N.Y. Estates, Powers & Trusts Law § 11-2.1: Principal and income

§ 11-2.1 Principal and income

(a) Duty of trustee as to receipts and expenditures.

(1) A trust shall be administered with due regard to the respective

interests of income beneficiaries and remaindermen. A trust is so

administered with respect to the allocation of receipts and expenditures

if a receipt is credited or an expense is charged to income or to

principal or partly to each (A) in accordance with the terms of the

trust instrument, notwithstanding any contrary provisions in this

section; (B) in the absence of any contrary terms of the trust

instrument, in accordance with the provisions of this section; or (C) if

neither of the preceding rules of administration is applicable, in

accordance with what is reasonable and equitable in view of the

interests of those entitled to income as well as those entitled to

principal and in view of the manner in which men of ordinary prudence,

discretion and judgment would act in the management of their own

affairs.

(2) If the trust instrument gives the trustee discretion in crediting

a receipt or charging an expenditure to income or principal or partly to

each, no inference that the trustee has or has not improperly exercised

such discretion arises from the fact that the trustee has made an

allocation contrary to the provisions of this section.

(b) What is income and what is principal; definitions.

(1) Income is the return in money or property derived from the use of

principal, including return received as:

(A) Rent from property, including sums received for the cancellation

or renewal of a lease.

(B) Interest on money lent, including sums received as consideration

for the privilege of prepayment of principal except as provided in

paragraph (f) on bond premium and discount.

(C) Income earned during the administration of a decedent's estate, as

provided in paragraph (d).

(D) Corporate distributions, as provided in paragraph (e).

(E) Accrued income on bonds or other obligations issued at a discount,

as provided in paragraph (f).

(F) Receipts from principal used in business, as provided in paragraph

(g).

(G) Receipts from disposition of natural resources, as provided in

paragraphs (h) and (i).

(H) Receipts from other principal subject to depletion, as provided in

paragraph (j).

(I) Receipts from disposition of underproductive property, as provided

in paragraph (k).

(2) Principal is property, disposed of in trust, the income from which

is payable to or to be accumulated for an income beneficiary and the

title to which is ultimately to vest in the person entitled to the

future estate. Principal includes:

(A) Consideration received by the trustee on the sale or other

transfer of principal, on repayment of a loan or as a refund,

replacement or change in the form of principal.

(B) Proceeds of property taken on eminent domain proceedings.

(C) Proceeds of insurance upon property forming part of the principal

except proceeds of insurance upon a separate interest of an income

beneficiary.

(D) Stock dividends, receipts on liquidation of a corporation and

other corporate distributions, as provided in paragraph (e).

(E) Receipts with respect to bonds and other obligations, as provided

in paragraph (f).

(F) Royalties and other receipts from disposition of natural

resources, as provided in paragraphs (h) and (i).

(G) Receipts from other principal subject to depletion, as provided in

paragraph (j).

(H) Any profit resulting from any change in the form of principal,

except as provided in paragraph (k) on underproductive property.

(I) Receipts from disposition of underproductive property, as provided

in paragraph (k).

(3) After determining income and principal in accordance with the

terms of the trust instrument or of this section the trustee shall

charge to income or principal expenses and other charges as provided in

paragraph (l).

(c) When right to income arises; apportionment of income or other

receipt.

(1) An income beneficiary is entitled to income from the date

specified in the trust instrument or, if none is specified, from the

date an asset becomes subject to the trust. In the case of an asset

which becomes subject to a trust by reason of a will, it becomes subject

to the trust as of the date of the death of the testator even though

there is an intervening period of administration of the testator's

estate.

(2) In the case of a decedent's estate, a testamentary trust or an

asset received under a will by a trustee: (A) receipts due but not paid

at the date of death of the testator are principal; (B) receipts in the

form of periodic payments (other than corporate distributions to

stockholders and savings bank and savings and loan association

dividends), such as rent, interest or annuities payable from any source,

not due at the date of death of the testator, shall be treated as

accruing from day to day. That portion of such a receipt accruing

before the date of death is principal and the balance is income.

(3) In all other cases any receipt from an income producing asset is

income even though the receipt was earned or accrued in whole or in part

before the date when the asset became subject to the trust.

(4) On termination of an income interest, the income beneficiary whose

interest is terminated or his estate is entitled to: (A) income

undistributed on the date of termination; (B) income due but not paid to

the trustee on the date of termination; (C) income in the form of

periodic payments (other than corporate distributions to stockholders

and savings bank and savings and loan association dividends) such as

rent, interest or annuities, not due on the date of termination, accrued

from day to day.

(d) Income earned during administration of a decedent's estate.

(1) Unless the will provides otherwise and subject to subparagraph (2)

hereof, all expenses incurred in connection with the settlement of a

decedent's estate, including but not limited to debts, funeral expenses,

estate taxes, interest and penalties concerning taxes, family

allowances, fees of attorneys and commissions of personal

representatives (other than commissions on estate income) and court

fees, costs and other charges shall be charged against the principal of

the estate.

(2) Unless the will provides otherwise, income from the assets of a

decedent's estate after the death of the testator and before

distribution, including income from property used to discharge

liabilities, shall be determined in accordance with the rules applicable

to a trustee under this section and distributed as follows: (A) to

specific beneficiaries the net income from the property disposed of to

them respectively; (B) to all other beneficiaries, except beneficiaries

of pecuniary dispositions not in trust, the balance of the net income in

proportion to their respective interests in the undistributed assets of

the estate computed at times of distribution on the basis of inventory

value; provided, however, (i) that the amount of income earned during

the further administration of the estate from and after the date of

payment of any estate or inheritance tax shall be distributed to such

beneficiaries in proportion to their respective interests in the

undistributed assets of the estate after the making of such payment on

the basis of the fair market value of such assets immediately after the

making of such payment, and (ii) any amount allowed as a tax deduction

to the estate for income payable to a charitable organization shall be

paid, without diminution for taxes, to the charitable organization

entitled to receive such income. This subparagraph does not apply to any

sums made payable in policies of insurance of any description or under

any contract for an annuity, including a variable annuity.

(3) (A) The residuary beneficiaries are entitled to the rent from the

decedent's real property, not specifically disposed of, from the date of

death, in proportion to their respective interests under the will,

unless the fiduciary, pursuant to a power to distribute in kind,

allocates all or part of such property in whole or partial satisfaction

of a pecuniary disposition in trust, in which event the rent from the

property so allocated shall be distributed, as of the date of death, to

the trustee of such disposition.

(B) This subparagraph applies to wills of decedents dying before, on

or after its effective date, provided, however, that it shall not be so

applied as to require residuary beneficiaries to repay to the estate any

distributions of income from real property, not specifically disposed

of, which were actually made to such beneficiaries prior to such

effective date.

(4) Income and rent received by a trustee under subparagraphs (2) or

(3) shall be treated as income of the trust.

(e) Distributions of corporations or associations.

(1) Notwithstanding the provisions of this paragraph, a will, deed or

other instrument which creates or declares a trust may provide with

respect to all matters covered by this section, and direct the manner of

ascertaining income and principal and the apportionment thereof or grant

discretion to the trustee or another person to do so, and such provision

or direction, where otherwise not contrary to law, controls.

(2) A distribution by a corporation or association made to a trustee

in the shares of the distributing corporation or association held in

such trust, whether in the form of a stock split or a stock dividend, at

the rate of six per cent or less of the shares of such corporation or

association upon which the distribution is made, is income. Any such

distribution at a greater rate is principal.

(3) For the purpose of determining whether a will, deed or other

instrument which creates or declares a trust has directed that a

distribution of shares described in subparagraph (2) is income in a

manner other than that provided in subparagraph (2), the following rules

apply unless different rules are provided in the will, deed or other

instrument:

(A) A distribution in the shares of the distributing corporation or

association means a distribution in such shares, whether in the form of

a stock split or a stock dividend, at the rate of six per cent or less

of the shares of such corporation or association upon which the

distribution is made.

(B) A distribution in the shares of the distributing corporation or

association, whether in the form of a stock split or a stock dividend,

at the rate of six per cent or less of the shares of such corporation or

association upon which the distribution is made, is ordinary and regular

and shall be deemed to be in lieu of a cash dividend.

(C) If the will, deed or other instrument which creates or declares a

trust grants to the trustee or another person discretion to allocate to

income or principal or between income and principal any distribution in

the shares of the distributing corporation or association, such

discretion may be exercised with respect to any such distribution in the

shares of the distributing corporation or association, whether in the

form of a stock split or a stock dividend, and no inference of

imprudence or partiality shall arise from the fact that the trustee or

other person has made an allocation contrary to a provision of

subparagraph (2) or of this subparagraph.

(4) (A) A right issued by the distributing corporation or association

to subscribe to shares or other securities, whether in the stock or

other securities of the distributing corporation or association or of a

corporation or association other than the distributing corporation or

association, accruing to shareholders on account of their stock

ownership, and the proceeds of any sale of such rights, are principal.

(B) A distribution by a corporation or association made to a trustee

in the shares of the distributing corporation, but of a different type

than the shares held in such trust, or a distribution of shares,

securities or obligations of a corporation or association other than

those of the distributing corporation or association (or the proceeds of

such a distribution) shall be principal.

(5) When a corporation or association calls in shares of stock or when

a corporation or association succeeds another by merger, consolidation,

reorganization or other method of acquiring its assets, shares of stock

issued for the shares so called in or shares of stock in the succeeding

corporation or association are principal.

(6) When a corporation or association is being wholly or partially

liquidated, shares of stock and cash or other assets distributed to

shareholders are principal, except that if the corporation or

association indicates that some part of such distribution is a

settlement of preferred or guaranteed dividends, that part of the

distribution settling dividends accruing since the trustee became a

shareholder is income. For the purposes of this paragraph, a corporation

or association is in liquidation if the corporation or association

indicates that the distribution is in total or partial liquidation, or

if the corporation or association is making a distribution of assets

other than cash pursuant to a court decree or final administrative order

by a government agency ordering the distribution of the particular

assets, unless the distributing corporation or association indicates

that a distribution pursuant to such court or administrative order is

wholly or partly in lieu of an ordinary cash dividend, in which case the

distribution is to that extent income.

(7) Distributions made from ordinary income by a regulated investment

company or by a trust qualifying and electing under federal law to be

taxed as a real estate investment trust are income. All other

distributions made by such company or trust, including distributions

from capital gains, depreciation or depletion, whether in the form of

cash or an option to take new shares or cash or an option to purchase

additional shares, are principal.

(8) If the distributing corporation or association gives a shareholder

an option to receive a distribution, whether in the form of cash or its

own shares or cash or an option to purchase new shares, the distribution

chosen is income.

(9) Except as provided in subparagraphs (2), (4), (5), (6) and (7),

all distributions of corporations or associations are income including:

(A) Cash dividends.

(B) Share distributions, as provided in subparagraphs (2) and (3).

(C) Preferred or guaranteed dividends, as provided in subparagraph

(6).

(D) Ordinary income from a regulated investment trust or a trust

qualifying and electing under federal law to be taxed as a real estate

investment trust, as provided in subparagraph (7).

(E) An option, as provided in subparagraph (8).

(10) The trustee or other person may rely upon any statement of the

distributing corporation or association as to any fact, relevant under

any provision of this paragraph, concerning the source or character of

distributions.

(11) Where the shares of stock of a corporation or association of this

state or of any other jurisdiction constitute part of an estate, trust

or other fund, and the allocation of any other distribution thereof to

principal or income, or between successive interests, depends on the

date of accrual thereof, the date of accrual of any distribution on such

shares shall be the date specified by the corporation or association

declaring such distribution as that on which the shareholders of record

entitled to such distribution are to be determined, or, if there be no

such date specified by the corporation or association, the date of

declaration of the distribution. For the purposes of this paragraph, the

"date of accrual" of a distribution means that date, on and after which

the distribution shall be treated in the same manner as if it had been

declared and paid or distributed on such date.

(12) If a trustee or other person has heretofore received or shall

hereafter receive any shares of stock distributed by any corporation or

association and is uncertain as to whether any or all of them are

allocable to income, the trustee or other person shall have with respect

to all such shares and the proceeds thereof the same duties and powers

(including powers of sale, investment and reinvestment) as though all

such shares constituted part of the principal of the trust fund. The

trustee or other person shall be under no obligation to retain any of

such shares in kind even though it may subsequently be determined that

some or all of them were allocable to income. If and when it is

determined that any or all of such shares were allocable to income, the

shares allocable to income shall be distributed in kind to income,

except that, if prior to such determination, the trustee or other person

had sold any of the new shares comprising the distribution or any of the

original shares upon which the distribution was received, income shall

be entitled to receive its ratable portion of the shares remaining, if

any, on hand and an amount of cash equal to its ratable portion of the

proceeds received by the trustee or other person upon the sale of such

shares. This subparagraph does not apply in any case in which a trustee

or other person has heretofore, in good faith, made any different

allocation of the shares or the proceeds of any sale thereof, or both,

as between income and principal and has made distribution in accordance

with such different allocation to income or to principal, or to both.

(13) Subparagraphs (1) to (6) inclusive and (8) to (11) inclusive

apply to any trust, whether created or declared before, on or after the

effective date hereof, except that subparagraphs (1) through (11) do not

apply to any distribution described in this paragraph which accrued

prior to such effective date, and subparagraph (7) applies to trusts

created on and after its effective date and to the wills of persons

dying on and after its effective date.

(f) Bond premium and discount.

(1) Bonds or other obligations for the payment of money are principal

at their inventory value, except as provided in subparagraph (2) for

discount bonds. No provision shall be made for amortization of bond

premiums or for accumulation of discount, except that in the case of

testamentary trusts created by the wills of persons dying, and inter

vivos trusts created by instruments executed, prior to September first,

nineteen hundred forty-two, premiums may, in the discretion of the

trustee, be amortized if the bonds and other obligations for the payment

of money were acquired prior to June first, nineteen hundred sixty-five.

The proceeds of a sale, redemption or other disposition of bonds or

other obligations are principal.

(2) The increment in value of a bond or other obligation for the

payment of money bearing no stated interest but payable or redeemable at

maturity or at a future time at an amount in excess of the amount in

consideration of which it was issued is income. If the income accrues

pursuant to a fixed schedule of appreciation such income is

distributable to the beneficiary at the time the increment occurs and

the trustee may transfer the amount thereof from principal to income on

each such date. Whenever unrealized increment is distributed as income

but out of principal the principal shall be reimbursed from the income

when realized.

(g) Business operations.

If a trustee uses any part of the principal in the continuance of a

business of which the person who created or declared the trust was a

sole proprietor or a partner, the net profits of the business, computed

in accordance with generally accepted accounting principles for a

comparable business, are income. If a loss results in any fiscal or

calendar year, the loss falls on principal and shall not be carried into

any other fiscal or calendar year for purposes of calculating net

income.

(h) Disposition of natural resources.

(1) If any part of the principal consists of a right to receive

royalties, overriding or limited royalties, working interests,

production payments, net profit interests or other interests in minerals

or other natural resources in, on or under land, the receipts from

taking the natural resources from the land shall be allocated as

follows: (A) if received as rent on a lease or extension payments on a

lease the receipts are income; (B) if received from a production

payment, the receipts are income to the extent of any factor for

interest or its equivalent provided in the governing instrument. There

shall be allocated to principal the fraction of the balance of the

receipts which the unrecovered cost of the production payment bears to

the balance owed on the production payment, exclusive of any factor for

interest or its equivalent. The receipts not allocated to principal are

income; (C) if received as a royalty, overriding or limited royalty, or

as a bonus, or from a working interest or from any other interest in

minerals or other natural resources, receipts not provided for in the

preceding subparagraphs shall be apportioned on a yearly basis in

accordance with this paragraph whether or not any natural resource was

being taken from the land at the time the trust was established. There

shall be added to principal as an allowance for depletion such portion

of the gross receipts as shall be allowed as a deduction for depletion

in computing taxable income for Federal income tax purposes. The balance

of the gross receipts, after payment therefrom of all expenses, direct

and indirect, is income.

(2) If a trustee, on the effective date of this section, held an item

of depletable property of a type specified in this paragraph, he shall

allocate receipts from the property in the manner used before the

effective date of this section but as to all depletable property

thereafter acquired by an existing or new trust, the method of

allocation provided herein shall be used.

(i) Sale of timber.

If any part of the principal consists of land from which merchantable

timber may be removed, the receipts from taking the timber from the land

shall be allocated in accordance with subparagraph (1) (C) of paragraph

(a).

(j) Other property subject to depletion.

Except as provided in paragraphs (h) and (i), if any part of the

principal consists of property subject to depletion, including

leaseholds, patents, copyrights, royalty rights and rights to receive

payments on a contract for deferred compensation, the receipts from such

property shall be allocated in accordance with subparagraph (1) (C) of

paragraph (a).

(k) Underproductive property.

(1) Except as otherwise provided in this paragraph (k), a portion of

the net proceeds of a sale by a fiduciary as defined in subparagraph

three of paragraph (A) of section 11-1.1 of any principal property of an

estate or trust, other than securities listed on a national securities

exchange or traded in over the counter, held for more than a year which

has not produced over the period held an average net income of one per

cent per annum of its inventory value (including as income the value of

any beneficial use of the property by any income beneficiary), shall be

allocated to income as delayed income, as provided in this paragraph

(k). The net proceeds of such sale shall be the gross proceeds received,

including the value of any property other than cash received, less the

expenses of sale, including tax, if any, incurred on the gain realized,

and less any carrying charges and expenses paid from the estate or trust

while such property was held by the fiduciary and was underproductive.

(2) The sum allocated to income as delayed income is the difference

between the net proceeds of sale and the amount which, had such amount

been invested at simple interest at five per cent per annum while the

property was underproductive, would have produced the amount of the net

proceeds. Such sum, plus any carrying charges and expenses charged

against income while such property was held by such fiduciary and the

property was underproductive, less any income actually received from the

property during such period and less the value of any beneficial use of

the property by any income beneficiary, is income and the balance is

principal.

(3) The amount allocated to income as delayed income under this

paragraph (k) shall be allocated and paid to the beneficiaries (or their

respective estates), if any, who were entitled under the governing

instrument to receive income from the estate or trust from time to time

during the period the property was held by the fiduciary and was

underproductive.

(4) If, or to the extent to which, any principal property subject to

this paragraph (k) is sold or disposed of by conversion, and the

proceeds of sale or conversion consist of property which cannot be

readily apportioned, including, without limitation, land or mortgages

(for example, real property acquired by or in lieu of foreclosure), the

income beneficiary shall be entitled to the net income from any form of

property or obligation received pursuant to such sale or conversion,

while the received property or obligation is held, and when such

property or obligation is later sold or otherwise disposed of by

conversion into easily apportionable property, no allocation to income

as provided in this paragraph (k) shall be made.

(5) This paragraph (k) shall not apply if the terms of the governing

instrument direct otherwise. A provision in a will or trust instrument

authorizing the fiduciary (A) to retain or to invest in property that is

unproductive or underproductive of income (described in the instrument

by the words "unproductive" or "underproductive" or words of similar

import), or to retain or to invest in property expressly without regard

to whether it is productive of income, (B) to transfer any portion of

receipts from income to principal on account of depreciation, depletion

or amortization, or (C) to accumulate income and add it to principal,

shall be deemed to be a direction that this paragraph (k) shall not

apply.

(l) Charges against income and principal.

(1) The following charges shall be made against income: (A) ordinary

expenses incurred in connection with the administration, management and

preservation of the trust property, including regularly recurring taxes

assessed against any portion of the principal, water rates, insurance

and bond premiums, interest paid by the trustee and ordinary repairs;

(B) any tax levied upon receipts defined as income under this section or

the trust instrument and payable by the trustee.

(2) If the court shall find that any judicial proceeding primarily

concerns income and that it is equitable to charge the expense of such

proceeding, or a part thereof, to income, the court may direct that all

or a specified part of the expense of such proceeding, including

attorneys' fees, shall be charged to income.

(3) If charges against income are of unusual amount, the trustee may

by means of reserves or other reasonable means charge them over a

reasonable period of time and withhold from distribution sufficient sums

to regularize distributions.

(4) The following charges shall be made against principal: (A) charges

not provided for in subparagraphs (1) and (2), including court costs and

attorneys' fees, the cost of investing and reinvesting principal,

payments on principal of an indebtedness (including a mortgage amortized

by periodic payments of principal), expenses of preparation of property

for sale, and, unless the court directs otherwise, expenses incurred in

maintaining or defending any action to protect or construe the trust or

the property or assure the title of any trust property; (B) repairs or

expenses incurred in making a capital improvement to principal,

including special assessments; (C) any tax levied upon profits, gain or

other receipts allocated to principal notwithstanding denomination of

the tax as an income tax by the taxing authority.

(5) Regularly recurring charges payable from income shall be

apportioned to the same extent and in the same manner that income is

apportioned under paragraph (c) hereof.

(6) Notwithstanding the provisions of subparagraphs one and four of

this paragraph, fees paid at least annually to banks, trust companies

and registered investment advisers for investment advisory and custodial

services shall be charged one-third against income and two-thirds

against principal.

(m) Application of section.

Except as specifically provided in the trust instrument, the will or

in this section, this section shall apply to any receipt or expense

received or incurred after its effective date by any trust or decedent's

estate whether established before, on or after the effective date of

this section and whether the asset involved was acquired by the trustee

before, on or after its effective date, provided that this section shall

not apply to any receipt or expense received or incurred by any trust or

decedent's estate after the effective date of article 11-A.

(n) Uniformity of interpretation.

This section shall be so construed as to effectuate its general

purpose to make uniform the law of those states which enact it.

(o) Definitions.

As used in this section:

(1) "Income beneficiary" means any person to whom income is presently

payable or for whom it is accumulated for distribution as income.

(2) "Remainderman" means any person entitled to principal, including

income which has been accumulated and added to principal.

(3) "Trustee" means an original trustee and any successor or

substituted trustee.

(4) "Inventory value" means the cost of property purchased by the

trustee and the market value of other property at the time it was made

subject to the trust.