§ 11-2.1 — Principal and income

New York § 11-2.1

• Jurisdiction: New York
• Law EPT: Estates, Powers & Trusts
• Part 2: Investments By Fiduciaries: Powers and Duties Relating Thereto
• Art. 11: Fiduciary: Powers, Duties and Limitations; Actions By or Against In Representative or Individual Capacities

Text

§ 11-2.1 Principal and income\n (a) Duty of trustee as to receipts and expenditures.\n (1) A trust shall be administered with due regard to the respective\ninterests of income beneficiaries and remaindermen. A trust is so\nadministered with respect to the allocation of receipts and expenditures\nif a receipt is credited or an expense is charged to income or to\nprincipal or partly to each (A) in accordance with the terms of the\ntrust instrument, notwithstanding any contrary provisions in this\nsection; (B) in the absence of any contrary terms of the trust\ninstrument, in accordance with the provisions of this section; or (C) if\nneither of the preceding rules of administration is applicable, in\naccordance with what is reasonable and equitable in view of the\ninterests of those entitled to income as well as those entitled to\nprincipal and in view of the manner in which men of ordinary prudence,\ndiscretion and judgment would act in the management of their own\naffairs.\n (2) If the trust instrument gives the trustee discretion in crediting\na receipt or charging an expenditure to income or principal or partly to\neach, no inference that the trustee has or has not improperly exercised\nsuch discretion arises from the fact that the trustee has made an\nallocation contrary to the provisions of this section.\n (b) What is income and what is principal; definitions.\n (1) Income is the return in money or property derived from the use of\nprincipal, including return received as:\n (A) Rent from property, including sums received for the cancellation\nor renewal of a lease.\n (B) Interest on money lent, including sums received as consideration\nfor the privilege of prepayment of principal except as provided in\nparagraph (f) on bond premium and discount.\n (C) Income earned during the administration of a decedent's estate, as\nprovided in paragraph (d).\n (D) Corporate distributions, as provided in paragraph (e).\n (E) Accrued income on bonds or other obligations issued at a discount,\nas provided in paragraph (f).\n (F) Receipts from principal used in business, as provided in paragraph\n(g).\n (G) Receipts from disposition of natural resources, as provided in\nparagraphs (h) and (i).\n (H) Receipts from other principal subject to depletion, as provided in\nparagraph (j).\n (I) Receipts from disposition of underproductive property, as provided\nin paragraph (k).\n (2) Principal is property, disposed of in trust, the income from which\nis payable to or to be accumulated for an income beneficiary and the\ntitle to which is ultimately to vest in the person entitled to the\nfuture estate. Principal includes:\n (A) Consideration received by the trustee on the sale or other\ntransfer of principal, on repayment of a loan or as a refund,\nreplacement or change in the form of principal.\n (B) Proceeds of property taken on eminent domain proceedings.\n (C) Proceeds of insurance upon property forming part of the principal\nexcept proceeds of insurance upon a separate interest of an income\nbeneficiary.\n (D) Stock dividends, receipts on liquidation of a corporation and\nother corporate distributions, as provided in paragraph (e).\n (E) Receipts with respect to bonds and other obligations, as provided\nin paragraph (f).\n (F) Royalties and other receipts from disposition of natural\nresources, as provided in paragraphs (h) and (i).\n (G) Receipts from other principal subject to depletion, as provided in\nparagraph (j).\n (H) Any profit resulting from any change in the form of principal,\nexcept as provided in paragraph (k) on underproductive property.\n (I) Receipts from disposition of underproductive property, as provided\nin paragraph (k).\n (3) After determining income and principal in accordance with the\nterms of the trust instrument or of this section the trustee shall\ncharge to income or principal expenses and other charges as provided in\nparagraph (l).\n (c) When right to income arises; apportionment of income or other\nreceipt.\n (1) An income beneficiary is entitled to income from the date\nspecified in the trust instrument or, if none is specified, from the\ndate an asset becomes subject to the trust. In the case of an asset\nwhich becomes subject to a trust by reason of a will, it becomes subject\nto the trust as of the date of the death of the testator even though\nthere is an intervening period of administration of the testator's\nestate.\n (2) In the case of a decedent's estate, a testamentary trust or an\nasset received under a will by a trustee: (A) receipts due but not paid\nat the date of death of the testator are principal; (B) receipts in the\nform of periodic payments (other than corporate distributions to\nstockholders and savings bank and savings and loan association\ndividends), such as rent, interest or annuities payable from any source,\nnot due at the date of death of the testator, shall be treated as\naccruing from day to day. That portion of such a receipt accruing\nbefore the date of death is principal and the balance is income.\n (3) In all other cases any receipt from an income producing asset is\nincome even though the receipt was earned or accrued in whole or in part\nbefore the date when the asset became subject to the trust.\n (4) On termination of an income interest, the income beneficiary whose\ninterest is terminated or his estate is entitled to: (A) income\nundistributed on the date of termination; (B) income due but not paid to\nthe trustee on the date of termination; (C) income in the form of\nperiodic payments (other than corporate distributions to stockholders\nand savings bank and savings and loan association dividends) such as\nrent, interest or annuities, not due on the date of termination, accrued\nfrom day to day.\n (d) Income earned during administration of a decedent's estate.\n (1) Unless the will provides otherwise and subject to subparagraph (2)\nhereof, all expenses incurred in connection with the settlement of a\ndecedent's estate, including but not limited to debts, funeral expenses,\nestate taxes, interest and penalties concerning taxes, family\nallowances, fees of attorneys and commissions of personal\nrepresentatives (other than commissions on estate income) and court\nfees, costs and other charges shall be charged against the principal of\nthe estate.\n (2) Unless the will provides otherwise, income from the assets of a\ndecedent's estate after the death of the testator and before\ndistribution, including income from property used to discharge\nliabilities, shall be determined in accordance with the rules applicable\nto a trustee under this section and distributed as follows: (A) to\nspecific beneficiaries the net income from the property disposed of to\nthem respectively; (B) to all other beneficiaries, except beneficiaries\nof pecuniary dispositions not in trust, the balance of the net income in\nproportion to their respective interests in the undistributed assets of\nthe estate computed at times of distribution on the basis of inventory\nvalue; provided, however, (i) that the amount of income earned during\nthe further administration of the estate from and after the date of\npayment of any estate or inheritance tax shall be distributed to such\nbeneficiaries in proportion to their respective interests in the\nundistributed assets of the estate after the making of such payment on\nthe basis of the fair market value of such assets immediately after the\nmaking of such payment, and (ii) any amount allowed as a tax deduction\nto the estate for income payable to a charitable organization shall be\npaid, without diminution for taxes, to the charitable organization\nentitled to receive such income. This subparagraph does not apply to any\nsums made payable in policies of insurance of any description or under\nany contract for an annuity, including a variable annuity.\n (3) (A) The residuary beneficiaries are entitled to the rent from the\ndecedent's real property, not specifically disposed of, from the date of\ndeath, in proportion to their respective interests under the will,\nunless the fiduciary, pursuant to a power to distribute in kind,\nallocates all or part of such property in whole or partial satisfaction\nof a pecuniary disposition in trust, in which event the rent from the\nproperty so allocated shall be distributed, as of the date of death, to\nthe trustee of such disposition.\n (B) This subparagraph applies to wills of decedents dying before, on\nor after its effective date, provided, however, that it shall not be so\napplied as to require residuary beneficiaries to repay to the estate any\ndistributions of income from real property, not specifically disposed\nof, which were actually made to such beneficiaries prior to such\neffective date.\n (4) Income and rent received by a trustee under subparagraphs (2) or\n(3) shall be treated as income of the trust.\n (e) Distributions of corporations or associations.\n (1) Notwithstanding the provisions of this paragraph, a will, deed or\nother instrument which creates or declares a trust may provide with\nrespect to all matters covered by this section, and direct the manner of\nascertaining income and principal and the apportionment thereof or grant\ndiscretion to the trustee or another person to do so, and such provision\nor direction, where otherwise not contrary to law, controls.\n (2) A distribution by a corporation or association made to a trustee\nin the shares of the distributing corporation or association held in\nsuch trust, whether in the form of a stock split or a stock dividend, at\nthe rate of six per cent or less of the shares of such corporation or\nassociation upon which the distribution is made, is income. Any such\ndistribution at a greater rate is principal.\n (3) For the purpose of determining whether a will, deed or other\ninstrument which creates or declares a trust has directed that a\ndistribution of shares described in subparagraph (2) is income in a\nmanner other than that provided in subparagraph (2), the following rules\napply unless different rules are provided in the will, deed or other\ninstrument:\n (A) A distribution in the shares of the distributing corporation or\nassociation means a distribution in such shares, whether in the form of\na stock split or a stock dividend, at the rate of six per cent or less\nof the shares of such corporation or association upon which the\ndistribution is made.\n (B) A distribution in the shares of the distributing corporation or\nassociation, whether in the form of a stock split or a stock dividend,\nat the rate of six per cent or less of the shares of such corporation or\nassociation upon which the distribution is made, is ordinary and regular\nand shall be deemed to be in lieu of a cash dividend.\n (C) If the will, deed or other instrument which creates or declares a\ntrust grants to the trustee or another person discretion to allocate to\nincome or principal or between income and principal any distribution in\nthe shares of the distributing corporation or association, such\ndiscretion may be exercised with respect to any such distribution in the\nshares of the distributing corporation or association, whether in the\nform of a stock split or a stock dividend, and no inference of\nimprudence or partiality shall arise from the fact that the trustee or\nother person has made an allocation contrary to a provision of\nsubparagraph (2) or of this subparagraph.\n (4) (A) A right issued by the distributing corporation or association\nto subscribe to shares or other securities, whether in the stock or\nother securities of the distributing corporation or association or of a\ncorporation or association other than the distributing corporation or\nassociation, accruing to shareholders on account of their stock\nownership, and the proceeds of any sale of such rights, are principal.\n (B) A distribution by a corporation or association made to a trustee\nin the shares of the distributing corporation, but of a different type\nthan the shares held in such trust, or a distribution of shares,\nsecurities or obligations of a corporation or association other than\nthose of the distributing corporation or association (or the proceeds of\nsuch a distribution) shall be principal.\n (5) When a corporation or association calls in shares of stock or when\na corporation or association succeeds another by merger, consolidation,\nreorganization or other method of acquiring its assets, shares of stock\nissued for the shares so called in or shares of stock in the succeeding\ncorporation or association are principal.\n (6) When a corporation or association is being wholly or partially\nliquidated, shares of stock and cash or other assets distributed to\nshareholders are principal, except that if the corporation or\nassociation indicates that some part of such distribution is a\nsettlement of preferred or guaranteed dividends, that part of the\ndistribution settling dividends accruing since the trustee became a\nshareholder is income. For the purposes of this paragraph, a corporation\nor association is in liquidation if the corporation or association\nindicates that the distribution is in total or partial liquidation, or\nif the corporation or association is making a distribution of assets\nother than cash pursuant to a court decree or final administrative order\nby a government agency ordering the distribution of the particular\nassets, unless the distributing corporation or association indicates\nthat a distribution pursuant to such court or administrative order is\nwholly or partly in lieu of an ordinary cash dividend, in which case the\ndistribution is to that extent income.\n (7) Distributions made from ordinary income by a regulated investment\ncompany or by a trust qualifying and electing under federal law to be\ntaxed as a real estate investment trust are income. All other\ndistributions made by such company or trust, including distributions\nfrom capital gains, depreciation or depletion, whether in the form of\ncash or an option to take new shares or cash or an option to purchase\nadditional shares, are principal.\n (8) If the distributing corporation or association gives a shareholder\nan option to receive a distribution, whether in the form of cash or its\nown shares or cash or an option to purchase new shares, the distribution\nchosen is income.\n (9) Except as provided in subparagraphs (2), (4), (5), (6) and (7),\nall distributions of corporations or associations are income including:\n (A) Cash dividends.\n (B) Share distributions, as provided in subparagraphs (2) and (3).\n (C) Preferred or guaranteed dividends, as provided in subparagraph\n(6).\n (D) Ordinary income from a regulated investment trust or a trust\nqualifying and electing under federal law to be taxed as a real estate\ninvestment trust, as provided in subparagraph (7).\n (E) An option, as provided in subparagraph (8).\n (10) The trustee or other person may rely upon any statement of the\ndistributing corporation or association as to any fact, relevant under\nany provision of this paragraph, concerning the source or character of\ndistributions.\n (11) Where the shares of stock of a corporation or association of this\nstate or of any other jurisdiction constitute part of an estate, trust\nor other fund, and the allocation of any other distribution thereof to\nprincipal or income, or between successive interests, depends on the\ndate of accrual thereof, the date of accrual of any distribution on such\nshares shall be the date specified by the corporation or association\ndeclaring such distribution as that on which the shareholders of record\nentitled to such distribution are to be determined, or, if there be no\nsuch date specified by the corporation or association, the date of\ndeclaration of the distribution. For the purposes of this paragraph, the\n"date of accrual" of a distribution means that date, on and after which\nthe distribution shall be treated in the same manner as if it had been\ndeclared and paid or distributed on such date.\n (12) If a trustee or other person has heretofore received or shall\nhereafter receive any shares of stock distributed by any corporation or\nassociation and is uncertain as to whether any or all of them are\nallocable to income, the trustee or other person shall have with respect\nto all such shares and the proceeds thereof the same duties and powers\n(including powers of sale, investment and reinvestment) as though all\nsuch shares constituted part of the principal of the trust fund. The\ntrustee or other person shall be under no obligation to retain any of\nsuch shares in kind even though it may subsequently be determined that\nsome or all of them were allocable to income. If and when it is\ndetermined that any or all of such shares were allocable to income, the\nshares allocable to income shall be distributed in kind to income,\nexcept that, if prior to such determination, the trustee or other person\nhad sold any of the new shares comprising the distribution or any of the\noriginal shares upon which the distribution was received, income shall\nbe entitled to receive its ratable portion of the shares remaining, if\nany, on hand and an amount of cash equal to its ratable portion of the\nproceeds received by the trustee or other person upon the sale of such\nshares. This subparagraph does not apply in any case in which a trustee\nor other person has heretofore, in good faith, made any different\nallocation of the shares or the proceeds of any sale thereof, or both,\nas between income and principal and has made distribution in accordance\nwith such different allocation to income or to principal, or to both.\n (13) Subparagraphs (1) to (6) inclusive and (8) to (11) inclusive\napply to any trust, whether created or declared before, on or after the\neffective date hereof, except that subparagraphs (1) through (11) do not\napply to any distribution described in this paragraph which accrued\nprior to such effective date, and subparagraph (7) applies to trusts\ncreated on and after its effective date and to the wills of persons\ndying on and after its effective date.\n (f) Bond premium and discount.\n (1) Bonds or other obligations for the payment of money are principal\nat their inventory value, except as provided in subparagraph (2) for\ndiscount bonds. No provision shall be made for amortization of bond\npremiums or for accumulation of discount, except that in the case of\ntestamentary trusts created by the wills of persons dying, and inter\nvivos trusts created by instruments executed, prior to September first,\nnineteen hundred forty-two, premiums may, in the discretion of the\ntrustee, be amortized if the bonds and other obligations for the payment\nof money were acquired prior to June first, nineteen hundred sixty-five.\n The proceeds of a sale, redemption or other disposition of bonds or\nother obligations are principal.\n (2) The increment in value of a bond or other obligation for the\npayment of money bearing no stated interest but payable or redeemable at\nmaturity or at a future time at an amount in excess of the amount in\nconsideration of which it was issued is income. If the income accrues\npursuant to a fixed schedule of appreciation such income is\ndistributable to the beneficiary at the time the increment occurs and\nthe trustee may transfer the amount thereof from principal to income on\neach such date. Whenever unrealized increment is distributed as income\nbut out of principal the principal shall be reimbursed from the income\nwhen realized.\n (g) Business operations.\n If a trustee uses any part of the principal in the continuance of a\nbusiness of which the person who created or declared the trust was a\nsole proprietor or a partner, the net profits of the business, computed\nin accordance with generally accepted accounting principles for a\ncomparable business, are income. If a loss results in any fiscal or\ncalendar year, the loss falls on principal and shall not be carried into\nany other fiscal or calendar year for purposes of calculating net\nincome.\n (h) Disposition of natural resources.\n (1) If any part of the principal consists of a right to receive\nroyalties, overriding or limited royalties, working interests,\nproduction payments, net profit interests or other interests in minerals\nor other natural resources in, on or under land, the receipts from\ntaking the natural resources from the land shall be allocated as\nfollows: (A) if received as rent on a lease or extension payments on a\nlease the receipts are income; (B) if received from a production\npayment, the receipts are income to the extent of any factor for\ninterest or its equivalent provided in the governing instrument. There\nshall be allocated to principal the fraction of the balance of the\nreceipts which the unrecovered cost of the production payment bears to\nthe balance owed on the production payment, exclusive of any factor for\ninterest or its equivalent. The receipts not allocated to principal are\nincome; (C) if received as a royalty, overriding or limited royalty, or\nas a bonus, or from a working interest or from any other interest in\nminerals or other natural resources, receipts not provided for in the\npreceding subparagraphs shall be apportioned on a yearly basis in\naccordance with this paragraph whether or not any natural resource was\nbeing taken from the land at the time the trust was established. There\nshall be added to principal as an allowance for depletion such portion\nof the gross receipts as shall be allowed as a deduction for depletion\nin computing taxable income for Federal income tax purposes. The balance\nof the gross receipts, after payment therefrom of all expenses, direct\nand indirect, is income.\n (2) If a trustee, on the effective date of this section, held an item\nof depletable property of a type specified in this paragraph, he shall\nallocate receipts from the property in the manner used before the\neffective date of this section but as to all depletable property\nthereafter acquired by an existing or new trust, the method of\nallocation provided herein shall be used.\n (i) Sale of timber.\n If any part of the principal consists of land from which merchantable\ntimber may be removed, the receipts from taking the timber from the land\nshall be allocated in accordance with subparagraph (1) (C) of paragraph\n(a).\n (j) Other property subject to depletion.\n Except as provided in paragraphs (h) and (i), if any part of the\nprincipal consists of property subject to depletion, including\nleaseholds, patents, copyrights, royalty rights and rights to receive\npayments on a contract for deferred compensation, the receipts from such\nproperty shall be allocated in accordance with subparagraph (1) (C) of\nparagraph (a).\n (k) Underproductive property.\n (1) Except as otherwise provided in this paragraph (k), a portion of\nthe net proceeds of a sale by a fiduciary as defined in subparagraph\nthree of paragraph (A) of section 11-1.1 of any principal property of an\nestate or trust, other than securities listed on a national securities\nexchange or traded in over the counter, held for more than a year which\nhas not produced over the period held an average net income of one per\ncent per annum of its inventory value (including as income the value of\nany beneficial use of the property by any income beneficiary), shall be\nallocated to income as delayed income, as provided in this paragraph\n(k). The net proceeds of such sale shall be the gross proceeds received,\nincluding the value of any property other than cash received, less the\nexpenses of sale, including tax, if any, incurred on the gain realized,\nand less any carrying charges and expenses paid from the estate or trust\nwhile such property was held by the fiduciary and was underproductive.\n (2) The sum allocated to income as delayed income is the difference\nbetween the net proceeds of sale and the amount which, had such amount\nbeen invested at simple interest at five per cent per annum while the\nproperty was underproductive, would have produced the amount of the net\nproceeds. Such sum, plus any carrying charges and expenses charged\nagainst income while such property was held by such fiduciary and the\nproperty was underproductive, less any income actually received from the\nproperty during such period and less the value of any beneficial use of\nthe property by any income beneficiary, is income and the balance is\nprincipal.\n (3) The amount allocated to income as delayed income under this\nparagraph (k) shall be allocated and paid to the beneficiaries (or their\nrespective estates), if any, who were entitled under the governing\ninstrument to receive income from the estate or trust from time to time\nduring the period the property was held by the fiduciary and was\nunderproductive.\n (4) If, or to the extent to which, any principal property subject to\nthis paragraph (k) is sold or disposed of by conversion, and the\nproceeds of sale or conversion consist of property which cannot be\nreadily apportioned, including, without limitation, land or mortgages\n(for example, real property acquired by or in lieu of foreclosure), the\nincome beneficiary shall be entitled to the net income from any form of\nproperty or obligation received pursuant to such sale or conversion,\nwhile the received property or obligation is held, and when such\nproperty or obligation is later sold or otherwise disposed of by\nconversion into easily apportionable property, no allocation to income\nas provided in this paragraph (k) shall be made.\n (5) This paragraph (k) shall not apply if the terms of the governing\ninstrument direct otherwise. A provision in a will or trust instrument\nauthorizing the fiduciary (A) to retain or to invest in property that is\nunproductive or underproductive of income (described in the instrument\nby the words "unproductive" or "underproductive" or words of similar\nimport), or to retain or to invest in property expressly without regard\nto whether it is productive of income, (B) to transfer any portion of\nreceipts from income to principal on account of depreciation, depletion\nor amortization, or (C) to accumulate income and add it to principal,\nshall be deemed to be a direction that this paragraph (k) shall not\napply.\n (l) Charges against income and principal.\n (1) The following charges shall be made against income: (A) ordinary\nexpenses incurred in connection with the administration, management and\npreservation of the trust property, including regularly recurring taxes\nassessed against any portion of the principal, water rates, insurance\nand bond premiums, interest paid by the trustee and ordinary repairs;\n(B) any tax levied upon receipts defined as income under this section or\nthe trust instrument and payable by the trustee.\n (2) If the court shall find that any judicial proceeding primarily\nconcerns income and that it is equitable to charge the expense of such\nproceeding, or a part thereof, to income, the court may direct that all\nor a specified part of the expense of such proceeding, including\nattorneys' fees, shall be charged to income.\n (3) If charges against income are of unusual amount, the trustee may\nby means of reserves or other reasonable means charge them over a\nreasonable period of time and withhold from distribution sufficient sums\nto regularize distributions.\n (4) The following charges shall be made against principal: (A) charges\nnot provided for in subparagraphs (1) and (2), including court costs and\nattorneys' fees, the cost of investing and reinvesting principal,\npayments on principal of an indebtedness (including a mortgage amortized\nby periodic payments of principal), expenses of preparation of property\nfor sale, and, unless the court directs otherwise, expenses incurred in\nmaintaining or defending any action to protect or construe the trust or\nthe property or assure the title of any trust property; (B) repairs or\nexpenses incurred in making a capital improvement to principal,\nincluding special assessments; (C) any tax levied upon profits, gain or\nother receipts allocated to principal notwithstanding denomination of\nthe tax as an income tax by the taxing authority.\n (5) Regularly recurring charges payable from income shall be\napportioned to the same extent and in the same manner that income is\napportioned under paragraph (c) hereof.\n (6) Notwithstanding the provisions of subparagraphs one and four of\nthis paragraph, fees paid at least annually to banks, trust companies\nand registered investment advisers for investment advisory and custodial\nservices shall be charged one-third against income and two-thirds\nagainst principal.\n (m) Application of section.\n Except as specifically provided in the trust instrument, the will or\nin this section, this section shall apply to any receipt or expense\nreceived or incurred after its effective date by any trust or decedent's\nestate whether established before, on or after the effective date of\nthis section and whether the asset involved was acquired by the trustee\nbefore, on or after its effective date, provided that this section shall\nnot apply to any receipt or expense received or incurred by any trust or\ndecedent's estate after the effective date of article 11-A.\n (n) Uniformity of interpretation.\n This section shall be so construed as to effectuate its general\npurpose to make uniform the law of those states which enact it.\n (o) Definitions.\n As used in this section:\n (1) "Income beneficiary" means any person to whom income is presently\npayable or for whom it is accumulated for distribution as income.\n (2) "Remainderman" means any person entitled to principal, including\nincome which has been accumulated and added to principal.\n (3) "Trustee" means an original trustee and any successor or\nsubstituted trustee.\n (4) "Inventory value" means the cost of property purchased by the\ntrustee and the market value of other property at the time it was made\nsubject to the trust.\n