SB109: Bill Text

LRB-0771/2

PJK:cjs:rs

2001 - 2002 LEGISLATURE

2001 Senate BILL 109

March 28, 2001 - Introduced by Senators Huelsman and George, cosponsored by Representatives Cullen and Gundrum, by request of Wisconsin Commission on Uniform State Laws. Referred to Committee on Judiciary, Consumer Affairs, and Campaign Finance Reform.

SB109,1,6 An Act to renumber and amend 701.24; to amend 20.907 (1), 23.0918 (2), 25.70, 36.29 (1), 40.82 (2), 66.0603 (1m) (b), 861.015 (2), 881.02 and 881.06; to repeal and recreate 701.20 and 881.01; and to create 701.24 (2) of the statutes; relating to: regulating the investments of personal representatives, trustees, conservators, and guardians of the estate; and providing rules for allocations between principal and income for trusts and estates.

Analysis by the Legislative Reference Bureau

Uniform Principal and Income Act

Current law contains a provision that is the Revised Uniform Principal and Income Act of 1962. The provision provides rules for trustees and personal representatives (fiduciaries) for apportioning trust and estate receipts and disbursements between principal and income. This bill replaces that provision with the Uniform Principal and Income Act of 1997 and an amendment to it. The Uniform Principal and Income Act of 1997 addresses essentially the same issues as the Revised Uniform Principal and Income Act of 1962, but is much more extensive and detailed, takes into account the widespread use today of revocable living trusts as will replacements, and provides rules related to financial instruments and transactions that were not in use previously, such as derivatives.

As under current law, the bill specifies that, in allocating receipts and disbursements between income and principal in the administration of trusts and estates, the terms of the trust or will control. The fiduciary may exercise discretion in the allocation if the trust or will gives the fiduciary such discretionary powers. If the trust or will does not contain a conflicting provision or provide discretionary powers, however, the fiduciary must follow the allocation rules provided in the bill in administering a trust or estate.

Under a trust, some beneficiaries may have a beneficial interest in receiving trust income, while other beneficiaries may receive the principal that remains after the trust terminates. The bill specifies which receipts by a trust are to be allocated to income and which are to be allocated to principal. Various types of receipts are addressed, including distributions from a trust or estate; receipts from the conduct of a business by the trustee; receipts from rental property; interest received on an obligation to pay money; proceeds from a life insurance policy or other contract; payments from a pension, individual retirement account, or annuity; receipts from an interest in minerals, water, or other natural resources; receipts from the sale of timber; distributions from the proceeds of financial assets that provide collateral for a security; and receipts from transactions in derivatives. Following are a few examples of how the bill provides rules for allocation of receipts between principal and income: 1) If part of a payment from an annuity, pension plan, or other retirement account is characterized as interest or dividend, that part of the payment must be allocated to income and the balance must be allocated to principal. If no part of such a payment is characterized as interest or dividend, however, 10% of the payment must be allocated to income and the balance must be allocated to principal. 2) Receipts from rental property must be allocated to income, but a refundable deposit, such as a security deposit, must be allocated to principal and may not be distributed to a beneficiary until the trustee's contractual obligations with respect to the amount have been satisfied. 3) Proceeds of a life insurance policy must be allocated to principal. Dividends on an insurance policy, however, must be allocated to income if the premiums on the policy are paid from income and allocated to principal if the premiums are paid from principal. 4) An amount received on account of an interest in water that is renewable must be allocated to income. If the water is not renewable, however, 90% of the amount received must be allocated to principal and the balance must be allocated to income.

The bill specifies which distributions from a trust are to be made from income and which are to be made from principal. Generally, ordinary administrative expenses are paid from income. One-half of the trustee's regular compensation is paid from income and one-half from principal, but the trustee's compensation for certain activities, such as disbursements made to prepare property for sale, are paid from principal. Expenses of proceedings that concern primarily principal must be paid from principal. Estate, inheritance, and other transfer taxes must be paid from principal, but a tax that is based on receipts allocated to income must be paid from income.

Under the bill, a trustee is authorized to transfer to principal a reasonable amount of the cash receipts from a principal asset that is subject to depreciation and to transfer an appropriate amount from income to principal to reimburse principal or provide a reserve for future principal disbursements if the trustee makes or expects to make a principal disbursement of a type specified in the bill, such as a capital improvement to a principal asset or disbursements to prepare a property for rental. Under the bill, a fiduciary may make adjustments between principal and income to offset any inequities resulting from tax rules or tax elections.

The bill prohibits a court from granting relief from a fiduciary's decision to exercise or not to exercise a discretionary power conferred under the bill, such as whether and to what extent an amount should be transferred from principal to income or from income to principal, unless the court determines that the decision was an abuse of the fiduciary's discretion. In that case, the court may require certain actions to be taken to place the beneficiaries in the positions that they would have occupied had the discretion not been abused and may even require the fiduciary to pay one or more beneficiaries from the fiduciary's own funds.

The bill provides general rules for fiduciaries to use for distributing income to beneficiaries and principal to remainder beneficiaries in an estate or after an income interest in a trust ends, rules for determining when a right to income begins and ends in different circumstances, rules for allocating income receipts and disbursements between income and principal on the basis of the relation in time to the decedent's death or the date on which an income interest begins, and rules for distributing undistributed income after an income interest in a trust ends.

Uniform Prudent Investor Act

Under current law, personal representatives, guardians of the estate, and trustees (fiduciaries) are bound by the prudent person rule. That is, they are required to invest the assets of their trusts and estates conservatively. For example, no more than 50% of the assets may consist of common stocks. This bill replaces the prudent person rule with the Uniform Prudent Investor Act, which sets general standards for fiduciaries, allows them greater flexibility in choosing investments, specifies that their work is to be judged on the basis of the performance of all their investments, allows them to delegate investment decisions, and requires them to consider the tax consequences of investments. These changes affect state and local deferred compensation plans, the historical society's funds that are invested by the investment board, municipal cemetery funds, employe welfare funds, wards' estates, care funds, and preneed trust funds. The bill also adds conservators to the types of fiduciaries to which the Uniform Prudent Investor Act applies. A conservator is appointed by a court to manage the property or income of a person who is competent and who has requested that the conservator be appointed.

The people of the state of Wisconsin, represented in senate and assembly, do enact as follows:

SB109, s. 1 Section 1. 20.907 (1) of the statutes is amended to read:

SB109,4,12 20.907 (1) Acceptance and investment. Unless otherwise provided by law, all gifts, grants, bequests, and devises to the state or to any state agency for the benefit or advantage of the state, whether made to trustees or otherwise, shall be legal and valid when approved by the joint committee on finance and shall be executed and enforced according to the provisions of the instrument making the same, including all provisions and directions in any such instrument for accumulation of the income of any fund or rents and profits of any real estate without being subject to the limitations and restrictions provided by law in other cases; but no such accumulation shall be allowed to produce a fund more than 20 times as great as that originally given. When such gifts, grants, bequests or devises include common stocks or other investments which are not authorized by s. 881.01, such common stocks or other investments may be held and may be exchanged, invested or reinvested in similar types of investments without being subject to the limitations provided by law in other cases.

SB109, s. 2 Section 2. 23.0918 (2) of the statutes is amended to read:

SB109,4,20 23.0918 (2) Unless the natural resources board determines otherwise in a specific case, only the income from the gifts, grants, or bequests in the fund is available for expenditure. The natural resources board may authorize expenditures only for preserving, developing, managing, or maintaining land under the jurisdiction of the department that is used for any of the purposes specified in s. 23.09 (2) (d). In this subsection, unless otherwise provided in a gift, grant, or bequest, principal and income are determined as provided under s. 701.20 (3).

SB109, s. 3 Section 3. 25.70 of the statutes is amended to read:

SB109,5,3 25.70 Historical society trust fund. There is established a separate nonlapsible trust fund designated as the historical society trust fund, consisting of all endowment principal and income and all cash balances of the historical society. Unless the board of curators of the historical society determines otherwise in each case, only the income from the assets in the historical society trust fund is available for expenditure. In this section, unless otherwise provided in the gift, grant, or bequest, principal and income are determined as provided under s. 701.20 (3).

SB109, s. 4 Section 4. 36.29 (1) of the statutes is amended to read:

SB109,6,2 36.29 (1) All gifts, grants, and bequests for the benefit or advantage of the system or any of its institutions, departments, or facilities or to provide any means of instruction, illustration, or knowledge in connection therewith, whether made to trustees or otherwise, shall be valid notwithstanding any other provision of this chapter except as otherwise provided in this subsection and shall be executed and enforced according to the provisions of the instrument making the same, including all provisions and directions in any such instrument for accumulation of the income of any fund or rents and profits of any real estate without being subject to the limitations and restrictions provided by law in other cases; but no such income accumulation shall be allowed to produce a fund more than 20 times as great as that originally given. When such gifts, grants or bequests include common stocks or other investments which are not authorized by ch. 881, the board may continue to hold such common stocks or other investments and exchange, invest or reinvest the funds of such gift, grant or bequest in similar types of investments without being subject to the limitations and restrictions provided by law in other cases. No such investment of the funds of such gifts, grants, or bequests shall knowingly be made in any company, corporation, subsidiary, or affiliate which that practices or condones through its actions discrimination on the basis of race, religion, color, creed, or sex. Except as otherwise provided in this section, the board may invest not to exceed 85% of trust funds held and administered by the board in common stocks , the limitation of 50% in s. 881.01 (2) to the contrary notwithstanding. This subsection does not apply to a gift, grant, or bequest that the board declines to accept or that the board is not authorized to accept under this section.

SB109, s. 5 Section 5. 40.82 (2) of the statutes is amended to read:

SB109,6,10 40.82 (2) Compensation which that is withheld under a deferred compensation plan contract between an employer and an employee may be invested by the employer or a person other than the employer who is authorized by contract to administer the funds. The employer may determine the types of investments in which the deferred compensation funds may be invested. The deferred compensation funds may be invested and reinvested in the same manner provided for investments under s. 881.01 (1).

SB109, s. 6 Section 6. 66.0603 (1m) (b) of the statutes is amended to read:

SB109,6,22 66.0603 (1m) (b) A town, city or village may invest surplus funds in any bonds or securities issued under the authority of the municipality, whether the bonds or securities create a general municipality liability or a liability of the property owners of the municipality for special improvements, and may sell or hypothecate the bonds or securities. Funds of an employer, as defined by s. 40.02 (28), in a deferred compensation plan may also be invested and reinvested in the same manner authorized for investments under s. 881.01 (1). Funds of any school district operating under ch. 119, held in trust for pension plans intended to qualify under section 401 (a) of the Internal Revenue Code, other than funds held in the public employee trust fund, may be invested and reinvested in the same manner as is authorized for investments under s. 881.01.

SB109, s. 7 Section 7. 701.20 of the statutes is repealed and recreated to read:

SB109,6,25 701.20 Uniform principal and income act. (1) Citing section. This section may be cited as the Uniform Principal and Income Act.

SB109,7,1 (2) Definitions. In this section:

SB109,7,5 (a) "Accounting period" means a calendar year, unless another 12-month period is selected by a fiduciary, and includes a portion of a calendar year or other 12-month period that begins when an income interest begins or that ends when an income interest ends.

SB109,7,8 (b) "Beneficiary" means a person who has a beneficial interest in a trust or an estate and includes, in the case of a decedent's estate, an heir, a legatee, and a devisee and, in the case of a trust, an income beneficiary and a remainder beneficiary.

SB109,7,11 (c) "Fiduciary" means a personal representative or a trustee and includes an executor, administrator, successor personal representative, special administrator, and a person performing substantially the same function as any of those.

SB109,7,15 (d) "Income" means money or property that a fiduciary receives as current return from a principal asset. "Income" includes a portion of receipts from a sale, exchange, or liquidation of a principal asset, to the extent provided in subs. (10) to (24).

SB109,7,17 (e) "Income beneficiary" means a person to whom net income of a trust is or may be payable.

SB109,7,20 (f) "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.

SB109,7,22 (g) "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.

SB109,7,25 (h) "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 section to or from income during the period.

SB109,8,4 (i) "Person" means 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.

SB109,8,6 (j) "Principal" means property held in trust for distribution to a remainder beneficiary when the trust terminates.

SB109,8,8 (k) "Remainder beneficiary" means a person entitled to receive principal when an income interest ends.

SB109,8,11 (L) "Terms of a trust" means the manifestation of the intent of a settlor or decedent with respect to a trust, expressed in a manner that admits of its proof in a judicial proceeding, whether by written or spoken words or by conduct.

SB109,8,13 (m) "Trustee" includes an original, additional, or successor trustee, whether or not appointed or confirmed by a court.

SB109,8,16 (3) Fiduciary duties; general principles. (a) In allocating receipts and disbursements to income or principal or between income and principal, and with respect to any matter within the scope of subs. (5) to (9), a fiduciary:

SB109,8,18 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 section;