disbursements to which Subsection (a) applies
include the following, but only to the extent that the trustee has
not been and does not expect to be reimbursed by a third party:
(1) an amount chargeable to income but paid from
principal because it is unusually large, including extraordinary
repairs;
(2) a capital improvement to a principal asset,
whether in the form of changes to an existing asset or the
construction of a new asset, including special assessments;
(3) disbursements made to prepare property for rental,
including tenant allowances, leasehold improvements, and broker's
commissions;
(4) periodic payments on an obligation secured by a
principal asset to the extent that the amount transferred from
income to principal for depreciation is less than the periodic
payments; and
(5) disbursements described in Section 116.202(a)(7).
(c) If the asset whose ownership gives rise to the
disbursements becomes subject to a successive income interest after
an income interest ends, a trustee may continue to transfer amounts
from income to principal as provided in Subsection (a).
Added by Acts 2003, 78th Leg., ch. 659, § 1, eff. Jan. 1, 2004.
§ 116.205. INCOME TAXES.
Text of section effective January 1, 2004
(a) A tax required to be paid by a trustee based on receipts
allocated to income must be paid from income.
(b) A tax required to be paid by a trustee based on receipts
allocated to principal must be paid from principal, even if the tax
is called an income tax by the taxing authority.
(c) A tax required to be paid by a trustee on the trust's
share of an entity's taxable income must be paid proportionately:
(1) from income to the extent that receipts from the
entity are allocated to income; and
(2) from principal to the extent that:
(A) receipts from the entity are allocated to
principal; and
(B) the trust's share of the entity's taxable
income exceeds the total receipts described in Subdivisions (1) and
(2)(A).
(d) For purposes of this section, receipts allocated to
principal or income must be reduced by the amount distributed to a
beneficiary from principal or income for which the trust receives a
deduction in calculating the tax.
Added by Acts 2003, 78th Leg., ch. 659, § 1, eff. Jan. 1, 2004.
§ 116.206. ADJUSTMENTS BETWEEN PRINCIPAL AND INCOME
BECAUSE OF TAXES.
Text of section effective January 1, 2004
(a) A fiduciary may make adjustments between principal and
income to offset the shifting of economic interests or tax benefits
between income beneficiaries and remainder beneficiaries which
arise from:
(1) elections and decisions, other than those
described in Subsection (b), that the fiduciary makes from time to
time regarding tax matters;
(2) an income tax or any other tax that is imposed upon
the fiduciary or a beneficiary as a result of a transaction
involving or a distribution from the estate or trust; or
(3) the ownership by an estate or trust of an interest
in an entity whose taxable income, whether or not distributed, is
includable in the taxable income of the estate, trust, or a
beneficiary.
(b) If the amount of an estate tax marital deduction or
charitable contribution deduction is reduced because a fiduciary
deducts an amount paid from principal for income tax purposes
instead of deducting it for estate tax purposes, and as a result
estate taxes paid from principal are increased and income taxes
paid by an estate, trust, or beneficiary are decreased, each
estate, trust, or beneficiary that benefits from the decrease in
income tax shall reimburse the principal from which the increase in
estate tax is paid. The total reimbursement must equal the increase
in the estate tax to the extent that the principal used to pay the
increase would have qualified for a marital deduction or charitable
contribution deduction but for the payment. The proportionate
share of the reimbursement for each estate, trust, or beneficiary
whose income taxes are reduced must be the same as its proportionate
share of the total decrease in income tax. An estate or trust shall
reimburse principal from income.
Added by Acts 2003, 78th Leg., ch. 659, § 1, eff. Jan. 1, 2004.
