This chapter shall be known and may be cited as the "Alabama Principal and Income Act."

As used in this chapter, the following terms are defined as follows:

(1) ACCOUNTING PERIOD. 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. 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. Money or property that a fiduciary receives as current return from a principal asset. The term also includes a portion of receipts from a sale, exchange, or liquidation of a principal asset, to the extent provided in Article 4.

(5) INCOME BENEFICIARY. A person to whom net income of a trust is or may be payable.

(6) INCOME INTEREST. 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) INVENTORY VALUE. a. The cost of an asset that is purchased by the fiduciary, or b. the market value of an asset at the time the asset becomes subject to the trust; except that in the case of a testamentary trust, the fiduciary may use any value finally determined for the purposes of an estate or inheritance tax.

(8) MANDATORY INCOME INTEREST. The right of an income beneficiary to receive net income that the terms of the trust require the fiduciary to distribute.

(9) NET INCOME. 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.

(10) PERSON. 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.

(11) PRESUMPTIVE REMAINDER BENEFICIARY. Those persons who would be entitled to the principal of a trust if the income interest were immediately terminated, and if a trust contains a power of appointment, the holder of such power of appointment shall also be a presumptive remainder beneficiary.

(12) PRINCIPAL. Property transferred to or acquired by a fiduciary and held in trust for distribution to a remainder beneficiary when an income interest ends.

(13) REMAINDER BENEFICIARY. A person entitled to receive principal when an income interest ends.

(14) TERMS OF A TRUST. 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.

(15) TRUSTEE. An original, additional, or successor trustee, whether or not appointed or confirmed by a court.

(a) In allocating receipts and disbursements to or between principal and income, and with respect to any matter within the scope of Article 2 and Article 3, a fiduciary:

(1) Shall administer a trust or decedent's 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 decedent's 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) Subject to the provisions of Section 19-3A-104, shall administer a trust or decedent's 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 19-3A-104(a), if applicable, 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 decedent's 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. The exercise of discretion in accordance with this chapter is presumed to be fair and reasonable to all of the beneficiaries.

(a) If the terms of the trust expressly provide by specific reference to this section, then a trustee may have the power to adjust between principal and income to the extent the trustee considers necessary if (1) the trustee invests and manages trust assets as a prudent investor; (2) 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 (3) the trustee determines, after applying the rules in Section 19-3A-103(a), that the trustee is unable to comply with Section 19-3A-103(b).

(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, but not limited to:

(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 for the trust;

(5) The regularity of income to the trust;

(6) The need for preservation and appreciation of capital;

(7) The nature of the assets held in the trust and the extent to which they consist of financial assets, interests in closely held enterprises, tangible and intangible personal property, or real property;

(8) The extent to which an asset is used by a beneficiary;

(9) Whether an asset was purchased by the trustee or received from the settlor;

(10) 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;

(11) Whether and to what extent the terms of the trust a. give the trustee the power to invade principal or accumulate income, or b. prohibit the trustee from invading principal or accumulating income;

(12) The extent to which the trustee has exercised a power from time to time to invade principal or accumulate income;

(13) The actual and anticipated effect of economic conditions, inflation, and deflation upon principal and income; and

(14) The anticipated income and transfer tax consequences of an adjustment.

(c) Notwithstanding the power conferred by subsection (a), 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 the transfer 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) That changes the 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 not a beneficiary, but the adjustment would benefit the trustee directly or indirectly; or

(8) If the trustee is a beneficiary of the trust.

(d) If subsection (c)(5), subsection (c)(6), subsection (c)(7), or subsection (c)(8) applies to a trustee and there is more than one trustee, then the co-trustee 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) through subsection (c)(7) 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) The trustee or any beneficiary of a trust covered by this chapter (or a trust to be created from a decedent's estate that is covered by this chapter) (1) may seek approval from a court of competent jurisdiction to be governed prospectively by this section, or (2) may at any time affirmatively elect to be governed prospectively by this section by obtaining the written consent of all of the current income beneficiaries and the presumptive remainder beneficiaries of the trust, and such written consent shall conclusively bind all persons who may have any interest in the affected trust, including all contingent remainder beneficiaries and potential appointees of the trust.

After the decedent's death, in the case of a decedent's estate, or after an income interest in a trust ends, the following rules apply:

(a) If property is specifically given to a beneficiary by will or by trust, then the fiduciary of the decedent's estate or of the terminating income interest shall distribute the net income and net principal receipts to the beneficiary who is to receive the specifically given property, subject to the following rules:

(1) The net income and principal receipts from the specifically given property are determined by including all of the amounts the fiduciary receives or pays with respect to the specifically given property, whether such amounts accrued or became due before, on, or after the date of the decedent's death or the date upon which an income interest in a trust terminates, and by making a reasonable provision for amounts that the fiduciary believes the decedent's estate or terminating income interest may become obligated to pay after the specifically given property is distributed.

(2) A fiduciary may not reduce principal or income receipts from the specifically given property on account of a payment described in Section 19-3A-501 or Section 19-3A-502 to the extent that the will, the terms of the trust, or applicable law requires the fiduciary to make the payment from property other than the specifically given property or to the extent that the fiduciary recovers or expects to recover the payment from a third party.

(b) If a beneficiary is to receive a pecuniary amount (1) outright, in the case of a decedent's estate or (2) outright from a trust after an income interest ends, then a fiduciary shall distribute to the beneficiary the interest or other amount provided by the will, the terms of the trust, or applicable law. The interest shall be paid from net income as determined under subsection (c) or from principal, to the extent that net income is insufficient.

(c) A fiduciary shall determine the remaining net income of the decedent's estate or terminating income interest as provided in Article 3 through Article 5 and by:

(1) Including in net income all income from property used to discharge liabilities;

(2) Paying from income or principal, in the fiduciary's discretion, a. fees of attorneys, accountants, and fiduciaries; b. court costs and other expenses of administration; and c. interest on death taxes. The fiduciary may pay these expenses from income of property passing to a trust for which the fiduciary claims an estate tax marital or charitable deduction, but only to the extent that the payment of these expenses from income will not cause the reduction or loss of the deduction; and

(3) 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 decedent's estate or terminating income interest by the will, the terms of the trust, or applicable law.

(d) A fiduciary shall distribute the remaining net income in the manner described in Section 19-3A-202 to all other beneficiaries, including a beneficiary who receives a pecuniary amount in trust, 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.

(e) In calculating the interest pursuant to subsection (b), the fiduciary shall use the interest rate for 180-day U.S. Treasury bills as of (1) the thirtieth day following the date on which the time for filing verified claims against the decedent's estate expires, or (2) the date upon which an income interest ends.

(a) Each beneficiary described in Section 19-3A-201(d) is entitled to receive a portion of the net income equal to the beneficiary's fractional interest in undistributed principal assets, using inventory values as of the appropriate distribution dates.

(b) In determining a beneficiary's share of net income, the following rules apply:

(1) The beneficiary's fractional interest in the undistributed principal assets shall be calculated without regard to property specifically given to the beneficiary and property required to pay pecuniary amounts not in trust.

(2) The beneficiary's fractional interest in the undistributed principal assets shall be calculated on the basis of the aggregate inventory value of those assets as of the distribution date without reducing the value by any unpaid principal obligation.

(c) If a fiduciary does not distribute all of the collected but undistributed net income to each person as of a distribution date, then the fiduciary shall maintain appropriate records showing the interest of each beneficiary in that net income.

(d) 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.

(e) 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.

(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, then on the date an asset becomes subject to a trust or a successive income interest.

(b) An asset becomes subject to a trust at the following times:

(1) In the case of an asset that is transferred to a trust during the transferor's life, on the date such asset is transferred to the trust;

(2) In the case of an asset that becomes subject to a trust by reason of a will, on the date of a testator's death, even if there is an intervening period of administration of the testator's estate; or

(3) In the case of an asset that is transferred to a fiduciary by a third party because of the individual's death, on the date of an 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 fiduciary may distribute income.

(a) A fiduciary shall allocate an income receipt or disbursement, other than one to which Section 19-3A-201(a) applies, to principal in the following instances:

(1) In the case of a decedent's estate, if its due date occurs before the date of a decedent's death; or

(2) In the case of a trust or successive income interest, if its due date occurs before an income interest begins.

(b) A fiduciary 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 shall be treated as accruing from day to day if its due date is not periodic or if 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 shall be allocated to principal and the balance shall 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, then there is no due date for the purposes of this chapter. Distributions to shareholders or other owners from an entity to which Section 19-3A-401 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 (1) for receipts or disbursements that must be paid at regular intervals under a lease or an obligation to pay interest or (2) for distributions customarily made by an entity at regular intervals.

(a) For the purposes of 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) Except as provided in subsection (c), on the date when a mandatory income interest ends, the fiduciary 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 mandatory income beneficiary's share of the undistributed income that is not disposed of under the terms of the trust.

(c) If, immediately before the income interest ends, the mandatory income beneficiary has an unqualified power to revoke more than five percent of the trust, then the undistributed income from the portion of the trust that may be revoked shall be added to principal.

(d) When a fiduciary's obligation to pay a fixed annuity or a fixed fraction of the value of the trust's assets ends, the fiduciary shall prorate the final payment.

(a) For purposes of 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 fiduciary has an interest other than (1) a trust or decedent's estate to which Section 19-3A-402 applies, (2) a business or activity to which Section 19-3A-403 applies, or (3) an asset-backed security to which Section 19-3A-415 applies.

(b) Except as otherwise provided in this section, a fiduciary shall allocate to income money received from an entity.

(c) A fiduciary shall allocate the following receipts from an entity to principal:

(1) Property other than money except in cases when the fiduciary has the choice to receive dividends or similar payments either in cash or in the shares or similar ownership interests of the corporation or other business entity, in which case, the fiduciary shall allocate the receipts to income;

(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) For purposes of subsection (c)(3), money is received in partial liquidation to the extent that the entity, at or near the time of a distribution, indicates that it is a distribution in partial liquidation.

(e) A fiduciary 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.

A fiduciary shall allocate to income an amount received as a distribution of income from a trust or a decedent's 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 decedent's estate. If a fiduciary 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 fiduciary, then Section 19-3A-401 or Section 19-3A-415 applies to a receipt from such a trust.

(a) If a fiduciary 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 other activity instead of accounting for it as part of the trust's general accounting records, then the fiduciary may maintain separate accounting records for its transactions, whether or not its assets are segregated from other trust assets.

(b) A fiduciary who accounts separately for a business or other activity may determine the extent to which net cash receipts must be retained for working capital, the acquisition or replacement of fixed assets and the other reasonably foreseeable needs of the business or other 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 fiduciary sells assets of the business or other activity, other than in the ordinary course of the business or activity, then the fiduciary shall account for the net amount received as principal in the trust's general accounting records to the extent the fiduciary determines that the amount received is no longer required in the conduct of the business or other activity.

(c) Businesses and other activities for which a fiduciary 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) Managing rental properties;

(5) Extracting minerals and other natural resources;

(6) Timber operations; and

(7) Activities to which Section 19-3A-414 applies.

A fiduciary 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 fiduciary as beneficiary;

(2) Subject to any contrary rules in Section 19-3A-401 through Section 19-3A-415, money or other property received from the sale, exchange, liquidation, or change in form of a principal asset, including realized profit;

(3) Amounts recovered from third parties to reimburse the trust because of disbursements described in Section 19-3A-502(c) or for other reasons 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 fiduciary may or must distribute income; and

(6) Other receipts as provided in Section 19-3A-408 through Section 19-3A-415.

To the extent the fiduciary does not account for receipts from rental property pursuant to Section 19-3A-403, the fiduciary 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, shall be added to principal and held subject to the terms of the lease and is not available for distribution to a beneficiary until the fiduciary's contractual obligations have been satisfied with respect to that amount.

(a) An amount received as interest, whether determined at a fixed, variable, or floating rate, on a bond or an obligation to pay money to the fiduciary shall be allocated to income.

(b) Except as provided for in subsection (c) and subsection (d), a fiduciary shall allocate to principal any gain or loss realized upon the sale or maturity of any bond or obligation to pay money to the fiduciary, regardless of how such bond or other obligation was acquired.

(c) A fiduciary shall allocate to income the difference between inventory value or cost, and the amount realized upon sale or maturity, if greater, for bonds or other obligations that do not bear interest, regardless of how or when such bond or other obligation was acquired.

(d) For bonds or other obligations that are acquired by a fiduciary subsequent to the time the principal was established and whose cost is greater than their par or maturity value, the fiduciary shall amortize periodically out of income the premium paid, and upon sale or maturity, shall allocate to principal any gain or loss realized thereon.

(e) This section does not apply to a bond or other obligation to which Section 19-3A-409, Section 19-3A-410, Section 19-3A-411, Section 19-3A-412, Section 19-3A-414, or Section 19-3A-415 applies.

(a) Except as otherwise provided in subsection (b), a fiduciary shall allocate to principal the proceeds of a life insurance policy or other contract in which the trust or its fiduciary is named as beneficiary, including a contract that insures the trust or its fiduciary against loss for damage to, destruction of, or loss of title to a trust asset. The fiduciary 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 fiduciary shall allocate to income proceeds of a contract that insures the fiduciary against loss of occupancy or other use by an income beneficiary, loss of income, or, subject to Section 19-3A-403, loss of profits from a business.

(c) This section does not apply to a contract to which Section 19-3A-409 applies.

(a) If a fiduciary determines that an allocation between principal and income required by Section 19-3A-409, Section 19-3A-410, Section 19-3A-411, Section 19-3A-412, or Section 19-3A-415 is insubstantial, then the fiduciary may allocate the entire amount to principal, unless one of the circumstances described in Section 19-3A-104(c) applies to the allocation. This power may be exercised by a co-trustee in the circumstances described in Section 19-3A-104(d) and may be released for the reasons and in the manner described in Section 19-3A-104(e). For purposes of this subsection, the circumstances set forth in Section 19-3A-104(c), Section 19-3A-104(d), and Section 19-3A-104(e) shall be applied whether or not Section 19-3A-104 is otherwise applicable to the trust.

(b) Nothing in this section imposes a duty on the fiduciary to make an allocation pursuant to this section, and the fiduciary is not liable for failure to make an allocation pursuant to this section.

(a) In this section, "payment" means a payment that a fiduciary 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 a payment or portion thereof is characterized by other sections of this chapter as income in the hands of the payer, a fiduciary shall allocate such payment or portion thereof to income. The fiduciary shall allocate to principal the balance of the payment and any other payment received in the same accounting period that is not characterized as income to the payer by other sections of this chapter.

(c) To the extent that a payment is not allocated between income and principal pursuant to subsection (b), a fiduciary 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 if the payment received by the fiduciary is the entire amount to which the fiduciary is entitled, then the fiduciary shall allocate the entire payment to principal. For purposes of this subsection, a payment is not "required to be made" to the extent that it is made because the fiduciary exercises a right of withdrawal.

(d) If, to obtain an estate tax marital deduction for a trust, a fiduciary must allocate more of a payment to income than that provided for by this section, then the fiduciary shall allocate to income the additional amount necessary to obtain the marital deduction.

(e) This section does not apply to payments to which Section 19-3A-410 applies.

(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 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 19-3A-409, natural resources subject to Section 19-3A-411, timber subject to Section 19-3A-412, an activity subject to Section 19-3A-414, an asset subject to Section 19-3A-415, or any asset for which the fiduciary establishes a reserve for depreciation under Section 19-3A-503.

(b) A fiduciary shall allocate to income ten percent (10%) of the receipts from a liquidating asset and the balance to principal.

(a) To the extent that a fiduciary accounts for receipts from an interest in minerals or other natural resources pursuant to this section, the fiduciary shall allocate them as follows:

(1) If received as nominal delay rental or nominal annual rent on a lease, a receipt shall be allocated to income.

(2) If received from a production payment, a receipt shall 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 shall be allocated to principal.

(3) If an amount received as a royalty payment, shut-in-well payment, take-or-pay payment, bonus, or a delay rental that is more than nominal, then ninety percent (90%) shall be allocated to principal and the balance to income.

(4) If an amount is received from a working interest or any other interest not provided for in subdivisions (1), (2), or (3), then ninety percent (90%) of the net amount received shall be allocated to principal and the balance to income.

(b) An amount received on account of an interest in water that is renewable shall be allocated to income. If the water is not renewable, then ninety percent (90%) of the amount shall be allocated to principal and the balance to income.

(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) If a trust owns an interest in minerals, water, or other natural resources on January 1, 2001, then the fiduciary may allocate receipts from the interest as provided in this chapter or in the manner used by the fiduciary before January 1, 2001. If the trust acquires an interest in minerals, water, or other natural resources after January 1, 2001, then the fiduciary shall allocate receipts from the interest as provided in this chapter.

(a) To the extent that a fiduciary accounts for receipts from the sale of timber and related products pursuant to this section, the fiduciary shall allocate the net receipts first to principal, based upon the volume of the timber at the time of transfer to the trust or decedent's estate. The balance shall be allocated eighty percent (80%) to income and the balance to principal.

(b) In determining net receipts as provided for in subsection (a), a fiduciary shall deduct the following expenses related to the sale of timber and related products from gross receipts:

(1) Management expenses;

(2) Legal and accounting expenses and fees;

(3) Sales commissions;

(4) Reforestation expenses; and

(5) Any necessary timber stand improvement expense that is recognized and accepted as good forest management practice at the time of sale.

(c) This chapter applies whether or not a decedent or transferor was harvesting timber from the property before it became subject to the trust or decedent's estate.

(d) If a trust owns an interest in timberland on January 1, 2001, then the fiduciary shall allocate net receipts from the sale of timber and related products as provided in this chapter or in the manner used by the fiduciary before January 1, 2001. If the trust acquires an interest in timberland after January 1, 2001, then the fiduciary shall allocate net receipts from the sale of timber and related products as provided in this section.

(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 fiduciary transfers from principal to income pursuant to Section 19-3A-104, if applicable, 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, then the spouse may require the fiduciary (1) to make property productive of income, (2) to convert property within a reasonable time or (3) to exercise the power conferred by Section 19-3A-104(a), if applicable. The fiduciary may decide which action or combination of actions to take.

(b) In cases not governed by subsection (a), a fiduciary shall allocate to principal the proceeds from the sale or other disposition of an asset without regard to the amount of income the asset produces during any accounting period.

(a) In this section, "derivative instrument" means a contract, a 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 fiduciary does not account under Section 19-3A-403 for transactions in derivative instruments, the fiduciary shall allocate to principal receipts from and disbursements made in connection with those transactions.

(c) If a fiduciary 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 fiduciary or other owner of the asset is required to deliver the asset if the option is exercised, then an amount received for granting the option shall be allocated to principal. An amount paid to acquire the option shall 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, shall be allocated to principal.

(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 (1) only the interest or other current return thereon or (2) only the proceeds other than interest or current return. The term does not include an asset to which Section 19-3A-401 or Section 19-3A-409 applies.

(b) If a trust receives a payment that includes interest or other current return and other proceeds of the collateral financial assets, then the fiduciary (1) shall allocate to income the portion of the payment which the payer identifies as being from interest or other current return; and (2) 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 within a 12-month period, then the fiduciary 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 within a period exceeding 12 months, then the fiduciary shall allocate ten percent (10%) of the payment to income and the balance to principal.

A trustee shall make the following disbursements from income to the extent that they are not disbursements to which Section 19-3A-201(c)(2) or Section 19-3A-201(c)(3) applies:

(a) All of the regular compensation of the trustee and of any person providing investment advisory or custodial services to the trustee, to the extent not charged to principal pursuant to Section 19-3A-502(a)(1);

(b) All expenses for accountings, judicial proceedings, or other matters that involve both the income and remainder interests, to the extent not charged to principal pursuant to Section 19-3A-502(a)(1);

(c) 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;

(d) All recurring premiums on insurance covering the loss of a principal asset or the loss of income from or use of the asset; and

(e) All disbursements related to environmental matters, to the extent not charged to principal pursuant to Section 19-3A-502(c).

(a) A trustee shall make the following disbursements from principal:

(1) An amount, not to exceed fifty percent (50%), of the disbursements described in Section 19-3A-501(a) and Section 19-3A-501(b);

(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 19-3A-501(d), of which the trust is the owner and beneficiary; and

(6) Estate, inheritance, and other transfer taxes, including penalties thereon, apportioned to the trust which carries the name of the estate.

(b) If a principal asset is encumbered with an obligation that requires income from that asset to be paid directly to the creditor, then 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.

(c) A trustee may charge all disbursements related to environmental matters to principal or income, as provided by applicable law.

(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 fiduciary may transfer from income 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 in any of the following circumstances:

(1) As to the portion of a. real property used or available for use by a beneficiary as a residence or b. 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) If the fiduciary is accounting separately for the business or activity in which the asset is used, pursuant to Section 19-3A-403.

(c) An amount transferred from income to principal need not be held as a separate fund.

(a) If a fiduciary makes or expects to make a principal disbursement described in this section, then the fiduciary 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 fiduciary 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; and

(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.

(c) If the asset whose ownership gives rise to the disbursements becomes subject to a successive income interest after an income interest ends, then a fiduciary may continue to transfer amounts from income to principal as provided in subsection (a).

(a) A tax required to be paid by a fiduciary based on receipts allocated to income shall be paid from income.

(b) A tax required to be paid by a fiduciary based on receipts allocated to principal shall 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 fiduciary on the trust's share of an entity's taxable income shall be paid proportionately as follows:

(1) From income to the extent that allocation from the entity of the items giving rise to the tax either are or would be, if distributed by the entity, allocated to income; and

(2) From principal to the extent that allocation from the entity of the items giving rise to the tax either are or would be, if distributed by the entity, allocated to principal.

(d) For purposes of this section, receipts allocated to principal or income shall be reduced by the amount distributed to a beneficiary from principal or income for which the trust receives a deduction in calculating the tax.

(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 any of the following:

(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 a decedent's estate, a trust, or a distribution from a decedent's estate or a trust; or

(3) The ownership by a decedent's estate or trust of an interest in an entity whose taxable income, whether or not distributed, is includable in the taxable income of the decedent's 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 a decedent's estate, trust, or beneficiary are decreased, then each decedent's 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 shall 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 decedent's estate, trust, or beneficiary whose income taxes are reduced shall be the same as its proportionate share of the total decrease in income tax. A decedent's estate or a trust shall reimburse principal from income.

In applying and construing this uniform act, consideration shall be given to the need to promote uniformity of the law with respect to its subject matter among states that enact it.

If any provision of this chapter or its application to any person or circumstance is held invalid, then the invalidity does not affect other provisions or applications of this chapter that can be given effect without the invalid provision or application, and to this end the provisions of this chapter are severable.

This chapter shall become effective on January 1, 2001, and shall apply to every trust and decedent's estate created on or after such date.

This chapter shall become applicable on January 1, 2001, to every trust and decedent's estate already in existence on January 1, 2001, and to every testamentary trust to be created on or after January 1, 2001, from a decedent's estate that is already in existence on January 1, 2001; provided, however, at any time prior to January 1, 2003, any such pre-existing trust or decedent's estate (or testamentary trust to be created from a pre-existing estate) shall have the right to elect to continue operating under the law in effect prior to this chapter. Any fiduciary, income beneficiary, or presumptive remainder beneficiary of an affected trust or estate shall have the right to make the election to continue operating under the law in effect prior to this chapter, which election shall be made by a written instrument delivered to, or executed by, the fiduciary and placed with the fiduciary's records. The decision of whether to make such election by the fiduciary or by any income beneficiary or presumptive remaindermen shall conclusively bind all persons who may have any interest in the affected trust, including all contingent remaindermen and potential appointees of the affected trust or estate.

A fiduciary may at any time obtain the written consent of all of the current income beneficiaries and presumptive remainder beneficiaries of a trust or decedent's estate as to the fiduciary's exercise of any discretion granted under this chapter, including the application of the chapter to pre-existing trusts or decedent's estates, and such written consent shall conclusively bind all persons who may have any interest in the affected trust or decedent's estate, including all contingent remainder beneficiaries and potential appointees of the affected trust or decedent's estate.