1. The Laws of New York
  2. Consolidated Laws
  3. Estates, Powers & Trusts
  4. Article 11: Fiduciary: Powers, Duties and Limitations; Actions By or Against In Representative or Individual Capacities
  5. Part 2: Investments By Fiduciaries: Powers and Duties Relating Thereto


Section 11-2.1 Principal and income

Estates, Powers & Trusts (EPT)

§ 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.