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(d) A trustee may apply the rules in this subsection, to the extent that the
22trustee considers it appropriate, to net gain or loss realized after the date of death
23or terminating event or earlier distribution date from the disposition of a principal
24asset if this subsection applies to the income from the asset.
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1(7) When right to income begins and ends. (a) An income beneficiary is
2entitled to net income from the date on which the income interest begins. An income
3interest begins on the date specified in the terms of the trust or, if no date is specified,
4on the date an asset becomes subject to a trust or successive income interest.
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(b) An asset becomes subject to a trust:
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1. On the date it is transferred to the trust in the case of an asset that is
7transferred to a trust during the transferor's life.
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2. On the date of a testator's death in the case of an asset that becomes subject
9to a trust by reason of a will, even if there is an intervening period of administration
10of the testator's estate.
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3. On the date of an individual's death in the case of an asset that a 3rd party
12transfers to a fiduciary because of the individual's death.
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(c) An asset becomes subject to a successive income interest on the day after
14the preceding income interest ends, as determined under par. (d), even if there is an
15intervening period of administration to wind up the preceding income interest.
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(d) An income interest ends on the day before an income beneficiary dies or
17another terminating event occurs, or on the last day of a period during which there
18is no beneficiary to whom a trustee may distribute income.
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19(8) Apportionment of receipts and disbursements when decedent dies or
20income interest begins. (a) A trustee shall allocate to principal an income receipt
21or disbursement other than one to which sub. (5) (a) applies if its due date occurs
22before a decedent dies in the case of an estate or before an income interest begins in
23the case of a trust or successive income interest.
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(b) A trustee shall allocate to income an income receipt or disbursement if its
25due date occurs on or after the date on which a decedent dies or an income interest
1begins and it is a periodic due date. An income receipt or disbursement must be
2treated as accruing from day to day if its due date is not periodic or it has no due date.
3The portion of the receipt or disbursement accruing before the date of death or an
4income interest begins must be allocated to principal and the balance must be
5allocated to income.
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(c) An item of income or an obligation is due on the date the payer is required
7to make a payment. If a payment date is not stated, there is no due date for the
8purposes of this section. Distributions to shareholders or other owners from an
9entity, as defined in sub. (10), are due on the date fixed by the entity for determining
10who is entitled to receive the distribution or, if no date is fixed, on the declaration date
11for the distribution. A due date is periodic for receipts or disbursements that must
12be paid at regular intervals under a lease or an obligation to pay interest or if an
13entity customarily makes distributions at regular intervals.
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14(9) Apportionment when income interest ends. (a) In this subsection,
15"undistributed income" means net income received before the date on which an
16income interest ends. "Undistributed income" does not include an item of income or
17expense that is due or accrued or net income that has been added or is required to
18be added to principal under the terms of the trust.
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(b) When a mandatory income interest ends, the trustee shall pay to a
20mandatory income beneficiary who survives that date, or to the estate of a deceased
21mandatory income beneficiary whose death causes the interest to end, the
22beneficiary's share of the undistributed income that is not disposed of under the
23terms of the trust unless the beneficiary has an unqualified power to revoke more
24than 5 percent of the trust immediately before the income interest ends. In the latter
1case, the undistributed income from the portion of the trust that may be revoked
2must be added to principal.
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(c) When a trustee's obligation to pay a fixed annuity or a fixed fraction of the
4value of the trust's assets ends, the trustee shall prorate the final payment if and to
5the extent required by applicable law to accomplish a purpose of the trust or its
6settlor relating to income, gift, estate, or other tax requirements.
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7(10) Character of receipts. (a) In this subsection, "entity" means a
8corporation, partnership, limited liability company, regulated investment company,
9real estate investment trust, common trust fund, or any other organization in which
10a trustee has an interest other than a trust or estate to which sub. (11) applies, a
11business or activity to which sub. (12) applies, or an asset-backed security to which
12sub. (24) applies.
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(b) Except as otherwise provided in this subsection, a trustee shall allocate to
14income money received from an entity.
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(c) A trustee shall allocate the following receipts from an entity to principal:
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1. Property other than money.
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2. Money received in one distribution or a series of related distributions in
18exchange for part or all of a trust's interest in the entity.
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3. Money received in total or partial liquidation of the entity.
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4. Money received from an entity that is a regulated investment company or
21a real estate investment trust if the money distributed is a capital gain dividend for
22federal income tax purposes.
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(d) Money is received in partial liquidation:
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1. To the extent that the entity, at or near the time of a distribution, indicates
25that it is a distribution in partial liquidation.
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12. If the total amount of money and property distributed in a distribution or
2series of related distributions is greater than 20 percent of the entity's gross assets,
3as shown by the entity's year-end financial statements immediately preceding the
4initial receipt.
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(e) Money is not received in partial liquidation, nor may it be taken into account
6under par. (d) 2., to the extent that it does not exceed the amount of income tax that
7a trustee or beneficiary must pay on taxable income of the entity that distributes the
8money.
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(f) A trustee may rely upon a statement made by an entity about the source or
10character of a distribution if the statement is made at or near the time of distribution
11by the entity's board of directors or other person or group of persons authorized to
12exercise powers to pay money or transfer property comparable to those of a
13corporation's board of directors.
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14(11) Distribution from trust or estate. A trustee shall allocate to income an
15amount received as a distribution of income from a trust or an estate in which the
16trust has an interest other than a purchased interest, and shall allocate to principal
17an amount received as a distribution of principal from such a trust or estate. If a
18trustee purchases an interest in a trust that is an investment entity, or a decedent
19or donor transfers an interest in such a trust to a trustee, sub. (10) or (24) applies to
20a receipt from the trust.
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21(12) Business and other activities conducted by trustee. (a) If a trustee who
22conducts a business or other activity determines that it is in the best interest of all
23the beneficiaries to account separately for the business or activity instead of
24accounting for it as part of the trust's general accounting records, the trustee may
1maintain separate accounting records for its transactions, whether or not its assets
2are segregated from other trust assets.
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(b) A trustee who accounts separately for a business or other activity may
4determine the extent to which its net cash receipts must be retained for working
5capital, the acquisition or replacement of fixed assets, and other reasonably
6foreseeable needs of the business or activity and the extent to which the remaining
7net cash receipts are accounted for as principal or income in the trust's general
8accounting records. If a trustee sells assets of the business or other activity, other
9than in the ordinary course of the business or activity, the trustee shall account for
10the net amount received as principal in the trust's general accounting records to the
11extent the trustee determines that the amount received is no longer required in the
12conduct of the business.
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(c) Activities for which a trustee may maintain separate accounting records
14include:
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1. Retail, manufacturing, service, and other traditional business activities.
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3. Raising and selling livestock and other animals.
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4. Management of rental properties.
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5. Extraction of minerals and other natural resources.
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6. Timber operations.
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7. Activities to which sub. (23) applies.
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22(13) Principal receipts. A trustee shall allocate to principal:
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(a) To the extent not allocated to income under this section, assets received from
24a transferor during the transferor's lifetime, a decedent's estate, a trust with a
1terminating income interest, or a payer under a contract naming the trust or its
2trustee as beneficiary.
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(b) Money or other property received from the sale, exchange, liquidation, or
4change in form of a principal asset, including realized profit, subject to subs. (10) to
5(24).
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(c) Amounts recovered from 3rd parties to reimburse the trust because of
7disbursements described in sub. (26) (a) 7. or for other reasons to the extent not based
8on the loss of income.
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(d) Proceeds of property taken by eminent domain, but a separate award made
10for the loss of income with respect to an accounting period during which a current
11income beneficiary had a mandatory income interest is income.
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(e) Net income received in an accounting period during which there is no
13beneficiary to whom a trustee may or must distribute income.
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(f) Other receipts as provided in subs. (17) to (24).
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15(14) Rental property. To the extent that a trustee accounts for receipts from
16rental property in accordance with this subsection, the trustee shall allocate to
17income an amount received as rent of real or personal property, including an amount
18received for cancellation or renewal of a lease. An amount received as a refundable
19deposit, including a security deposit or a deposit that is to be applied as rent for
20future periods, must be added to principal and held subject to the terms of the lease
21and is not available for distribution to a beneficiary until the trustee's contractual
22obligations have been satisfied with respect to that amount.
SB93,27,2
23(15) Obligation to pay money. (a) An amount received as interest, whether
24determined at a fixed, variable, or floating rate, on an obligation to pay money to the
1trustee, including an amount received as consideration for prepaying principal, must
2be allocated to income without any provision for amortization of premium.
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(b) A trustee shall allocate to principal an amount received from the sale,
4redemption, or other disposition of an obligation to pay money to the trustee more
5than one year after it is purchased or acquired by the trustee, including an obligation
6whose purchase price or value when it is acquired is less than its value at maturity.
7If the obligation matures within one year after the trustee purchases or acquires it,
8an amount received in excess of its purchase price or its value when the trust acquires
9it must be allocated to income.
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(c) This subsection does not apply to an obligation to which sub. (18), (19), (20),
11(21), (23), or (24) applies.
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12(16) Insurance policies and similar contracts. (a) Except as provided in par.
13(b), a trustee shall allocate to principal the proceeds of a life insurance policy or other
14contract in which the trust or its trustee is named as beneficiary, including a contract
15that insures the trust or its trustee against loss for damage to, destruction of, or loss
16of title to, a trust asset. The trustee shall allocate dividends on an insurance policy
17to income if the premiums on the policy are paid from income, and to principal if the
18premiums are paid from principal.
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(b) A trustee shall allocate to income proceeds of a contract that insures the
20trustee against loss of occupancy or other use by an income beneficiary, loss of
21income, or, subject to sub. (12), loss of profits from a business.
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(c) This subsection does not apply to a contract to which sub. (18) applies.
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23(17) Insubstantial allocations not required. If a trustee determines that an
24allocation between principal and income required by sub. (15) (b), (18), (19), (20), (21),
25or (24) is insubstantial, the trustee may allocate the entire amount to principal
1unless one of the circumstances described in sub. (4) (c) applies to the allocation. This
2power may be exercised by a cotrustee in the circumstances described in sub. (4) (d)
3and may be released for the reasons and in the manner described in sub. (4) (e). An
4allocation is presumed to be insubstantial if:
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(a) The amount of the allocation would increase or decrease net income in an
6accounting period, as determined before the allocation, by less than 10 percent.
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(b) The value of the asset producing the receipt for which the allocation would
8be made is less than 10 percent of the total value of the trust's assets at the beginning
9of the accounting period.
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10(18) Deferred compensation, annuities, and similar payments. (a) In this
11subsection, "payment" means a payment that a trustee may receive over a fixed
12number of years or during the life of one or more individuals because of services
13rendered or property transferred to the payer in exchange for future payments. The
14term includes a payment made in money or property from the payer's general assets
15or from a separate fund created by the payer, including a private or commercial
16annuity, an individual retirement account, and a pension, profit-sharing,
17stock-bonus, or stock-ownership plan.
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(b) To the extent that a payment is characterized as interest or a dividend or
19a payment made in lieu of interest or a dividend, a trustee shall allocate it to income.
20The trustee shall allocate to principal the balance of the payment and any other
21payment received in the same accounting period that is not characterized as interest,
22a dividend, or an equivalent payment.
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(c) 1. In this paragraph, "plan income" means any of the following:
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a. With respect to payments received from a plan that maintains separate
25accounts or funds for its participants or account holders, such as defined contribution
1retirement plans, individual retirement accounts, Roth individual retirement
2accounts, and some types of deferred compensation plans, either the amount of the
3plan account or fund held for the benefit of the trust that, if the plan account or fund
4were a trust, would be allocated to income under pars. (b) and (d) for that accounting
5period, or 4 percent of the value of the plan account or fund on the first day of the
6accounting period. The trustee shall, in his or her discretion, choose the method of
7determining "plan income" under this subd. 1. a., and may change the method of
8determining "plan income" under this subd. 1. a. for any subsequent accounting
9period.
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b. With respect to payments received from a plan that does not maintain
11separate accounts or funds for its participants or account holders, such as defined
12benefit retirement plans and some types of deferred compensation plans, 4 percent
13of the total present value of the trust's interest in the plan as of the first day of the
14accounting period, based on reasonable actuarial assumptions as determined by the
15trustee.
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2. For each accounting period of a trust in which the trust receives a payment
17but no part of any payment is allocated to income under par. (b), the trustee shall
18allocate to income that portion of the aggregate value of all payments received by the
19trustee in that accounting period that is equal to the amount of plan income that is
20attributable to the trust's interest in the plan from which payment is received for that
21accounting period. The trustee shall allocate the balance of any payments to
22principal.
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(d) If, to obtain an estate or gift tax marital deduction for an interest in a trust,
24a trustee must allocate more of a payment to income than provided for by this
1subsection, the trustee shall allocate to income the additional amount necessary to
2obtain the marital deduction.
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(e) This subsection does not apply to payments to which sub. (19) applies.
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4(19) Liquidating asset. (a) In this subsection, "liquidating asset" means an
5asset whose value will diminish or terminate because the asset is expected to produce
6receipts for a period of limited duration. The term includes a leasehold, patent,
7copyright, royalty right, and right to receive payments during a period of more than
8one year under an arrangement that does not provide for the payment of interest on
9the unpaid balance. The term does not include a payment subject to sub. (18),
10resources subject to sub. (20), timber subject to sub. (21), an activity subject to sub.
11(23), an asset subject to sub. (24), or any asset for which the trustee establishes a
12reserve for depreciation under sub. (27).
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(b) A trustee shall allocate to income 10 percent of the receipts from a
14liquidating asset and the balance to principal.
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15(20) Minerals, water, and other natural resources. (a) To the extent that a
16trustee accounts for receipts from an interest in minerals or other natural resources
17in accordance with this subsection, the trustee shall allocate them as follows:
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1. If received as nominal delay rental or nominal annual rent on a lease, a
19receipt must be allocated to income.
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2. If received from a production payment, a receipt must be allocated to income
21if and to the extent that the agreement creating the production payment provides a
22factor for interest or its equivalent. The balance must be allocated to principal.
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3. If an amount received as a royalty, shut-in-well payment, take-or-pay
24payment, bonus, or delay rental is more than nominal, 90 percent must be allocated
25to principal and the balance to income.
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14. If an amount is received from a working interest or any other interest not
2provided for in subd. 1., 2., or 3., 90 percent of the net amount received must be
3allocated to principal and the balance to income.
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(b) An amount received on account of an interest in water that is renewable
5must be allocated to income. If the water is not renewable, 90 percent of the amount
6must be allocated to principal and the balance to income.
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(c) This subsection applies whether or not a decedent or donor was extracting
8minerals, water, or other natural resources before the interest became subject to the
9trust.
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(d) If a trust owns an interest in minerals, water, or other natural resources on
11the effective date of this paragraph .... [revisor inserts date], the trustee may allocate
12receipts from the interest as provided in this subsection or in the manner used by the
13trustee before the effective date of this paragraph .... [revisor inserts date]. If the
14trust acquires an interest in minerals, water, or other natural resources after the
15effective date of this paragraph .... [revisor inserts date], the trustee shall allocate
16receipts from the interest as provided in this subsection.
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17(21) Timber. (a) To the extent that a trustee accounts for receipts from the sale
18of timber and related products in accordance with this subsection, the trustee shall
19allocate the net receipts:
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1. To income to the extent that the amount of timber removed from the land does
21not exceed the rate of growth of the timber during the accounting periods in which
22a beneficiary has a mandatory income interest.
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2. To principal to the extent that the amount of timber removed from the land
24exceeds the rate of growth of the timber or the net receipts are from the sale of
25standing timber.
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13. To income or principal or between income and principal if the net receipts
2are from the lease of timberland or from a contract to cut timber from land owned by
3a trust, by determining the amount of timber removed from the land under the lease
4or contract and applying the rules in subds. 1. and 2.
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4. To principal to the extent that advance payments, bonuses, and other
6payments are not allocated under subd. 1., 2., or 3.
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(b) In determining net receipts to be allocated under par. (a), a trustee shall
8deduct and transfer to principal a reasonable amount for depletion.
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(c) This subsection applies whether or not a decedent or transferor was
10harvesting timber from the property before it became subject to the trust.
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(d) If a trust owns an interest in timberland on the effective date of this
12paragraph .... [revisor inserts date], the trustee may allocate net receipts from the
13sale of timber and related products as provided in this subsection or in the manner
14used by the trustee before the effective date of this paragraph .... [revisor inserts
15date]. If the trust acquires an interest in timberland after the effective date of this
16paragraph .... [revisor inserts date], the trustee shall allocate net receipts from the
17sale of timber and related products as provided in this subsection.
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18(22) Property not productive of income. (a) If a marital deduction is allowed
19for all or part of a trust whose assets consist substantially of property that does not
20provide the surviving spouse with sufficient income from or use of the trust assets,
21and if the amounts that the trustee transfers from principal to income under sub. (4)
22and distributes to the spouse from principal in accordance with the terms of the trust
23are insufficient to provide the spouse with the beneficial enjoyment required to
24obtain the marital deduction, the spouse may require the trustee to make property
25productive of income, convert property within a reasonable time, or exercise the
1power conferred by sub. (4) (a). The trustee may decide which action or combination
2of actions to take.
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(b) In cases not governed by par. (a), proceeds from the sale or other disposition
4of an asset are principal without regard to the amount of income the asset produces
5during any accounting period.
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6(23) Derivatives and options. (a) In this subsection, "derivative" means a
7contract or financial instrument or a combination of contracts and financial
8instruments that gives a trust the right or obligation to participate in some or all
9changes in the price of a tangible or intangible asset or group of assets, or changes
10in a rate, an index of prices or rates, or another market indicator for an asset or a
11group of assets.
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(b) To the extent that a trustee does not account under sub. (12) for transactions
13in derivatives, the trustee shall allocate to principal receipts from and
14disbursements made in connection with those transactions.
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(c) If a trustee grants an option to buy property from the trust, whether or not
16the trust owns the property when the option is granted, grants an option that permits
17another person to sell property to the trust, or acquires an option to buy property for
18the trust or an option to sell an asset owned by the trust, and the trustee or other
19owner of the asset is required to deliver the asset if the option is exercised, an amount
20received for granting the option must be allocated to principal. An amount paid to
21acquire the option must be paid from principal. A gain or loss realized upon the
22exercise of an option, including an option granted to a settlor of the trust for services
23rendered, must be allocated to principal.
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24(24) Asset-backed securities. (a) In this subsection, "asset-backed security"
25means an asset whose value is based upon the right it gives the owner to receive
1distributions from the proceeds of financial assets that provide collateral for the
2security. The term includes an asset that gives the owner the right to receive from
3the collateral financial assets only the interest or other current return or only the
4proceeds other than interest or current return. The term does not include an asset
5to which sub. (10) or (18) applies.
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(b) If a trust receives a payment from interest or other current return and from
7other proceeds of the collateral financial assets, the trustee shall allocate to income
8the portion of the payment that the payer identifies as being from interest or other
9current return and shall allocate the balance of the payment to principal.
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(c) If a trust receives one or more payments in exchange for the trust's entire
11interest in an asset-backed security in one accounting period, the trustee shall
12allocate the payments to principal. If a payment is one of a series of payments that
13will result in the liquidation of the trust's interest in the security over more than one
14accounting period, the trustee shall allocate 10 percent of the payment to income and
15the balance to principal.
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16(25) Disbursements from income. A trustee shall make the following
17disbursements from income to the extent that they are not disbursements specified
18in sub. (5) (b) 2. or 3.: