Article 5.3. Allocation Of Receipts During Administration Of Trust: Receipts Normally Apportioned of California Probate Code >> Division 9. >> Part 4. >> Chapter 3. >> Article 5.3.

(a) If a trustee determines that an allocation between principal and income required by Section 16361, 16362, 16363, 16364, or 16367 is insubstantial, the trustee may allocate the entire amount to principal unless one of the circumstances described in subdivision (b) of Section 16336 applies to the allocation. This power may be exercised by a cotrustee in the circumstances described in subdivision (c) of Section 16336 and may be released for the reasons and in the manner provided in subdivisions (d) and (e) of Section 16336.
  (b) An allocation is presumed to be insubstantial in either of the following cases:
  (1) Where 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.
  (2) Where 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.
  (c) Nothing in this section imposes a duty on the trustee to make an allocation under this section, and the trustee is not liable for failure to make an allocation under this section.

(a) For purposes of this section, the following terms have the following meanings:
  (1) "Payment" means a payment that a trustee may receive over a fixed number of years or during the life of an individual because of services rendered or property transferred to the payer in exchange for future payments. The term also includes a payment made in money or property from the payer's general assets or from a separate fund created by the payer. For purposes of subdivisions (d), (e), (f), and (g), "payment" also includes any payment from a separate fund, regardless of the reason for the payment.
  (2) "Separate fund" includes a private or commercial annuity, an individual retirement account, and a pension, profit-sharing, stock bonus, or stock ownership plan.
  (b) To the extent that any portion of the payment is characterized by the payer as interest, a dividend, or a payment made in lieu of interest or a dividend, a trustee shall allocate that portion of the payment to income. The trustee shall allocate to principal the balance of the payment.
  (c) If no part of a payment is characterized as interest, a dividend, or an equivalent payment, and all or part of the payment is required to be made, a trustee shall allocate to income 10 percent of the part that is required to be made during the accounting period and the balance to principal. If no part of a payment is required to be made or the payment received is the entire amount to which the trustee is entitled, the trustee shall allocate the entire payment to principal. For purposes of this subdivision, a payment is not "required to be made" to the extent that it is made because the trustee exercises a right of withdrawal.
  (d) Subdivisions (f) and (g) shall apply, except as provided in subdivision (e), and subdivisions (b) and (c) shall not apply, in determining the allocation of a payment made from a separate fund to either of the following:
  (1) A trust to which an election to qualify for a marital deduction is made under Section 2056(b)(7) of the Internal Revenue Code.
  (2) A trust that qualifies for the marital deduction under Section 2056(b)(5) of the Internal Revenue Code.
  (e) Subdivisions (d), (f), and (g) shall not apply if the series of payments would, without the application of subdivision (d), qualify for the marital deduction under Section 2056(b)(7)(C) of the Internal Revenue Code.
  (f) If the separate fund payer provides documentation reflecting the internal income of the separate fund to the trustee, the trustee shall allocate the internal income of each separate fund for the accounting period as if the separate fund were a trust subject to this act. Upon request of the surviving spouse, the trustee shall require that the person administering the separate fund distribute this internal income to the trust. The trustee shall allocate a payment from the separate fund to income to the extent of the internal income of the separate fund and distribute that amount to the surviving spouse. The trustee shall allocate the balance to principal. Upon request of the surviving spouse, the trustee shall allocate principal to income to the extent the internal income of the separate fund exceeds payments made from the separate fund to the trust during the accounting period.
  (g) If the separate fund payer does not provide documentation reflecting the internal income of the separate fund to the trustee, but the trustee can determine the value of the separate fund, the internal income of the separate fund is deemed to equal 4 percent of the fund's value, according to the most recent statement of value preceding the beginning of the accounting period. If the separate fund payer does not provide documentation reflecting the internal income of the separate fund to the trustee and the trustee cannot determine the value of the separate fund, the internal income of the fund is deemed to equal the product of the interest rate and the present value of the expected future payments, as determined under Section 7520 of the Internal Revenue Code for the month preceding the accounting period for which the computation is made.
  (h) This section does not apply to a payment to which Section 16362 applies.

Section 16361, as amended by the act adding this section, applies to a trust described in subdivision (d) of Section 16361, on and after the following dates:
  (a) If the trust is not funded as of January 1, 2010, the date of the decedent's death.
  (b) If the trust is initially funded in the calendar year beginning January 1, 2010, the date of the decedent's death.
  (c) If the trust is not described in subdivision (a) or (b), on January 1, 2010.

(a) In this section, "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 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 Section 16361, resources subject to Section 16363, timber subject to Section 16364, an activity subject to Section 16366, an asset subject to Section 16367, or any asset for which the trustee establishes a reserve for depreciation under Section 16372.
  (b) A trustee shall allocate to income 10 percent of the receipts from a liquidating asset and the balance to principal.

(a) To the extent that a trustee accounts for receipts from an interest in minerals, water, or other natural resources pursuant to this section, the trustee shall allocate them as follows:
  (1) If received as a nominal bonus, nominal delay rental, or nominal annual rent on a lease, a receipt shall be allocated to income.
  (2) If received from a production payment, a receipt shall 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 shall be allocated to principal.
  (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 shall be allocated to principal and the balance to income.
  (4) If an amount is received from a working interest or any other interest in mineral or other natural resources not described in paragraph (1), (2), or (3), 90 percent of the net amount received shall be allocated to principal and the balance to income.
  (b) An amount received on account of an interest in water that is renewable shall be allocated to income. If the water is not renewable, 90 percent of the amount shall be allocated to principal and the balance to income.
  (c) This chapter applies whether or not a decedent or donor was extracting minerals, water, or other natural resources before the interest became subject to the trust.
  (d) If a trust owned an interest in minerals, water, or other natural resources on January 1, 2000, the trustee may at all times allocate receipts from the interest as provided in this chapter or in the manner reasonably used by the trustee prior to that date. Receipts from an interest in minerals, water, or other natural resources acquired after January 1, 2000, shall be allocated by the trustee as provided in this chapter. If the interest was owned by the trust on January 1, 2000, a trustee that allocated receipts from the interest between January 1, 2000, and December 31, 2006, as provided in this chapter shall not have a duty to review that allocation and shall not have liability arising from the allocation. Nothing in this section is intended to create or imply a duty to allocate in a manner used by the trustee prior to January 1, 2000, and a trustee is not liable for not considering whether to make such an allocation or for choosing not to make such an allocation.

(a) To the extent that a trustee accounts for receipts from the sale of timber and related products pursuant to this section, the trustee shall allocate the net receipts as follows:
  (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.
  (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.
  (3) To 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 paragraphs (1) and (2).
  (4) To principal to the extent that advance payments, bonuses, and other payments are not allocated pursuant to paragraph (1), (2), or (3).
  (b) In determining net receipts to be allocated under subdivision (a), a trustee shall deduct and transfer to principal a reasonable amount for depletion.
  (c) This chapter applies whether or not a decedent or transferor was harvesting timber from the property before it became subject to the trust.
  (d) If a trust owned an interest in timberland on January 1, 2000, the trustee may at all times allocate net receipts from the sale of timber and related products as provided in this chapter or in the manner reasonably used by the trustee prior to that date. Net receipts from an interest in timberland acquired after January 1, 2000, shall be allocated by the trustee as provided in this chapter. If the interest was owned by the trust on January 1, 2000, a trustee that allocated net receipts from the interest between January 1, 2000, and December 31, 2006, as provided in this chapter shall not have a duty to review that allocation and shall not have liability arising from the allocation. Nothing in this section is intended to create or imply a duty to allocate in a manner used by the trustee prior to January 1, 2000, and a trustee is not liable for not considering whether to make such an allocation or for choosing not to make such an allocation.

(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 spouse with sufficient income from or use of the trust assets, and if the amounts that the trustee transfers from principal to income under Section 16336 and distributes to the spouse from principal pursuant to 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 or convert it into productive property or exercise the power under subdivision (a) of Section 16336 within a reasonable time. The trustee may decide which action or combination of actions to take.
  (b) In cases not governed by subdivision (a), proceeds from the sale or other disposition of a trust asset are principal without regard to the amount of income the asset produces during any accounting period.

(a) In this section, "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 other market indicator for an asset or a group of assets.
  (b) To the extent that a trustee does not account under Section 16352 for transactions in derivatives, the trustee shall allocate to principal receipts from and disbursements made in connection with those transactions.
  (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 shall be allocated to principal. An amount paid to acquire the option shall 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, shall be allocated to principal.

(a) In this section, "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 Section 16350 or 16361 applies.
  (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 which the payer identifies as being from interest or other current return and shall allocate the balance of the payment to principal.
  (c) If a trust receives one or more payments in exchange for the trust's entire interest in an asset-backed security in one accounting period, the trustee shall allocate the payments to principal. If a payment is one of a series of payments that will result in the liquidation of the trust's interest in the security over more than one accounting period, the trustee shall allocate 10 percent of the payment to income and the balance to principal.