701.20(9)
(9) Apportionment when income interest ends. 701.20(9)(a)(a) In this subsection, "undistributed income" means net income received before the date on which an income interest ends. "Undistributed income" does not include an item of income or expense that is due or accrued or net income that has been added or is required to be added to principal under the terms of the trust.
701.20(9)(b)
(b) When a mandatory income interest ends, the trustee shall pay to a mandatory income beneficiary who survives that date, or to the estate of a deceased mandatory income beneficiary whose death causes the interest to end, the beneficiary's share of the undistributed income that is not disposed of under the terms of the trust unless the beneficiary has an unqualified power to revoke more than 5 percent of the trust immediately before the income interest ends. In the latter case, the undistributed income from the portion of the trust that may be revoked must be added to principal.
701.20(9)(c)
(c) When a trustee's obligation to pay a fixed annuity or a fixed fraction of the value of the trust's assets ends, the trustee shall prorate the final payment if and to the extent required by applicable law to accomplish a purpose of the trust or its settlor relating to income, gift, estate, or other tax requirements.
701.20(10)(a)(a) In this subsection, "entity" means a corporation, partnership, limited liability company, regulated investment company, real estate investment trust, common trust fund, or any other organization in which a trustee has an interest other than a trust or estate to which
sub. (11) applies, a business or activity to which
sub. (12) applies, or an asset-backed security to which
sub. (24) applies.
701.20(10)(b)
(b) Except as otherwise provided in this subsection, a trustee shall allocate to income money received from an entity.
701.20(10)(c)
(c) A trustee shall allocate the following receipts from an entity to principal:
701.20(10)(c)2.
2. Money received in one distribution or a series of related distributions in exchange for part or all of a trust's interest in the entity.
701.20(10)(c)3.
3. Money received in total or partial liquidation of the entity.
701.20(10)(c)4.
4. Money received from an entity that is a regulated investment company or a real estate investment trust if the money distributed is a capital gain dividend for federal income tax purposes.
701.20(10)(d)1.
1. To the extent that the entity, at or near the time of a distribution, indicates that it is a distribution in partial liquidation.
701.20(10)(d)2.
2. If the total amount of money and property distributed in a distribution or series of related distributions is greater than 20 percent of the entity's gross assets, as shown by the entity's year-end financial statements immediately preceding the initial receipt.
701.20(10)(e)
(e) Money is not received in partial liquidation, nor may it be taken into account under
par. (d) 2., to the extent that it does not exceed the amount of income tax that a trustee or beneficiary must pay on taxable income of the entity that distributes the money.
701.20(10)(f)
(f) A trustee may rely upon a statement made by an entity about the source or character of a distribution if the statement is made at or near the time of distribution by the entity's board of directors or other person or group of persons authorized to exercise powers to pay money or transfer property comparable to those of a corporation's board of directors.
701.20(11)
(11) Distribution from trust or estate. A trustee shall allocate to income an amount received as a distribution of income from a trust or an estate in which the trust has an interest other than a purchased interest, and shall allocate to principal an amount received as a distribution of principal from such a trust or estate. If a trustee purchases an interest in a trust that is an investment entity, or a decedent or donor transfers an interest in such a trust to a trustee,
sub. (10) or
(24) applies to a receipt from the trust.
701.20(12)
(12) Business and other activities conducted by trustee. 701.20(12)(a)(a) If a trustee who conducts a business or other activity determines that it is in the best interest of all the beneficiaries to account separately for the business or activity instead of accounting for it as part of the trust's general accounting records, the trustee may maintain separate accounting records for its transactions, whether or not its assets are segregated from other trust assets.
701.20(12)(b)
(b) A trustee who accounts separately for a business or other activity may determine the extent to which its net cash receipts must be retained for working capital, the acquisition or replacement of fixed assets, and other reasonably foreseeable needs of the business or activity and the extent to which the remaining net cash receipts are accounted for as principal or income in the trust's general accounting records. If a trustee sells assets of the business or other activity, other than in the ordinary course of the business or activity, the trustee shall account for the net amount received as principal in the trust's general accounting records to the extent the trustee determines that the amount received is no longer required in the conduct of the business.
701.20(12)(c)
(c) Activities for which a trustee may maintain separate accounting records include:
701.20(12)(c)1.
1. Retail, manufacturing, service, and other traditional business activities.
701.20(13)
(13) Principal receipts. A trustee shall allocate to principal:
701.20(13)(a)
(a) To the extent not allocated to income under this section, assets received from a transferor during the transferor's lifetime, a decedent's estate, a trust with a terminating income interest, or a payer under a contract naming the trust or its trustee as beneficiary.
701.20(13)(b)
(b) Money or other property received from the sale, exchange, liquidation, or change in form of a principal asset, including realized profit, subject to
subs. (10) to
(24).
701.20(13)(c)
(c) Amounts recovered from 3rd parties to reimburse the trust because of disbursements described in
sub. (26) (a) 7. or for other reasons to the extent not based on the loss of income.
701.20(13)(d)
(d) Proceeds of property taken by eminent domain, but a separate award made for the loss of income with respect to an accounting period during which a current income beneficiary had a mandatory income interest is income.
701.20(13)(e)
(e) Net income received in an accounting period during which there is no beneficiary to whom a trustee may or must distribute income.
701.20(14)
(14) Rental property. To the extent that a trustee accounts for receipts from rental property in accordance with this subsection, the trustee shall allocate to income an amount received as rent of real or personal property, including an amount received for cancellation or renewal of a lease. An amount received as a refundable deposit, including a security deposit or a deposit that is to be applied as rent for future periods, must be added to principal and held subject to the terms of the lease and is not available for distribution to a beneficiary until the trustee's contractual obligations have been satisfied with respect to that amount.
701.20(15)(a)(a) An amount received as interest, whether determined at a fixed, variable, or floating rate, on an obligation to pay money to the trustee, including an amount received as consideration for prepaying principal, must be allocated to income without any provision for amortization of premium.
701.20(15)(b)
(b) A trustee shall allocate to principal an amount received from the sale, redemption, or other disposition of an obligation to pay money to the trustee more than one year after it is purchased or acquired by the trustee, including an obligation whose purchase price or value when it is acquired is less than its value at maturity. If the obligation matures within one year after the trustee purchases or acquires it, an amount received in excess of its purchase price or its value when the trust acquires it must be allocated to income.
701.20(16)
(16) Insurance policies and similar contracts. 701.20(16)(a)(a) Except as provided in
par. (b), a trustee shall allocate to principal the proceeds of a life insurance policy or other contract in which the trust or its trustee is named as beneficiary, including a contract that insures the trust or its trustee against loss for damage to, destruction of, or loss of title to, a trust asset. The trustee shall allocate dividends on an insurance policy to income if the premiums on the policy are paid from income, and to principal if the premiums are paid from principal.
701.20(16)(b)
(b) A trustee shall allocate to income proceeds of a contract that insures the trustee against loss of occupancy or other use by an income beneficiary, loss of income, or, subject to
sub. (12), loss of profits from a business.
701.20(16)(c)
(c) This subsection does not apply to a contract to which
sub. (18) applies.
701.20(17)
(17) Insubstantial allocations not required. If a trustee determines that an allocation between principal and income required by
sub. (15) (b),
(18),
(19),
(20),
(21), or
(24) is insubstantial, the trustee may allocate the entire amount to principal unless one of the circumstances described in
sub. (4) (c) applies to the allocation. This power may be exercised by a cotrustee in the circumstances described in
sub. (4) (d) and may be released for the reasons and in the manner described in
sub. (4) (e). An allocation is presumed to be insubstantial if:
701.20(17)(a)
(a) The amount of the allocation would increase or decrease net income in an accounting period, as determined before the allocation, by less than 10 percent.
701.20(17)(b)
(b) The value of the asset producing the receipt for which the allocation would be made is less than 10 percent of the total value of the trust's assets at the beginning of the accounting period.
701.20(18)
(18) Deferred compensation, annuities, and similar payments. 701.20(18)(a)(a) In this subsection, "payment" means a payment that a trustee may receive over a fixed number of years or during the life of one or more individuals because of services rendered or property transferred to the payer in exchange for future payments. The term includes a payment made in money or property from the payer's general assets or from a separate fund created by the payer, including a private or commercial annuity, an individual retirement account, and a pension, profit-sharing, stock-bonus, or stock-ownership plan.
701.20(18)(b)
(b) To the extent that a payment is characterized as interest or a dividend or a payment made in lieu of interest or a dividend, a trustee shall allocate it to income. The trustee shall allocate to principal the balance of the payment and any other payment received in the same accounting period that is not characterized as interest, a dividend, or an equivalent payment.
701.20(18)(c)1.1. In this paragraph, "plan income" means any of the following:
701.20(18)(c)1.a.
a. With respect to payments received from a plan that maintains separate accounts or funds for its participants or account holders, such as defined contribution retirement plans, individual retirement accounts, Roth individual retirement accounts, and some types of deferred compensation plans, either the amount of the plan account or fund held for the benefit of the trust that, if the plan account or fund were a trust, would be allocated to income under
pars. (b) and
(d) for that accounting period, or 4 percent of the value of the plan account or fund on the first day of the accounting period. The trustee shall, in his or her discretion, choose the method of determining "plan income" under this
subd. 1. a., and may change the method of determining "plan income" under this
subd. 1. a. for any subsequent accounting period.
701.20(18)(c)1.b.
b. With respect to payments received from a plan that does not maintain separate accounts or funds for its participants or account holders, such as defined benefit retirement plans and some types of deferred compensation plans, 4 percent of the total present value of the trust's interest in the plan as of the first day of the accounting period, based on reasonable actuarial assumptions as determined by the trustee.
701.20(18)(c)2.
2. For each accounting period of a trust in which the trust receives a payment but no part of any payment is allocated to income under
par. (b), the trustee shall allocate to income that portion of the aggregate value of all payments received by the trustee in that accounting period that is equal to the amount of plan income that is attributable to the trust's interest in the plan from which payment is received for that accounting period. The trustee shall allocate the balance of any payments to principal.
701.20(18)(d)
(d) If, to obtain an estate or gift tax marital deduction for an interest in a trust, a trustee must allocate more of a payment to income than provided for by this subsection, the trustee shall allocate to income the additional amount necessary to obtain the marital deduction.
701.20(18)(e)
(e) This subsection does not apply to payments to which
sub. (19) applies.
701.20(19)(a)(a) In this subsection, "liquidating asset" means an asset whose value will diminish or terminate because the asset is expected to produce receipts for a period of limited duration. The term includes a leasehold, patent, copyright, royalty right, and right to receive payments during a period of more than one year under an arrangement that does not provide for the payment of interest on the unpaid balance. The term does not include a payment subject to
sub. (18), resources subject to
sub. (20), timber subject to
sub. (21), an activity subject to
sub. (23), an asset subject to
sub. (24), or any asset for which the trustee establishes a reserve for depreciation under
sub. (27).
701.20(19)(b)
(b) A trustee shall allocate to income 10 percent of the receipts from a liquidating asset and the balance to principal.
701.20(20)
(20) Minerals, water, and other natural resources. 701.20(20)(a)(a) To the extent that a trustee accounts for receipts from an interest in minerals or other natural resources in accordance with this subsection, the trustee shall allocate them as follows:
701.20(20)(a)1.
1. If received as nominal delay rental or nominal annual rent on a lease, a receipt must be allocated to income.
701.20(20)(a)2.
2. If received from a production payment, a receipt must be allocated to income if and to the extent that the agreement creating the production payment provides a factor for interest or its equivalent. The balance must be allocated to principal.
701.20(20)(a)3.
3. If an amount received as a royalty, shut-in-well payment, take-or-pay payment, bonus, or delay rental is more than nominal, 90 percent must be allocated to principal and the balance to income.
701.20(20)(a)4.
4. If an amount is received from a working interest or any other interest not provided for in
subd. 1.,
2., or
3., 90 percent of the net amount received must be allocated to principal and the balance to income.
701.20(20)(b)
(b) An amount received on account of an interest in water that is renewable must be allocated to income. If the water is not renewable, 90 percent of the amount must be allocated to principal and the balance to income.
701.20(20)(c)
(c) This subsection applies whether or not a decedent or donor was extracting minerals, water, or other natural resources before the interest became subject to the trust.
701.20(20)(d)
(d) If a trust owns an interest in minerals, water, or other natural resources on May 17, 2005, the trustee may allocate receipts from the interest as provided in this subsection or in the manner used by the trustee before May 17, 2005. If the trust acquires an interest in minerals, water, or other natural resources after May 17, 2005, the trustee shall allocate receipts from the interest as provided in this subsection.
701.20(21)(a)(a) To the extent that a trustee accounts for receipts from the sale of timber and related products in accordance with this subsection, the trustee shall allocate the net receipts:
701.20(21)(a)1.
1. To income to the extent that the amount of timber removed from the land does not exceed the rate of growth of the timber during the accounting periods in which a beneficiary has a mandatory income interest.
701.20(21)(a)2.
2. To principal to the extent that the amount of timber removed from the land exceeds the rate of growth of the timber or the net receipts are from the sale of standing timber.
701.20(21)(a)3.
3. To income or principal or between income and principal if the net receipts are from the lease of timberland or from a contract to cut timber from land owned by a trust, by determining the amount of timber removed from the land under the lease or contract and applying the rules in
subds. 1. and
2.
701.20(21)(a)4.
4. To principal to the extent that advance payments, bonuses, and other payments are not allocated under
subd. 1.,
2., or
3.
701.20(21)(b)
(b) In determining net receipts to be allocated under
par. (a), a trustee shall deduct and transfer to principal a reasonable amount for depletion.
701.20(21)(c)
(c) This subsection applies whether or not a decedent or transferor was harvesting timber from the property before it became subject to the trust.
701.20(21)(d)
(d) If a trust owns an interest in timberland on May 17, 2005, the trustee may allocate net receipts from the sale of timber and related products as provided in this subsection or in the manner used by the trustee before May 17, 2005. If the trust acquires an interest in timberland after May 17, 2005, the trustee shall allocate net receipts from the sale of timber and related products as provided in this subsection.
701.20(22)
(22) Property not productive of income. 701.20(22)(a)(a) If a marital deduction is allowed for all or part of a trust whose assets consist substantially of property that does not provide the surviving spouse with sufficient income from or use of the trust assets, and if the amounts that the trustee transfers from principal to income under
sub. (4) and distributes to the spouse from principal in accordance with the terms of the trust are insufficient to provide the spouse with the beneficial enjoyment required to obtain the marital deduction, the spouse may require the trustee to make property productive of income, convert property within a reasonable time, or exercise the power conferred by
sub. (4) (a). The trustee may decide which action or combination of actions to take.
701.20(22)(b)
(b) In cases not governed by
par. (a), proceeds from the sale or other disposition of an asset are principal without regard to the amount of income the asset produces during any accounting period.
701.20(23)(a)(a) In this subsection, "derivative" means a contract or financial instrument or a combination of contracts and financial instruments that gives a trust the right or obligation to participate in some or all changes in the price of a tangible or intangible asset or group of assets, or changes in a rate, an index of prices or rates, or another market indicator for an asset or a group of assets.
701.20(23)(b)
(b) To the extent that a trustee does not account under
sub. (12) for transactions in derivatives, the trustee shall allocate to principal receipts from and disbursements made in connection with those transactions.
701.20(23)(c)
(c) If a trustee grants an option to buy property from the trust, whether or not the trust owns the property when the option is granted, grants an option that permits another person to sell property to the trust, or acquires an option to buy property for the trust or an option to sell an asset owned by the trust, and the trustee or other owner of the asset is required to deliver the asset if the option is exercised, an amount received for granting the option must be allocated to principal. An amount paid to acquire the option must be paid from principal. A gain or loss realized upon the exercise of an option, including an option granted to a settlor of the trust for services rendered, must be allocated to principal.
701.20(24)(a)(a) In this subsection, "asset-backed security" means an asset whose value is based upon the right it gives the owner to receive distributions from the proceeds of financial assets that provide collateral for the security. The term includes an asset that gives the owner the right to receive from the collateral financial assets only the interest or other current return or only the proceeds other than interest or current return. The term does not include an asset to which
sub. (10) or
(18) applies.
701.20(24)(b)
(b) If a trust receives a payment from interest or other current return and from other proceeds of the collateral financial assets, the trustee shall allocate to income the portion of the payment that the payer identifies as being from interest or other current return and shall allocate the balance of the payment to principal.
