SENATE BILL NO. 309
AN ACT TO AMEND TITLE 12 OF THE DELAWARE CODE RELATING TO THE ALLOCATION OF PRINCIPAL AND INCOME IN TRUSTS AND DECEDENTS' ESTATES.
BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF DELAWARE:
Section 1. Amend Title 12 of the Delaware Code by adding thereto a new Part designated as Part VI and a new Chapter designated as Chapter 61 to read as follows:
CHAPTER 61. ALLOCATION OF PRINCIPAL AND INCOME
As used in this chapter:
(l) "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.
§6102. Duty of Trustee as to Receipts and Expenditure
(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, nowwithstanding contrary provisions of this chapter;
(2) in the absence of any contrary terms of the trust instrument, in accordance with the provisions of 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 n 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.
§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 lease, subject, however, to the provisions of sections 6108 and 6109;
(2) interest on money lent, including sums received as consideration for the privilege of prepayment of principal except as provided in section 6107 on bond pre:alum and bond discount;
(3) income earned during administration of a decedent's estate as provided in section 6105;
(4) corporate distributions as provided in section 6106;
(5) accrued increment on bonds or other obligations issued at discount as provided in section 6107;
(6) receipts from business and farming operations as provided in section 6108;
(7) receipts from principal subject to depletion as provided in section 6109.
(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 section 6106;
(5) receipts from the disposition of corporate securities as provided in section 6107;
(6) receipts from principal subject to depletion as provided in section 6109;
(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 section 6110.
6104. When Right to Income Arises; Apportionment of Income
(a) Except as provided in section 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 section 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 his 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.
§6105. Income Earned During Administration of a Decedent's Estate
(a) Unless the will otherwise provided and subject to subsection (b), all expenses Incurred in connection with the settlement of a decedents' estate, including debts, tuners/ 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 non-residuary 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 (ii) taxes imposed on income (excluding taxes on capital gain) which accrue during the period of administration;
(2) to all other legatee; 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), 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) shall be treated as income of the trust. §61013. 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 or preferred or guaranteed dividends accrued since the trustee became a stockholder or is in lieu of 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
(1) 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), 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), 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 the any fact relevant under any provision of this Chapter concerning the source of character of dividends or distributions of corporate assets.
§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) 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 (I) bearing no stated interest but payable at a future time in excess of the price at which it was issued or purchased or (ii) 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.
§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 men of ordinary prudence, discretion and judgment would act in the management of their own affairs in accordance with section 6102 of this title.
§6109. Natural Resources and Other Assets Subject to Depletion
(a) Except as provided In subsection (b), 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 section 6102(a)(3).
(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 5% per year of its inventory value, are income, and the balance principal.
§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;
(1) 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;
(2) any tax levied upon receipts defined as Income under this chapter or the trust instrument and payable by the trustee.
(h) 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), 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 subsection (aX2) and by section 6108;
(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;
(1) 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 section 8104.
§6111. Effect on Accounts filed with the Register of Wills
Nothing In this Chapter shall be construed to affect or change the form of accounting required under section 2301 of this title."
Section 2. Amend §§3524 and 3528, Chapter 35, Title 12, Delaware Code, by striking said sections in their entireties.
Section 3. if any provision of this Act or the application thereof to any person or circumstance is held invalid, the Invalidity does not affect other provisions or applications of this Act which can be given effect without the Invalid provision or application and to this end the provisions of this Act are severable.
Section 4. This Act shall take effect January 1, 1984. Except as provided In the will, It shall apply to the estates of decedents dying on or after that date but shall not apply to estates of decedents dying prior to that date. Except as provided in an Inter vivos trust or other governing instrument, It shall apply to any receipt or expense received or incury any trust in the first accounting year beginning after December 31, 1983, even though the trust was established before the effective date of this Act or any asset thereof was acquired before the effective date of this Act.
Approved July 13, 1983.