SB109: Bill Text

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;

SB109,8,22 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 section;

SB109,8,25 3. Shall administer a trust or estate in accordance with this section 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

SB109,9,3 4. Shall add a receipt or charge a disbursement to principal to the extent that the terms of the trust and this section do not provide a rule for allocating the receipt or disbursement to principal or income or between principal and income.

SB109,9,11 (b) In exercising the power to adjust under sub. (4) (a) or a discretionary power of administration regarding a matter within the scope of this section, whether granted by the terms of a trust, a will, or this section, 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 section is presumed to be fair and reasonable to all of the beneficiaries.

SB109,9,17 (4) 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 sub. (3) (a), that the trustee is unable to comply with sub. (3) (b).

SB109,9,20 (b) In deciding whether and to what extent to exercise the power conferred by par. (a), a trustee shall consider all factors relevant to the trust and its beneficiaries, including the following factors to the extent they are relevant:

SB109,9,21 1. The nature, purpose, and expected duration of the trust;

SB109,9,22 2. The intent of the settlor;

SB109,9,23 3. The identity and circumstances of the beneficiaries;

SB109,9,25 4. The needs for liquidity, regularity of income, and preservation and appreciation of capital;

SB109,10,4 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;

SB109,10,8 6. The net amount allocated to income under the other subsections of this section and the increase or decrease in the value of the principal assets, which the trustee may estimate in the case of assets for which market values are not readily available;

SB109,10,12 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;

SB109,10,14 8. The actual and anticipated effect of economic conditions on principal and income and effects of inflation and deflation; and

SB109,10,15 9. The anticipated tax consequences of an adjustment.

SB109,10,16 (c) A trustee may not make an adjustment:

SB109,10,20 1. That diminishes the income interest in a trust that requires all of the income to be paid at least annually to a surviving spouse and for which an estate tax or gift tax marital deduction would be allowed, in whole or in part, if the trustee did not have the power to make the adjustment;

SB109,10,22 2. 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;

SB109,10,24 3. That changes the amount payable to a beneficiary as a fixed annuity or a fixed fraction of the value of the trust assets;

SB109,11,2 4. 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;

SB109,11,6 5. If possessing or exercising the power to make an adjustment causes an individual to be treated as the owner of all or part of the trust for income tax purposes, and the individual would not be treated as the owner if the trustee did not possess the power to make an adjustment;

SB109,11,11 6. If possessing or exercising the power to make an adjustment causes all or part of the trust assets to be included for estate tax purposes in the estate of an individual who has the power to remove a trustee or appoint a trustee, or both, and the assets would not be included in the estate of the individual if the trustee did not possess the power to make an adjustment;

SB109,11,12 7. If the trustee is a beneficiary of the trust; or

SB109,11,14 8. If the trustee is not a beneficiary, but the adjustment would benefit the trustee directly or indirectly.

SB109,11,18 (d) If par. (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.

SB109,12,2 (e) A trustee may release the entire power conferred by par. (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 par. (c) 1. to 6. or 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 par. (c). The release may be permanent or for a specified period, including a period measured by the life of an individual.

SB109,12,6 (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 subsection 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 par. (a).

SB109,12,10 (4m) Judicial review of discretionary power. (a) Unless it determines that the decision was an abuse of the fiduciary's discretion, a court may not grant relief from a fiduciary's decision to exercise or not to exercise a discretionary power conferred by this section, including:

SB109,12,12 1. A decision under sub. (4) (a) as to whether and to what extent an amount should be transferred from principal to income or from income to principal.

SB109,12,16 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 under sub. (4) (a).

SB109,12,19 (b) A fiduciary'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.

SB109,12,23 (c) If the court determines that a fiduciary has abused the fiduciary's discretion, the court may place the income and remainder beneficiaries in the positions that they would have occupied had the discretion not been abused, according to the following rules:

SB109,13,3 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 fiduciary 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.

SB109,13,9 2. To the extent that the abuse of discretion has resulted in a distribution to a beneficiary that 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 fiduciary to withhold an amount from one or more future distributions to the beneficiary who received the distribution that was too large or by ordering that beneficiary to return some or all of the distribution to the trust.

SB109,13,14 3. To the extent that the court is unable, after applying subds. 1. and 2., to place the beneficiaries, the trust, or both in the positions that they would have occupied had the discretion not been abused, the court may order the fiduciary to pay an appropriate amount from its own funds to one or more of the beneficiaries, the trust, or both.

SB109,13,24 (d) Upon petition by the fiduciary, the court having jurisdiction over a trust shall determine whether a proposed exercise or nonexercise by the fiduciary of a discretionary power conferred under this section will result in an abuse of the fiduciary's discretion. The petition must describe the proposed exercise or nonexercise of the power and contain sufficient information to inform the beneficiaries of the reasons for the proposal, the facts upon which the fiduciary 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 of the power has the burden of establishing that it will result in an abuse of discretion.

SB109,14,3 (5) 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:

SB109,14,8 (a) 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 subs. (7) to (30) that apply to trustees and the rules in par. (e). The fiduciary shall distribute the net income and net principal receipts to the beneficiary who is to receive the specific property.

SB109,14,11 (b) A fiduciary shall determine the remaining net income of a decedent's estate or a terminating income interest under the rules in subs. (7) to (30) that apply to trustees and by:

SB109,14,13 1. Including in net income all income from property used to discharge liabilities;

SB109,14,19 2. 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

SB109,14,25 3. Paying from principal all other disbursements made or incurred in connection with the settlement of a decedent's estate or the winding up of a terminating income interest, including debts, funeral expenses, disposition of remains, family allowances, and death taxes and related penalties that are apportioned to the estate or terminating income interest by the will, the terms of the trust, or applicable law.

SB109,15,9 (c) 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 par. (b) 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.