KRS 386.480: Receipts from deferred compensation, annuities, and similar payments --

Exceptions -- Allocations of payments made from a separate fund.

(1) As used in this section:

(a) "Payment" means a payment that a trustee may receive over a fixed number of

years or during the life of one (1) 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 f und created by the payer. For purposes of

subsections (4), (5), (6), and (7) of this section, the term also includes any

payment from any separate fund, regardless of the reason for the payment; and

(b) "Separate fund" includes a private or commercial annu ity, an individual

retirement account, and a pension profit -sharing, stock -bonus, or stock -

ownership plan.

(2) To the extent that a payment is characterized as interest or a dividend or a payment

made in lieu of interest or a dividend, a trustee shall allo cate 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.

(3) If no part of a payment is c haracterized 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 ten percent (10%) of the part that is required to be made during

the accounting period and the balance to principal. 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 this subsection, a payment is not "requi red to be made" to the extent

that it is made because the trustee exercises a right of withdrawal.

(4) Except as otherwise provided in subsection (5) of this section, subsections (6) and

(7) of this section shall apply, and subsections (2) and (3) of this section shall not

apply, in determining the allocation of a payment made from a separate fund to:

(a) A trust to which an election to qualify for a marital deduction under 26 U.S.C.

sec. 2056(b)(7) has been made; or

(b) A trust that qualifies for the marit al deduction under 26 U.S.C. sec.

2056(b)(5).

(5) Subsections (4), (6), and (7) of this section shall not apply if and to the extent that

the series of payments would, without the application of subsection (4) of this

section, qualify for the marital deduction under 26 U.S.C sec. 2056(b)(7)(C).

(6) A trustee shall determine the internal income of each separate fund for the

accounting period as if the separate fund were a trust subject to KRS 386.450 to

386.504. Upon request of the surviving spouse, the trus tee shall demand that the

person administering the separate fund distribute the internal income to the trust.

The trustee shall allocate a payment from the separate fund to income to the extent

of the internal income of the separate fund and distribute tha t amount to the

surviving spouse. The trustee shall allocate the balance of the payment to principal.

Upon request of the surviving spouse, the trustee shall allocate principal to income

to the extent the internal income of the separate fund exceeds paymen ts made from

the separate fund to the trust during the accounting period.

(7) If a trustee cannot determine the internal income of a separate fund but can

determine the value of the separate fund, the internal income of the separate fund is

deemed to equal three percent (3%) of the fund's value, according to the most recent

statement of value preceding the beginning of the accounting period. If the trustee

can determine neither the internal income of the separate fund nor the fund's value,

the internal inco me of the fund is deemed to equal the product of the interest rate

and the present value of the expected future payments, as determined under 26

U.S.C. sec. 7520, for the month preceding the accounting period for which the

computation is made.

(8) This section shall not apply to payments to which KRS 386.482 applies.