There is a newer version of the New York Consolidated Laws
2006 New York Code - Powers And Duties Relating Thereto
§ 11-2.1 Principal and income
(a) Duty of trustee as to receipts and expenditures.
(1) 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 expense is charged to income or to
principal or partly to each (A) in accordance with the terms of the
trust instrument, notwithstanding any contrary provisions in this
section; (B) in the absence of any contrary terms of the trust
instrument, in accordance with the provisions of this section; or (C) 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 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.
(2) 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 that the trustee has or has not improperly exercised
such discretion arises from the fact that the trustee has made an
allocation contrary to the provisions of this section.
(b) What is income and what is principal; definitions.
(1) Income is the return in money or property derived from the use of
principal, including return received as:
(A) Rent from property, including sums received for the cancellation
or renewal of a lease.
(B) Interest on money lent, including sums received as consideration
for the privilege of prepayment of principal except as provided in
paragraph (f) on bond premium and discount.
(C) Income earned during the administration of a decedent's estate, as
provided in paragraph (d).
(D) Corporate distributions, as provided in paragraph (e).
(E) Accrued income on bonds or other obligations issued at a discount,
as provided in paragraph (f).
(F) Receipts from principal used in business, as provided in paragraph
(g).
(G) Receipts from disposition of natural resources, as provided in
paragraphs (h) and (i).
(H) Receipts from other principal subject to depletion, as provided in
paragraph (j).
(I) Receipts from disposition of underproductive property, as provided
in paragraph (k).
(2) Principal is property, disposed of in trust, the income from which
is payable to or to be accumulated for an income beneficiary and the
title to which is ultimately to vest in the person entitled to the
future estate. Principal includes:
(A) Consideration received by the trustee on the sale or other
transfer of principal, on repayment of a loan or as a refund,
replacement or change in the form of principal.
(B) Proceeds of property taken on eminent domain proceedings.
(C) Proceeds of insurance upon property forming part of the principal
except proceeds of insurance upon a separate interest of an income
beneficiary.
(D) Stock dividends, receipts on liquidation of a corporation and
other corporate distributions, as provided in paragraph (e).
(E) Receipts with respect to bonds and other obligations, as provided
in paragraph (f).
(F) Royalties and other receipts from disposition of natural
resources, as provided in paragraphs (h) and (i).
(G) Receipts from other principal subject to depletion, as provided in
paragraph (j).
(H) Any profit resulting from any change in the form of principal,
except as provided in paragraph (k) on underproductive property.
(I) Receipts from disposition of underproductive property, as provided
in paragraph (k).
(3) After determining income and principal in accordance with the
terms of the trust instrument or of this section the trustee shall
charge to income or principal expenses and other charges as provided in
paragraph (l).
(c) When right to income arises; apportionment of income or other
receipt.
(1) 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
which becomes subject to a trust by reason of a will, 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.
(2) In the case of a decedent's estate, a testamentary trust or an
asset received under a will by a trustee: (A) receipts due but not paid
at the date of death of the testator are principal; (B) receipts in the
form of periodic payments (other than corporate distributions to
stockholders and savings bank and savings and loan association
dividends), such as rent, interest or annuities payable from any source,
not due at the date of death of the testator, shall be treated as
accruing from day to day. That portion of such a receipt accruing
before the date of death is principal and the balance is income.
(3) 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.
(4) On termination of an income interest, the income beneficiary whose
interest is terminated or his estate is entitled to: (A) income
undistributed on the date of termination; (B) income due but not paid to
the trustee on the date of termination; (C) income in the form of
periodic payments (other than corporate distributions to stockholders
and savings bank and savings and loan association dividends) such as
rent, interest or annuities, not due on the date of termination, accrued
from day to day.
(d) Income earned during administration of a decedent's estate.
(1) Unless the will provides otherwise and subject to subparagraph (2)
hereof, all expenses incurred in connection with the settlement of a
decedent's estate, including but not limited to debts, funeral expenses,
estate taxes, interest and penalties concerning taxes, family
allowances, fees of attorneys and commissions of personal
representatives (other than commissions on estate income) and court
fees, costs and other charges shall be charged against the principal of
the estate.
(2) Unless the will provides otherwise, income from the assets of a
decedent's estate after the death of the testator 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 section and distributed as follows: (A) to
specific beneficiaries the net income from the property disposed of to
them respectively; (B) to all other beneficiaries, except beneficiaries
of pecuniary dispositions not in trust, the balance of the net income in
proportion to their respective interests in the undistributed assets of
the estate computed at times of distribution on the basis of inventory
value; provided, however, (i) that the amount of income earned during
the further administration of the estate from and after the date of
payment of any estate or inheritance tax shall be distributed to such
beneficiaries in proportion to their respective interests in the
undistributed assets of the estate after the making of such payment on
the basis of the fair market value of such assets immediately after the
making of such payment, and (ii) any amount allowed as a tax deduction
to the estate for income payable to a charitable organization shall be
paid, without diminution for taxes, to the charitable organization
entitled to receive such income. This subparagraph does not apply to any
sums made payable in policies of insurance of any description or under
any contract for an annuity, including a variable annuity.
(3) (A) The residuary beneficiaries are entitled to the rent from the
decedent's real property, not specifically disposed of, from the date of
death, in proportion to their respective interests under the will,
unless the fiduciary, pursuant to a power to distribute in kind,
allocates all or part of such property in whole or partial satisfaction
of a pecuniary disposition in trust, in which event the rent from the
property so allocated shall be distributed, as of the date of death, to
the trustee of such disposition.
(B) This subparagraph applies to wills of decedents dying before, on
or after its effective date, provided, however, that it shall not be so
applied as to require residuary beneficiaries to repay to the estate any
distributions of income from real property, not specifically disposed
of, which were actually made to such beneficiaries prior to such
effective date.
(4) Income and rent received by a trustee under subparagraphs (2) or
(3) shall be treated as income of the trust.
(e) Distributions of corporations or associations.
(1) Notwithstanding the provisions of this paragraph, a will, deed or
other instrument which creates or declares a trust may provide with
respect to all matters covered by this section, and direct the manner of
ascertaining income and principal and the apportionment thereof or grant
discretion to the trustee or another person to do so, and such provision
or direction, where otherwise not contrary to law, controls.
(2) A distribution by a corporation or association made to a trustee
in the shares of the distributing corporation or association held in
such trust, whether in the form of a stock split or a stock dividend, at
the rate of six per cent or less of the shares of such corporation or
association upon which the distribution is made, is income. Any such
distribution at a greater rate is principal.
(3) For the purpose of determining whether a will, deed or other
instrument which creates or declares a trust has directed that a
distribution of shares described in subparagraph (2) is income in a
manner other than that provided in subparagraph (2), the following rules
apply unless different rules are provided in the will, deed or other
instrument:
(A) A distribution in the shares of the distributing corporation or
association means a distribution in such shares, whether in the form of
a stock split or a stock dividend, at the rate of six per cent or less
of the shares of such corporation or association upon which the
distribution is made.
(B) A distribution in the shares of the distributing corporation or
association, whether in the form of a stock split or a stock dividend,
at the rate of six per cent or less of the shares of such corporation or
association upon which the distribution is made, is ordinary and regular
and shall be deemed to be in lieu of a cash dividend.
(C) If the will, deed or other instrument which creates or declares a
trust grants to the trustee or another person discretion to allocate to
income or principal or between income and principal any distribution in
the shares of the distributing corporation or association, such
discretion may be exercised with respect to any such distribution in the
shares of the distributing corporation or association, whether in the
form of a stock split or a stock dividend, and no inference of
imprudence or partiality shall arise from the fact that the trustee or
other person has made an allocation contrary to a provision of
subparagraph (2) or of this subparagraph.
(4) (A) A right issued by the distributing corporation or association
to subscribe to shares or other securities, whether in the stock or
other securities of the distributing corporation or association or of a
corporation or association other than the distributing corporation or
association, accruing to shareholders on account of their stock
ownership, and the proceeds of any sale of such rights, are principal.
(B) A distribution by a corporation or association made to a trustee
in the shares of the distributing corporation, but of a different type
than the shares held in such trust, or a distribution of shares,
securities or obligations of a corporation or association other than
those of the distributing corporation or association (or the proceeds of
such a distribution) shall be principal.
(5) When a corporation or association calls in shares of stock or when
a corporation or association succeeds another by merger, consolidation,
reorganization or other method of acquiring its assets, shares of stock
issued for the shares so called in or shares of stock in the succeeding
corporation or association are principal.
(6) When a corporation or association is being wholly or partially
liquidated, shares of stock and cash or other assets distributed to
shareholders are principal, except that if the corporation or
association indicates that some part of such distribution is a
settlement of preferred or guaranteed dividends, that part of the
distribution settling dividends accruing since the trustee became a
shareholder is income. For the purposes of this paragraph, a corporation
or association is in liquidation if the corporation or association
indicates that the distribution is in total or partial liquidation, or
if the corporation or association is making a distribution of assets
other than cash pursuant to a court decree or final administrative order
by a government agency ordering the distribution of the particular
assets, unless the distributing corporation or association indicates
that a distribution pursuant to such court or administrative order is
wholly or partly in lieu of an ordinary cash dividend, in which case the
distribution is to that extent income.
(7) Distributions made from ordinary income by a regulated investment
company or by a trust qualifying and electing under federal law to be
taxed as a real estate investment trust are income. All other
distributions made by such company or trust, including distributions
from capital gains, depreciation or depletion, whether in the form of
cash or an option to take new shares or cash or an option to purchase
additional shares, are principal.
(8) If the distributing corporation or association gives a shareholder
an option to receive a distribution, whether in the form of cash or its
own shares or cash or an option to purchase new shares, the distribution
chosen is income.
(9) Except as provided in subparagraphs (2), (4), (5), (6) and (7),
all distributions of corporations or associations are income including:
(A) Cash dividends.
(B) Share distributions, as provided in subparagraphs (2) and (3).
(C) Preferred or guaranteed dividends, as provided in subparagraph
(6).
(D) Ordinary income from a regulated investment trust or a trust
qualifying and electing under federal law to be taxed as a real estate
investment trust, as provided in subparagraph (7).
(E) An option, as provided in subparagraph (8).
(10) The trustee or other person may rely upon any statement of the
distributing corporation or association as to any fact, relevant under
any provision of this paragraph, concerning the source or character of
distributions.
(11) Where the shares of stock of a corporation or association of this
state or of any other jurisdiction constitute part of an estate, trust
or other fund, and the allocation of any other distribution thereof to
principal or income, or between successive interests, depends on the
date of accrual thereof, the date of accrual of any distribution on such
shares shall be the date specified by the corporation or association
declaring such distribution as that on which the shareholders of record
entitled to such distribution are to be determined, or, if there be no
such date specified by the corporation or association, the date of
declaration of the distribution. For the purposes of this paragraph, the
"date of accrual" of a distribution means that date, on and after which
the distribution shall be treated in the same manner as if it had been
declared and paid or distributed on such date.
(12) If a trustee or other person has heretofore received or shall
hereafter receive any shares of stock distributed by any corporation or
association and is uncertain as to whether any or all of them are
allocable to income, the trustee or other person shall have with respect
to all such shares and the proceeds thereof the same duties and powers
(including powers of sale, investment and reinvestment) as though all
such shares constituted part of the principal of the trust fund. The
trustee or other person shall be under no obligation to retain any of
such shares in kind even though it may subsequently be determined that
some or all of them were allocable to income. If and when it is
determined that any or all of such shares were allocable to income, the
shares allocable to income shall be distributed in kind to income,
except that, if prior to such determination, the trustee or other person
had sold any of the new shares comprising the distribution or any of the
original shares upon which the distribution was received, income shall
be entitled to receive its ratable portion of the shares remaining, if
any, on hand and an amount of cash equal to its ratable portion of the
proceeds received by the trustee or other person upon the sale of such
shares. This subparagraph does not apply in any case in which a trustee
or other person has heretofore, in good faith, made any different
allocation of the shares or the proceeds of any sale thereof, or both,
as between income and principal and has made distribution in accordance
with such different allocation to income or to principal, or to both.
(13) Subparagraphs (1) to (6) inclusive and (8) to (11) inclusive
apply to any trust, whether created or declared before, on or after the
effective date hereof, except that subparagraphs (1) through (11) do not
apply to any distribution described in this paragraph which accrued
prior to such effective date, and subparagraph (7) applies to trusts
created on and after its effective date and to the wills of persons
dying on and after its effective date.
(f) Bond premium and discount.
(1) Bonds or other obligations for the payment of money are principal
at their inventory value, except as provided in subparagraph (2) for
discount bonds. No provision shall be made for amortization of bond
premiums or for accumulation of discount, except that in the case of
testamentary trusts created by the wills of persons dying, and inter
vivos trusts created by instruments executed, prior to September first,
nineteen hundred forty-two, premiums may, in the discretion of the
trustee, be amortized if the bonds and other obligations for the payment
of money were acquired prior to June first, nineteen hundred sixty-five.
The proceeds of a sale, redemption or other disposition of bonds or
other obligations are principal.
(2) The increment in value of a bond or other obligation for the
payment of money bearing no stated interest but payable or redeemable at
maturity or at a future time at an amount in excess of the amount in
consideration of which it was issued is income. If the income accrues
pursuant to a fixed schedule of appreciation such income is
distributable to the beneficiary at the time the increment occurs and
the trustee may transfer the amount thereof from principal to income on
each such date. Whenever unrealized increment is distributed as income
but out of principal the principal shall be reimbursed from the income
when realized.
(g) Business operations.
If a trustee uses any part of the principal in the continuance of a
business of which the person who created or declared the trust was a
sole proprietor or a partner, the net profits of the business, computed
in accordance with generally accepted accounting principles for a
comparable business, are income. If a loss results in any fiscal or
calendar year, the loss falls on principal and shall not be carried into
any other fiscal or calendar year for purposes of calculating net
income.
(h) Disposition of natural resources.
(1) If any part of the principal consists of a right to receive
royalties, overriding or limited royalties, working interests,
production payments, net profit interests or other interests in minerals
or other natural resources in, on or under land, the receipts from
taking the natural resources from the land shall be allocated as
follows: (A) if received as rent on a lease or extension payments on a
lease the receipts are income; (B) if received from a production
payment, the receipts are income to the extent of any factor for
interest or its equivalent provided in the governing instrument. There
shall be allocated to principal the fraction of the balance of the
receipts which the unrecovered cost of the production payment bears to
the balance owed on the production payment, exclusive of any factor for
interest or its equivalent. The receipts not allocated to principal are
income; (C) if received as a royalty, overriding or limited royalty, or
as a bonus, or from a working interest or from any other interest in
minerals or other natural resources, receipts not provided for in the
preceding subparagraphs shall be apportioned on a yearly basis in
accordance with this paragraph whether or not any natural resource was
being taken from the land at the time the trust was established. There
shall be added to principal as an allowance for depletion such portion
of the gross receipts as shall be allowed as a deduction for depletion
in computing taxable income for Federal income tax purposes. The balance
of the gross receipts, after payment therefrom of all expenses, direct
and indirect, is income.
(2) If a trustee, on the effective date of this section, held an item
of depletable property of a type specified in this paragraph, he shall
allocate receipts from the property in the manner used before the
effective date of this section but as to all depletable property
thereafter acquired by an existing or new trust, the method of
allocation provided herein shall be used.
(i) Sale of timber.
If any part of the principal consists of land from which merchantable
timber may be removed, the receipts from taking the timber from the land
shall be allocated in accordance with subparagraph (1) (C) of paragraph
(a).
(j) Other property subject to depletion.
Except as provided in paragraphs (h) and (i), if any part of the
principal consists of property subject to depletion, including
leaseholds, patents, copyrights, royalty rights and rights to receive
payments on a contract for deferred compensation, the receipts from such
property shall be allocated in accordance with subparagraph (1) (C) of
paragraph (a).
(k) Underproductive property.
(1) Except as otherwise provided in this paragraph (k), a portion of
the net proceeds of a sale by a fiduciary as defined in subparagraph
three of paragraph (A) of section 11-1.1 of any principal property of an
estate or trust, other than securities listed on a national securities
exchange or traded in over the counter, held for more than a year which
has not produced over the period held an average net income of one per
cent per annum of its inventory value (including as income the value of
any beneficial use of the property by any income beneficiary), shall be
allocated to income as delayed income, as provided in this paragraph
(k). The net proceeds of such sale shall be the gross proceeds received,
including the value of any property other than cash received, less the
expenses of sale, including tax, if any, incurred on the gain realized,
and less any carrying charges and expenses paid from the estate or trust
while such property was held by the fiduciary and was underproductive.
(2) The sum allocated to income as delayed income is the difference
between the net proceeds of sale and the amount which, had such amount
been invested at simple interest at five per cent per annum while the
property was underproductive, would have produced the amount of the net
proceeds. Such sum, plus any carrying charges and expenses charged
against income while such property was held by such fiduciary and the
property was underproductive, less any income actually received from the
property during such period and less the value of any beneficial use of
the property by any income beneficiary, is income and the balance is
principal.
(3) The amount allocated to income as delayed income under this
paragraph (k) shall be allocated and paid to the beneficiaries (or their
respective estates), if any, who were entitled under the governing
instrument to receive income from the estate or trust from time to time
during the period the property was held by the fiduciary and was
underproductive.
(4) If, or to the extent to which, any principal property subject to
this paragraph (k) is sold or disposed of by conversion, and the
proceeds of sale or conversion consist of property which cannot be
readily apportioned, including, without limitation, land or mortgages
(for example, real property acquired by or in lieu of foreclosure), the
income beneficiary shall be entitled to the net income from any form of
property or obligation received pursuant to such sale or conversion,
while the received property or obligation is held, and when such
property or obligation is later sold or otherwise disposed of by
conversion into easily apportionable property, no allocation to income
as provided in this paragraph (k) shall be made.
(5) This paragraph (k) shall not apply if the terms of the governing
instrument direct otherwise. A provision in a will or trust instrument
authorizing the fiduciary (A) to retain or to invest in property that is
unproductive or underproductive of income (described in the instrument
by the words "unproductive" or "underproductive" or words of similar
import), or to retain or to invest in property expressly without regard
to whether it is productive of income, (B) to transfer any portion of
receipts from income to principal on account of depreciation, depletion
or amortization, or (C) to accumulate income and add it to principal,
shall be deemed to be a direction that this paragraph (k) shall not
apply.
(l) Charges against income and principal.
(1) The following charges shall be made against income: (A) ordinary
expenses incurred in connection with the administration, management and
preservation of the trust property, including regularly recurring taxes
assessed against any portion of the principal, water rates, insurance
and bond premiums, interest paid by the trustee and ordinary repairs;
(B) any tax levied upon receipts defined as income under this section or
the trust instrument and payable by the trustee.
(2) If the court shall find that any judicial proceeding primarily
concerns income and that it is equitable to charge the expense of such
proceeding, or a part thereof, to income, the court may direct that all
or a specified part of the expense of such proceeding, including
attorneys' fees, shall be charged to income.
(3) 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.
(4) The following charges shall be made against principal: (A) charges
not provided for in subparagraphs (1) and (2), including court costs and
attorneys' fees, the cost of investing and reinvesting principal,
payments on principal of an indebtedness (including a mortgage amortized
by periodic payments of principal), expenses of preparation of property
for sale, and, unless the court directs otherwise, expenses incurred in
maintaining or defending any action to protect or construe the trust or
the property or assure the title of any trust property; (B) repairs or
expenses incurred in making a capital improvement to principal,
including special assessments; (C) any tax levied upon profits, gain or
other receipts allocated to principal notwithstanding denomination of
the tax as an income tax by the taxing authority.
(5) Regularly recurring charges payable from income shall be
apportioned to the same extent and in the same manner that income is
apportioned under paragraph (c) hereof.
(6) Notwithstanding the provisions of subparagraphs one and four of
this paragraph, fees paid at least annually to banks, trust companies
and registered investment advisers for investment advisory and custodial
services shall be charged one-third against income and two-thirds
against principal.
(m) Application of section.
Except as specifically provided in the trust instrument, the will or
in this section, this section shall apply to any receipt or expense
received or incurred after its effective date by any trust or decedent's
estate whether established before, on or after the effective date of
this section and whether the asset involved was acquired by the trustee
before, on or after its effective date, provided that this section shall
not apply to any receipt or expense received or incurred by any trust or
decedent's estate after the effective date of article 11-A.
(n) Uniformity of interpretation.
This section shall be so construed as to effectuate its general
purpose to make uniform the law of those states which enact it.
(o) Definitions.
As used in this section:
(1) "Income beneficiary" means any person to whom income is presently
payable or for whom it is accumulated for distribution as income.
(2) "Remainderman" means any person entitled to principal, including
income which has been accumulated and added to principal.
(3) "Trustee" means an original trustee and any successor or
substituted trustee.
(4) "Inventory value" means the cost of property purchased by the
trustee and the market value of other property at the time it was made
subject to the trust.
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