AB140: Bill Text

LRB-2269/2

CMH:kjf:ch

2005 - 2006 LEGISLATURE

2005 Assembly BILL 140

February 28, 2005 - Introduced by Representative Hundertmark, cosponsored by Senator Stepp. Referred to Committee on Financial Institutions.

AB140,1,6 An Act to renumber and amend 701.24; to amend 20.907 (1), 23.0918 (2), 25.70, 701.12 (3), 701.21 (1), 705.21 (12) (a) and 861.015 (2); to repeal and recreate 701.20; and to create 701.24 (2), 701.24 (3) and 705.21 (12) (am) of the statutes; relating to: providing rules for allocations between principal and income for trusts and estates and authorizing the conversion of a trust to a unitrust.

Analysis by the Legislative Reference Bureau

This bill generally replaces the Revised Uniform Principal and Income Act of 1962 with the Uniform Principal and Income Act of 1997. The Uniform Principal and Income Act of 1997 addresses the same issues but is more extensive and detailed, takes into account the widespread use of revocable living trusts as will replacements, and provides rules related to financial instruments and transactions that were not in use previously.

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.

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. Under the bill, a trustee is also authorized to convert a trust to a unitrust under specified circumstances.

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 or whether to convert a trust to a unitrust, unless the court determines that the decision was an abuse of the fiduciary's discretion. If the court determines that the decision was an abuse, 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.

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.

For further information see the state and local fiscal estimate, which will be printed as an appendix to this bill.

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

AB140, s. 1 Section 1. 20.907 (1) of the statutes is amended to read:

AB140,3,15 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.

AB140, s. 2 Section 2. 23.0918 (2) of the statutes is amended to read:

AB140,4,2 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).

AB140, s. 3 Section 3. 25.70 of the statutes is amended to read:

AB140,4,10 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).

AB140, s. 4 Section 4. 701.12 (3) of the statutes is amended to read:

AB140,4,14 701.12 (3) Nothing in this section shall prevent revocation, modification, or termination of a trust pursuant to its terms or otherwise in accordance with law or prevent conversion of a trust to a unitrust under s. 701.20 (4g).

AB140, s. 5 Section 5. 701.20 of the statutes is repealed and recreated to read:

AB140,4,16 701.20 Principal and income. (2) Definitions. In this section:

AB140,4,20 (a) "Accounting period" means a calendar year, unless a fiduciary selects another 12-month period, 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.

AB140,4,23 (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.

AB140,5,3 (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.

AB140,5,7 (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).

AB140,5,9 (e) "Income beneficiary" means a person to whom net income of a trust is or may be payable.

AB140,5,12 (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.

AB140,5,14 (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.

AB140,5,17 (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.

AB140,5,21 (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.

AB140,5,23 (j) "Principal" means property held in trust for distribution to a remainder beneficiary when the trust terminates.

AB140,5,25 (k) "Remainder beneficiary" means a person entitled to receive principal when an income interest ends.

AB140,6,2 (L) "Sui juris beneficiary" means a beneficiary not under a legal disability. The term includes all of the following:

AB140,6,4 1. A court-appointed guardian of a beneficiary who is incompetent, as defined in s. 880.01 (4).

AB140,6,5 2. An agent for an incapacitated beneficiary.

AB140,6,7 3. A court-appointed guardian of a minor beneficiary's estate or, if there is no court-appointed guardian, the parents of the minor beneficiary.

AB140,6,10 (m) "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.

AB140,6,12 (n) "Trustee" includes an original, additional, or successor trustee, whether or not appointed or confirmed by a court.

AB140,6,15 (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:

AB140,6,17 1. Shall first 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.

AB140,6,21 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.

AB140,6,24 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.

AB140,7,3 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.