CHAPTER 116. UNIFORM PRINCIPAL AND INCOME ACT - Texas Statutes

PROPERTY CODE

TITLE 9. TRUSTS

SUBTITLE B. TEXAS TRUST CODE: CREATION, OPERATION, AND

TERMINATION OF TRUSTS

CHAPTER 116. UNIFORM PRINCIPAL AND INCOME ACT

SUBCHAPTER A. DEFINITIONS, FIDUCIARY DUTIES, AND OTHER

MISCELLANEOUS PROVISIONS

Sec. 116.001. SHORT TITLE. This chapter may be cited as the

Uniform Principal and Income Act.

Added by Acts 2003, 78th Leg., ch. 659, Sec. 1, eff. Jan. 1,

2004.

Sec. 116.002. DEFINITIONS. 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" has the meaning assigned by Section 111.004.

(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" has the meaning assigned by Section 111.004.

Added by Acts 2003, 78th Leg., ch. 659, Sec. 1, eff. Jan. 1,

2004.

Amended by:

Acts 2007, 80th Leg., R.S., Ch.

451, Sec. 12, eff. September 1, 2007.

Sec. 116.003. UNIFORMITY OF APPLICATION AND CONSTRUCTION. 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, Sec. 1, eff. Jan. 1,

2004.

Sec. 116.004. FIDUCIARY DUTIES; GENERAL PRINCIPLES. (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, Sec. 1, eff. Jan. 1,

2004.

Sec. 116.005. TRUSTEE'S POWER TO ADJUST. (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 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;

(2) that changes the amount payable to a beneficiary as a fixed

annuity or a fixed fraction of the value of the trust assets;

(3) 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;

(4) 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;

(5) 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;

(6) if the trustee is a beneficiary of the trust; or

(7) 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, Sec. 1, eff. Jan. 1,

2004.

Amended by:

Acts 2005, 79th Leg., Ch.

148, Sec. 25, eff. January 1, 2006.

Sec. 116.006. JUDICIAL CONTROL OF DISCRETIONARY POWER. (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, 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 or attorneys ad litem

pursuant to Section 115.014. 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, any guardian ad litem, and any attorney 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, 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, Sec. 1, eff. Jan. 1,

2004.

Amended by:

Acts 2009, 81st Leg., R.S., Ch.

672, Sec. 7, eff. September 1, 2009.

Sec. 116.007. PROVISIONS REGARDING NONCHARITABLE UNITRUSTS. (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, Sec. 1, eff. Jan. 1,

2004.

SUBCHAPTER B. DECEDENT'S ESTATE OR TERMINATING INCOME INTEREST

Sec. 116.051. DETERMINATION AND DISTRIBUTION OF NET INCOME.

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, Sec. 1, eff. Jan. 1,

2004.

Sec. 116.052. DISTRIBUTION TO RESIDUARY AND REMAINDER

BENEFICIARIES. (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, Sec. 1, eff. Jan. 1,

2004.

SUBCHAPTER C. APPORTIONMENT AT BEGINNING AND END OF INCOME

INTEREST

Sec. 116.101. WHEN RIGHT TO INCOME BEGINS AND ENDS. (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, Sec. 1, eff. Jan. 1,

2004.

Sec. 116.102. APPORTIONMENT OF RECEIPTS AND DISBURSEMENTS WHEN

DECEDENT DIES OR INCOME INTEREST BEGINS. (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, Sec. 1, eff. Jan. 1,

2004.

Sec. 116.103. APPORTIONMENT WHEN INCOME INTEREST ENDS. (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, Sec. 1, eff. Jan. 1,

2004.

SUBCHAPTER D. ALLOCATION OF RECEIPTS DURING ADMINISTRATION OF

TRUST

PART 1. RECEIPTS FROM ENTITIES

Sec. 116.151. CHARACTER OF RECEIPTS. (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, Sec. 1, eff. Jan. 1,

2004.

Sec. 116.152. DISTRIBUTION FROM TRUST OR ESTATE. 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, Sec. 1, eff. Jan. 1,

2004.

Sec. 116.153. BUSINESS AND OTHER ACTIVITIES CONDUCTED BY

TRUSTEE. (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, Sec. 1, eff. Jan. 1,

2004.

PART 2. RECEIPTS NOT NORMALLY APPORTIONED

Sec. 116.161. PRINCIPAL RECEIPTS. 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, Sec. 1, eff. Jan. 1,

2004.

Sec. 116.162. RENTAL PROPERTY. 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, Sec. 1, eff. Jan. 1,

2004.

Sec. 116.163. OBLIGATION TO PAY MONEY. (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, Sec. 1, eff. Jan. 1,

2004.

Sec. 116.164. INSURANCE POLICIES AND SIMILAR CONTRACTS. (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, Sec. 1, eff. Jan. 1,

2004.

PART 3. RECEIPTS NORMALLY APPORTIONED

Sec. 116.171. INSUBSTANTIAL ALLOCATIONS NOT REQUIRED. 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, Sec. 1, eff. Jan. 1,

2004.

Sec. 116.172. DEFERRED COMPENSATION, ANNUITIES, AND SIMILAR

PAYMENTS. (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.

(3) "Separate fund" includes 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 on the date specified in Subsection (d); less

(2) the total amount that the trustee has allocated to income

for all previous payments received from the future payment asset

during the same accounting period in which the payment is

received.

(d) For purposes of Subsection (c)(1), the determination of the

fair market value of a future payment asset is made on the later

of:

(1) the date on which the future payment asset first becomes

subject to the trust; or

(2) the last day of the accounting period of the trust that

immediately precedes the accounting period during which the

payment is received.

(e) For each accounting period a payment is received, the amount

determined under Subsection (c)(1) must be prorated on a daily

basis unless the determination of the fair market value 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) Subsections (j) and (k) apply and Subsections (b) and (c) do

not apply in determining the allocation of a payment made from a

separate fund to:

(1) a trust to which an election to qualify for a marital

deduction under Section 2056(b)(7), Internal Revenue Code of

1986, has been made; or

(2) a trust that qualifies for the marital deduction under

Section 2056(b)(5), Internal Revenue Code of 1986.

(i) Subsections (h), (j), and (k) do not apply if and to the

extent that a series of payments would, without the application

of Subsection (h), qualify for the marital deduction under

Section 2056(b)(7)(C), Internal Revenue Code of 1986.

(j) The trustee shall determine the internal income of the

separate fund for the accounting period as if the separate fund

were a trust subject to this code. On request of the surviving

spouse, the trustee shall demand of the person administering the

separate fund that this internal income be distributed 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 the balance to the principal. On request of

the surviving spouse, the trustee shall allocate principal to

income to the extent the internal income of the separate fund

exceeds payments made to the trust during the accounting period

from the separate fund.

(k) If the trustee cannot determine the internal income of the

separate fund but can determine the value of the separate fund,

the internal income of the separate fund shall be four percent 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 income of the fund shall be

the product of the interest rate and the present value of the

expected future payments, as determined under Section 7520,

Internal Revenue Code of 1986, for the month preceding the

accounting period for which the computation is made.

Added by Acts 2003, 78th Leg., ch. 659, Sec. 1, eff. Jan. 1,

2004.

Amended by:

Acts 2005, 79th Leg., Ch.

148, Sec. 26, eff. January 1, 2006.

Acts 2007, 80th Leg., R.S., Ch.

451, Sec. 13, eff. September 1, 2007.

Acts 2009, 81st Leg., R.S., Ch.

672, Sec. 8, eff. September 1, 2009.

Acts 2009, 81st Leg., R.S., Ch.

672, Sec. 9, eff. September 1, 2009.

Sec. 116.173. LIQUIDATING ASSET. (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, Sec. 1, eff. Jan. 1,

2004.

Sec. 116.174. MINERALS, WATER, AND OTHER NATURAL RESOURCES. (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 delay rental or 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 received as a royalty, shut-in-well payment, take-or-pay

payment, or bonus, 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, Sec. 1, eff. Jan. 1,

2004.

Amended by:

Acts 2007, 80th Leg., R.S., Ch.

451, Sec. 14, eff. September 1, 2007.

Sec. 116.175. TIMBER. (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, Sec. 1, eff. Jan. 1,

2004.

Sec. 116.176. PROPERTY NOT PRODUCTIVE OF INCOME. (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, Sec. 1, eff. Jan. 1,

2004.

Sec. 116.177. DERIVATIVES AND OPTIONS. (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, Sec. 1, eff. Jan. 1,

2004.

Sec. 116.178. ASSET-BACKED SECURITIES. (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, Sec. 1, eff. Jan. 1,

2004.

SUBCHAPTER E. ALLOCATION OF DISBURSEMENTS DURING ADMINISTRATION

OF TRUST

Sec. 116.201. DISBURSEMENTS FROM INCOME. 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, Sec. 1, eff. Jan. 1,

2004.

Sec. 116.202. DISBURSEMENTS FROM PRINCIPAL. (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, Sec. 1, eff. Jan. 1,

2004.

Sec. 116.203. TRANSFERS FROM INCOME TO PRINCIPAL FOR

DEPRECIATION. (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, Sec. 1, eff. Jan. 1,

2004.

Sec. 116.204. TRANSFERS FROM INCOME TO REIMBURSE PRINCIPAL. (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, Sec. 1, eff. Jan. 1,

2004.

Sec. 116.205. INCOME TAXES. (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, Sec. 1, eff. Jan. 1,

2004.

Sec. 116.206. ADJUSTMENTS BETWEEN PRINCIPAL AND INCOME BECAUSE

OF TAXES. (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 tota