2006 Delaware Code - CHAPTER 61 — GENERAL PROVISIONS

§ 6101. Definitions.

As used in this chapter:

(1) "Income beneficiary" means the person to whom income is presently payable or for whom it is accumulated for distribution as income.

(2) "Inventory value" means the cost of property purchased by the trustee and the market value of other property at the time it became subject to the trust, but in the case of a testamentary trust the trustee may use any value finally determined for the purposes of an estate or inheritance tax.

(3) "Remainderman" means the person entitled to principal, including income which has been accumulated and added to principal.

(4) "Trustee" means an original trustee and any successor or added trustee. (64 Del. Laws, c. 176, § 1; 70 Del. Laws, c. 186, § 1 .)

§ 6102. Duty of trustee as to receipts and expenditures.

(a) A trust shall be administered with due regard to the respective interests of income beneficiaries and remaindermen. A trust is so administered with respect to the allocation of receipts and expenditures if a receipt is credited or an expenditure is charged to income or principal or partly to each:

(1) In accordance with the terms of the trust instrument, notwithstanding contrary provisions of this chapter;

(2) In the absence of any contrary terms of the trust instrument, in accordance with this chapter; or

(3) If neither of the preceding rules of administration is applicable, in accordance with what is reasonable and equitable in view of the interests of those entitled to income as well as of those entitled to principal, and in view of the manner in which men of ordinary prudence, discretion and judgment would act in the management of their own affairs.

(b) If the trust instrument gives the trustee discretion in crediting a receipt or charging an expenditure to income or principal or partly to each, no inference of imprudence or partiality arises from the fact that the trustee has made an allocation contrary to a provision of this chapter. (64 Del. Laws, c. 176, § 1; 70 Del. Laws, c. 186, § 1.)

§ 6103. Income; principal; charges.

(a) Income is the return in money or property derived from the use of principal, including return received as:

(1) Rent of real or personal property, including sums received for cancellation or renewal of a lease, subject, however, to §§ 6108 and 6109 of this title;

(2) Interest on money lent, including sums received as consideration for the privilege of prepayment of principal except as provided in § 6107 of this title on bond premium and bond discount;

(3) Income earned during administration of a decedent's estate as provided in § 6105 of this title;

(4) Corporate distributions as provided in § 6106 of this title;

(5) Accrued increment on bonds or other obligations issued at discount as provided in § 6107 of this title;

(6) Receipts from business and farming operations as provided in § 6108 of this title;

(7) Receipts from principal subject to depletion as provided in § 6109 of this title.

(b) Principal is the property which has been set aside by the owner or the person legally empowered so that it is held in trust eventually to be delivered to a remainderman while the return or use of the principal is in the meantime taken or received by or held for accumulation for an income beneficiary. Principal includes:

(1) Consideration received by the trustee on the sale or other transfer of principal or on repayment of a loan or as a refund or replacement or change in the form of principal;

(2) Proceeds of property taken on eminent domain proceedings;

(3) Proceeds of insurance upon property forming part of the principal except proceeds of insurance upon a separate interest of an income beneficiary;

(4) Stock dividends, receipts on liquidation of a corporation, and other corporate distributions as provided in § 6106 of this title;

(5) Receipts from the disposition of corporate securities as provided in § 6107 of this title;

(6) Receipts from principal subject to depletion as provided in § 6109 of this title;

(7) Any profit resulting from any change in the form of principal.

(c) After determining income and principal in accordance with the terms of the trust instrument or of this chapter, the trustee shall charge to income or principal expenses and other charges as provided in § 6110 of this title. (64 Del. Laws, c. 176, § 1; 70 Del. Laws, c. 186, § 1.)

§ 6104. When right to income arises; apportionment of income.

(a) Except as provided in § 3525 of this title, an income beneficiary is entitled to income from the date specified in the trust instrument, or, if none is specified, from the date an asset becomes subject to the trust. In the case of an asset becoming subject to a trust by reason of a will, except as provided in § 3525 of this title, it becomes subject to the trust as of the date of the death of the testator even though there is an intervening period of administration of the testator's estate.

(b) In the administration of a decedent's estate or an asset becoming subject to a trust by reason of a will:

(1) Receipts of income due but not paid at the date of death of the testator are principal;

(2) Receipts of income in the form of periodic payments (other than corporate distributions to stockholders) not due at the date of the death of the testator shall be treated as accruing from day to day. That portion of the receipt accruing before the date of death is principal, and the balance is income.

(c) In all other cases, any receipt from an income producing asset is income even though the receipt was earned or accrued in whole or in part before the date when the asset became subject to the trust.

(d) On termination of an income interest, the income beneficiary whose interest is terminated, or the beneficiary's estate, is entitled to:

(1) Income undistributed on the date of termination;

(2) Income due but not paid to the trustee on the date of termination;

(3) Income in the form of periodic payments (other than corporate distributions to stockholders) including rent, interest or annuities, not due on the date of termination, accrued from day to day.

(e) Corporate distributions to stockholders shall be treated as due on the "ex" dividend date. In the absence of an "ex" dividend date then the date fixed by the corporation for determination of stockholders of record entitled to distribution shall be used and if no such date is fixed, then the date of declaration of the distribution by the corporation shall be used. (64 Del. Laws, c. 176, § 1; 70 Del Laws, c. 186, § 1.)

§ 6105. Income earned during administration of decedent's estate.

(a) Unless the will otherwise provided and subject to subsection (b) of this section, all expenses incurred in connection with the settlement of a decedent's estate, including debts, funeral expenses, estate and other death taxes, interest and penalties concerning taxes, family allowances, fees of attorneys and personal representatives and court costs shall be charged against the principal of the estate except that such expenses shall be charged against income to the extent necessary to prevent the abatement of any nonresiduary devise or bequest.

(b) Unless the will otherwise provides, income from the assets of a decedent's estate after the death of the decedent and before distribution, including income from property used to discharge liabilities, shall be determined in accordance with the rules applicable to a trustee under this chapter and whenever distributed pursuant to the terms of the will or the discretion of the personal representative shall be distributed as follows:

(1) To specific legatees, the income from the property bequeathed to them respectively, less:

a. Taxes, ordinary repairs and other expenses of management and operation of the property,

b. A portion of:

1. Interest accrued since the death of the decedent; and

2. Taxes imposed on income (excluding taxes on capital gains) which accrue during the period of administration;

(2) To all other legatees, except legatees of pecuniary bequests whether or not in trust, and legatees or residuary bequests in trust, the balance of the income after payment of the expenses as provided in subsection (a) of this section, less the balance of taxes, ordinary repairs and other expenses of management and operation of all property from which the estate is entitled to income, interest accrued since the death of the testator, and taxes imposed on income (excluding taxes on capital gains) which accrue during the period of administration, in proportion to their respective interests in the undistributed assets of the estate computed at times of distribution on the basis of inventory value.

(c) Income received by a trustee under subsection (b) of this section shall be treated as income of the trust. (64 Del. Laws, c. 176, § 1.)

§ 6106. Corporate distributions.

(a) Corporate distributions of shares of the distributing corporation, including distributions in the form of a stock split or stock dividend, are principal. A right to subscribe to shares or other securities issued by the distributing corporation accruing to stockholders on account of their stock ownership and the proceeds of any sale of the right are principal.

(b) Except to the extent that the corporation indicates that some part of a corporate distribution is a settlement of preferred or guaranteed dividends accrued since the trustee became a stockholder or is in lieu of an ordinary cash dividend, a corporate distribution is principal if the distribution is pursuant to:

(1) A call of shares;

(2) A merger, consolidation, reorganization or other plan by which assets of the corporation are acquired by another corporation; or

(3) A total or partial liquidation of the corporation, including any distribution which the corporation indicates is a distribution in total or partial liquidation or any distribution of assets pursuant to a court decree or final administrative order by a government agency ordering distribution of the particular assets.

(c) Distributions made from ordinary income by a regulated investment company or by a trust qualifying and electing to be taxed under federal law as a real estate investment trust are income. All other distributions made by the company or trust, including distributions from capital gains, depreciation or depletion, whether in the form of cash or an option to take new stock or cash or an option to purchase additional shares, are principal.

(d) Except as provided in subsections (a), (b) and (c) of this section, all corporate distributions are income, including cash dividends, distributions of or rights to subscribe to shares or securities or obligations of corporations other than the distributing corporation, and the proceeds of the rights or property distributions. Except as provided in subsections (b) and (c) of this section, if the distributing corporation gives a stockholder an option to receive a distribution either in cash or in its own shares, the distribution chosen is income.

(e) The trustee may rely upon any statement of the distributing corporation as to any fact relevant under any provision of this chapter concerning the source or character of dividends or distributions of corporate assets. (64 Del. Laws, c. 176, § 1.)

§ 6107. Bond premium and discount.

(a) Bonds or other obligations for the payment of money are principal at their inventory value, except as provided in subsection (b) of this section for discount bonds. No provision shall be made for amortization of bond premiums or for accumulation for discount. The proceeds of sale, redemption or other disposition of the bonds or obligations are principal.

(b) The increment in value of a bond or other obligation for the payment of money: (1) Bearing no stated interest but payable at a future time in excess of the price at which it was issued or purchased; or (2) payable at a future time in accordance with a fixed schedule of appreciation in excess of the price at which it was issued or purchased is distributable as income. The increment in value on a bond or other obligation having a fixed schedule of appreciation distributable to the beneficiary who was the income beneficiary at the time of increment may be paid from the first principal cash available. The increment in value of a bond or other obligation not previously paid shall be paid to the beneficiary who was the income beneficiary at time of increment, when realized by sale, redemption or other disposition. Whenever unrealized increment is distributed as income but out of principal, the principal shall be reimbursed for the increment when realized. (64 Del. Laws, c. 176, § 1.)

§ 6108. Business and farming operations.

If a trustee uses any part of the principal in the operation of a trade or business or farming operation, the proceeds and losses of the trade or business or farming operation shall be allocated in accordance with what is reasonable and equitable in view of the interests of those entitled to income as well as those entitled to principal, and in view of the manner in which people of ordinary prudence, discretion and judgment would act in the management of their own affairs in accordance with § 6102 of this title. (64 Del. Laws, c. 176, § 1; 70 Del Laws, c. 186, § 1.)

§ 6109. Natural resources and other assets subject to depletion.

(a) Except as provided in subsection (b) of this section, if any part of the principal consists of property subject to depletion including, without limitation, natural resources, leaseholds, patents and copyrights, the receipts therefrom shall be allocated in accordance with paragraph (3) of subsection (a) of § 6102 of this title.

(b) If any part of the principal consists of rights to receive payments under an annuity, pension or profit sharing plan, deferred compensation plan or other similar property, receipts from such property, not in excess of 6% per year of its inventory value, are income, and the balance principal. (64 Del. Laws, c. 176, § 1.)

§ 6110. Charges against income and principal.

(a) The following charges shall be made against income:

(1) Ordinary expenses incurred in connection with the administration, management or preservation of the trust property, including regularly recurring taxes assessed against any portion of the principal, water rates, premiums on insurance taken upon the interests of the income beneficiary, remainderman or trustee, interest paid by the trustee, and ordinary repairs;

(2) A reasonable allowance for depreciation on property subject to depreciation under generally accepted accounting principles, but no allowance shall be made for depreciation of that portion of any real property used by a beneficiary as a residence or for depreciation of any property held by the trustee on the effective date of this chapter for which the trustee is not then making an allowance for depreciation;

(3) One-half of court costs, attorney's fees and other fees on periodic judicial accounting, unless the court directs otherwise;

(4) Court costs, attorney's fees and other fees on other accountings or judicial proceedings if the matter primarily concerns the income interest, unless the court directs otherwise;

(5) Any tax levied upon receipts defined as income under this chapter or the trust instrument and payable by the trustee.

(b) If charges against income are of unusual amount, the trustee may by means of reserves or other reasonable means charge them over a reasonable period of time and withhold from distribution sufficient sums to regularize distributions.

(c) The following charges shall be made against principal:

(1) Trustee's compensation not chargeable to income, special compensation of trustees, expenses reasonably incurred in connection with principal, court costs and attorney's fees primarily concerning matters of principal and trustee's compensation computed on principal as an acceptance, distribution or termination fee;

(2) Charges not provided for in subsection (a) of this section, including the cost of investing and reinvesting principal, the payments on principal of an indebtedness (including a mortgage amortized by periodic payments of principal), expenses for preparation of property for rental or sale, and, unless the court directs otherwise, expenses incurred in maintaining or defending any action to construe the trust or protect it or the property or assure the title of any trust property;

(3) Extraordinary repairs or expenses incurred in making a capital improvement to principal, including special assessments, but a trustee may establish an allowance for depreciation out of income to the extent permitted by paragraph (2) of subsection (a) of this section and by § 6108 of this title;

(4) Any tax levied upon profit, gain or other receipts allocated to principal notwithstanding denomination of the tax as an income tax by the taxing authority;

(5) If an estate, inheritance or generation-skipping tax is levied in respect of a trust in which both an income beneficiary and a remainderman have an interest, any amount apportioned to the trust, including interest and penalties, even though the income beneficiary also has rights in the principal.

(d) Regularly recurring charges payable from income shall be apportioned to the same extent and in the same manner that income is apportioned under § 6104 of this title. (64 Del. Laws, c. 176, § 1; 70 Del. Laws, c. 186, § 1.)

§ 6111. Accounts filed with Register of Wills not affected.

Nothing in this chapter shall be construed to affect or change the form of accounting required under § 2301 of this title. (64 Del. Laws, c. 176, § 1.)

§ 6112. Certain charitable remainder unitrusts.

(a) Notwithstanding any contrary provision of this chapter, if the trust instrument adopts the provisions of this section by reference, an increase in the value of the following investments owned by a charitable remainder unitrust, of the type authorized in § 664(d)(3) of the Internal Revenue Code [26 U.S.C. § 664] or any successor provision thereof, is distributable as income when it becomes available for distribution:

(1) A zero coupon bond;

(2) An annuity contract before annuitization;

(3) A life insurance contract before the death of the insured;

(4) An interest in a common trust fund (as defined in § 584 of the Internal Revenue Code [26 U.S.C. § 584] or any successor provision thereof);

(5) An interest in a partnership (as defined in § 7701 of the Internal Revenue Code [26 U.S.C. § 7701] or any successor provision thereof); or

(6) Any other obligation for the payment of money that is payable at a future time in accordance with a fixed, variable or discretionary schedule of appreciation in excess of the price at which it was issued.

(b) For purposes of this section, the increase in value of an investment described in subsection (a) is available for distribution only when the trustee receives cash on account of the investment. Any trust instrument executed prior to June 30, 1997, which incorporates by reference subsection (c) of this section shall be deemed as having incorporated by reference this subsection. (70 Del. Laws, c. 165, § 1; 71 Del. Laws, c. 118, §§ 1-4.)

§ 6113. 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 that the trustee is otherwise unable to comply with § 6102 of this title in a fair and equitable manner.

(b) In deciding whether and to what extent to exercise the power conferred by subsection (a) of this section, a trustee shall consider all factors relevant to the trust and its beneficiaries, including the following factors to the extent that they are relevant:

(1) The nature, purpose, and expected duration of the trust;

(2) The intent of the settlor;

(3) The identity and circumstances of the beneficiaries;

(4) The needs for liquidity, regularity of income, and preservation and appreciation of capital;

(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;

(6) The net amount allocated to income under the other sections of this chapter and the increase or decrease in the value of the principal assets, which the trustee may estimate as to assets for which market values are not readily available;

(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;

(8) The actual and anticipated effect of economic conditions on principal and income and effects of inflation and deflation; and

(9) The anticipated tax consequences of an adjustment.

(c) A trustee may not make an adjustment:

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

(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;

(3) That changes the amount payable to a beneficiary as a fixed annuity or a fixed fraction of the value of the trust assets;

(4) If the adjustment is from any amount that is permanently set aside for charitable purposes under the governing instrument and for which a federal estate- or gift-tax charitable deduction has been taken unless both income and principal are so set aside;

(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;

(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;

(7) If the trustee is a beneficiary of the trust; or

(8) If the trustee is not a beneficiary, but the adjustment would benefit the trustee directly or indirectly.

(d) If paragraph (c)(5), (6), (7), or (8) of this section applies to a trustee and there is more than 1 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.

(e) A trustee may release the entire power conferred by subsection (a) of this section 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 the possession or exercise of the power will cause a result described in paragraph (c)(1) through (6) or (c)(8) of this section or if the trustee determines that the possession or exercise of the power might deprive the trust of a tax benefit or impose a tax burden not described in subsection (c) of this section. The release may be permanent or for a specified period, including a period measured by the life of an individual.

(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 section 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 subsection (a) of this section.

(g) This section shall have no application to trusts governed by §§ 3527 and 3527A of this title. This section shall be construed as pertaining to the administration of a trust and shall be available to any trust that is administered in Delaware under Delaware law or to any trust, regardless of its place of administration, whose governing instrument provides that Delaware law governs matters of construction or administration.

(h) Following the exercise of the power conferred by subsection (a) of this section to adjust principal to income, the trustee:

(1) Shall consider the amount so adjusted as paid from ordinary income for federal income-tax purposes to the extent not allocable to net accounting income;

(2) After calculating the trust's capital gain net income described in § 1222(9) [26 U.S.C. § 1222(9)| of the Internal Revenue Code, may consider the amount so adjusted as paid from net short-term capital gain described in § 1222(5) ›26 U.S.C. § 1222(5)| of the Internal Revenue Code, and then from net long-term capital gain described in § 1222(7) ›26 U.S.C. § 1222(7)] of the Internal Revenue Code; and

(3) Shall then consider any remaining amount so adjusted as coming from the principal of the trust. (75 Del. Laws, c. 97, § 8; 75 Del. Laws, c. 301, § 5.)

§ 6114. Judicial proceedings and discretionary powers.

(a) In any proceeding involving a trustee's decision to exercise or refrain from the exercise of a discretionary power conferred upon the trustee by this chapter, the trustee's decision shall be changed by the court only if the court determines that the trustee's decision was an abuse of the trustee's discretion. A trustee'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.

(b) The decisions to which subsection (a) of this section applies include:

(1) A decision under § 6113 of this title as to whether and to what extent an amount should be transferred from principal to income or from income to principal.

(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 by § 6113 of this title.

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

(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 trustee 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.

(2) To the extent that the abuse of discretion has resulted in a distribution to a beneficiary which 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 trustee to withhold an amount from 1 or more future distributions to the beneficiary who received the distribution that was too large or ordering that beneficiary to return some or all of the distribution to the trust.

(3) To the extent that the court is unable, after applying paragraphs (1) and (2) of this subsection, to place the beneficiaries, the trust, or both, in the positions they would have occupied if the discretion had not been abused, the court may order the trustee to pay an appropriate amount from its own funds to 1 or more beneficiaries or the trust or both.

(d) In a proceeding brought by a trustee under this section, the Court of Chancery is to determine in accordance with the provisions of this section whether a proposed exercise or nonexercise by the trustee of a discretionary power conferred by this chapter would result in an abuse of the trustee's discretion. If the petition describes the proposed exercise or nonexercise of the power and contains sufficient information to inform the beneficiaries of the reason for the proposal, the facts upon which the trustee 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 has the burden of establishing that it will result in an abuse of discretion. (75 Del. Laws, c. 97, § 9.)