Article 4 - Allocation of Receipts

California Probate Code — §§ 16340-16355

Sections (16)

Repealed and added by Stats. 2023, Ch. 28, Sec. 2. (SB 522) Effective January 1, 2024.

(a)The following definitions apply for purposes of this section:

(1)“Capital distribution” means an entity distribution of money that is either of the following:

(A)A return of capital.

(B)A distribution in total or partial liquidation of the entity.

(2)“Entity” means a corporation, partnership, limited liability company, regulated investment company, real estate investment trust, common trust fund, or any other organization or arrangement in which a person owns or holds an interest, whether or not the entity is a taxpayer for federal income tax

purposes. “Entity” does not include any of the following:

(A)A trust or estate to which Section 16341 applies.

(B)A business or other activity to which Section 16342 applies that is not conducted by an entity described in subparagraph (A).

(C)An asset-backed security.

(D)An instrument or arrangement to which Section 16355 applies.

(3)“Entity distribution” means a payment or transfer by an entity made to a person in the person’s capacity as an owner or holder of an interest in the entity.

(b)For purposes of this section, an attribute or action of an entity includes an attribute or action of any other entity in which the

entity owns or holds an interest, including an interest owned or held indirectly through another entity.

(c)Except as otherwise provided in paragraphs (2) to (4), inclusive, of subdivision (d), a fiduciary shall allocate money received in an entity distribution to income.

(d)A fiduciary shall allocate to principal all of the following:

(1)Property received in an entity distribution that is not money.

(2)Money received in an entity distribution in an exchange for part or all of the fiduciary’s interest in the entity, to the extent the entity distribution reduces the fiduciary’s interest in the entity relative to the interests of other persons that own or hold interests in the entity.

(3)Money received in an entity distribution that the fiduciary determines or estimates is a capital distribution.

(4)Money received in an entity distribution from an entity that is a regulated investment company or real estate investment trust if the money received is a capital gain dividend for federal income tax purposes.

(5)Money received in an entity distribution that is treated, for federal income purposes, comparably to the treatment described in paragraph (4).

(e)A fiduciary may determine or estimate that money received in an entity distribution is a capital distribution in any of the following ways:

(1)By relying without inquiry or investigation on a characterization of the entity distribution provided by or on behalf of the

entity, except under either of the following circumstances:

(A)The fiduciary determines, on the basis of information known to the fiduciary, that the characterization is or may be incorrect.

(B)The fiduciary owns or holds more than 50 percent of the voting interest in the entity.

(2)By determining or estimating, on the basis of information known to the fiduciary or provided to the fiduciary by or on behalf of the entity, that the total amount of money and property received by the fiduciary in the entity distribution or a series of related entity distributions is, or will be, greater than 20 percent of the fair market value of the fiduciary’s interest in the entity.

(3)If neither paragraph (1) nor (2) applies, by considering the factors in

subdivision (f) and the information known to the fiduciary or provided to the fiduciary by, or on behalf of, the entity.

(f)In making a determination or estimate under paragraph (3) of subdivision (e), a fiduciary may consider the following:

(1)A characterization of an entity distribution provided by or on behalf of the entity.

(2)The amount of money or property received in either of the following:

(A)The entity distribution.

(B)What the fiduciary determines is, or will be, a series of related entity distributions.

(3)The amount described in paragraph (2) compared to the amount the fiduciary determines or estimates is,

during the current or preceding accounting periods, either of the following:

(A)The entity’s operating income.

(B)The proceeds of the entity’s sale or other disposition of any of the following:

(i)All or part of the business or other activity conducted by the entity.

(ii) One or more business assets that are not sold to customers in the ordinary course of the business or other activity conducted by the entity.

(iii) One or more assets other than business assets, unless the entity’s primary activity is to invest in assets to realize gain on the disposition of all or some of the assets.

is to invest in assets to realize gain on the disposition of all or some of the assets, the gain realized on the disposition.

(D) The entity’s regular, periodic entity distributions.

(E) The amount of money the entity has accumulated.

(F) The amount of money the entity has borrowed.

(G) The amount of money the entity has received from the sources described in Sections 16346, 16349, 16350, and 16351.

(H) The amount of money the entity has received from a source not otherwise described in this paragraph.

(4)Any other factor the fiduciary determines is relevant.

(g)If, after applying subdivisions (c) to (f), inclusive, a fiduciary determines that a part of an entity distribution is a capital distribution but is in doubt about the amount of the entity distribution that is a capital distribution, the fiduciary shall allocate to principal the amount of the entity distribution that is in doubt.

(h)If a fiduciary receives additional information about the application of this section to an entity distribution before the fiduciary has paid part or all of the entity distribution to a beneficiary, the fiduciary may consider the additional information before making the payment to the beneficiary and may change a decision to make the payment to the beneficiary.

(i)If a fiduciary receives additional information about the application of this section to an entity distribution after the fiduciary has paid part or all of the entity

distribution to a beneficiary, the fiduciary has no duty to change or recover the payment to the beneficiary but may consider that information in determining whether to exercise the power to adjust under Section 16327.

§ 16341

Repealed and added by Stats. 2023, Ch. 28, Sec. 2. (SB 522) Effective January 1, 2024.

A fiduciary shall allocate to income an amount received as a distribution of income, including a unitrust distribution under Article 3 (commencing with Section 16330), from a trust or estate in which the fiduciary has an interest, other than an interest the fiduciary purchased in a trust that is an investment entity, and shall allocate to principal an amount received as a distribution of principal from the trust or estate. If a fiduciary purchases, or receives from a settlor, an interest in a trust that is an investment entity, Section 16340, 16354, or 16355 applies to a receipt from the trust.

§ 16342

Added by Stats. 2023, Ch. 28, Sec. 2. (SB 522) Effective January 1, 2024.

(a)This section applies to a business or other activity conducted by a fiduciary if the fiduciary determines that it is in the interests of the beneficiaries to account separately for the business or other activity instead of doing either of the following:

(1)Accounting for the business or other activity as part of the fiduciary’s general accounting records.

(2)Conducting the business or other activity through an entity described in subparagraph (A) of paragraph (2) of subdivision (a) of Section 16340.

(b)A fiduciary may account separately under this section for the transactions of a business or other activity,

whether or not assets of the business or other activity are segregated from other assets held by the fiduciary.

(c)A fiduciary that accounts separately under this section for a business or other activity:

(1)May determine the extent to which the net money receipts of the business or other activity shall be retained for any of the following purposes:

(A)Working capital.

(B)The acquisition or replacement of fixed assets.

(C)Other reasonably foreseeable needs of the business or other activity.

(2)May determine the extent to which the remaining net money receipts are accounted for as principal or income in the fiduciary’s

general accounting records for the trust.

(3)May make a determination under paragraph (1) separately and differently from the fiduciary’s decisions concerning distributions of income or principal.

(4)Shall account for the net amount received from the sale of an asset of the business or other activity, other than a sale in the ordinary course of the business or other activity, as principal in the fiduciary’s general accounting records for the trust, to the extent the fiduciary determines that the net amount received is no longer required in the conduct of the business or other activity.

(d)Activities for which a fiduciary may account separately under this section include all of the following:

(1)Retail, manufacturing, service, and other traditional

business activities.

(2)Farming.

(3)Raising and selling livestock and other animals.

(4)Managing rental properties.

(5)Extracting minerals, water, and other natural resources.

(6)Growing and cutting timber.

(7)An activity to which Section 16353, 16354, or 16355 applies.

(8)Any other business conducted by the fiduciary.

§ 16343

Added by Stats. 2023, Ch. 28, Sec. 2. (SB 522) Effective January 1, 2024.

A fiduciary shall allocate to principal any of the following:

(a)To the extent not allocated to income under this chapter, an asset received from any of the following:

(1)An individual, during the individual’s lifetime.

(2)An estate.

(3)A trust, on termination of an income interest.

(4)A payor under a contract naming the fiduciary as beneficiary.

(b)Except as otherwise provided in this article, money or other property received from the

sale, exchange, liquidation, or change in form of a principal asset.

(c)An amount recovered from a third party to reimburse the fiduciary because of a disbursement described in subdivision (a) of Section 16361, or for another reason to the extent not based on loss of income.

(d)Proceeds of property taken by eminent domain, except that proceeds awarded for loss of income in an accounting period are income if a current income beneficiary had a mandatory income interest during the period.

(e)Net income received in an accounting period during which there is no beneficiary to which a fiduciary may or shall distribute income.

(f)Other receipts as provided in Article 3 (commencing with Section 16330).

§ 16344

Added by Stats. 2023, Ch. 28, Sec. 2. (SB 522) Effective January 1, 2024.

To the extent a fiduciary does not account for the management of rental property as a business under Section 16342, the fiduciary shall allocate to income an amount received as rent of real or personal property, including an amount received for cancellation or renewal of a lease. Both of the following apply to an amount received as a refundable deposit, including a security deposit or a deposit that is to be applied as rent for future periods:

(1)The amount shall be added to principal and held subject to the terms of the lease, except as otherwise provided by law other than this chapter.

(2)The amount is not allocated to income or available for distribution to a beneficiary until the fiduciary’s

contractual obligations have been satisfied with respect to that amount.

§ 16345

Repealed and added by Stats. 2023, Ch. 28, Sec. 2. (SB 522) Effective January 1, 2024.

(a)This section does not apply to an obligation to which Section 16348, 16349, 16350, 16351, 16353, 16354, or 16355 applies.

(b)A fiduciary shall allocate to income, without provision for amortization of premium, an amount received as interest on an obligation to pay money to the fiduciary, including an amount received as consideration for prepaying principal.

(c)A fiduciary shall allocate to principal an amount received from the sale, redemption, or other disposition of an obligation to pay money to the fiduciary. A fiduciary shall allocate to income 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 another future time, in an amount that exceeds the amount in consideration of which it was issued.

§ 16346

Repealed and added by Stats. 2023, Ch. 28, Sec. 2. (SB 522) Effective January 1, 2024.

(a)This section does not apply to a contract to which Section 16348 applies.

(b)Except as otherwise provided in subdivision (c), a fiduciary shall allocate to principal the proceeds of a life insurance policy or other contract received by the fiduciary as beneficiary, including a contract that insures against damage to, destruction of, or loss of title to an asset. The fiduciary shall allocate dividends on an insurance policy to income to the extent premiums on the policy are paid from income and to principal to the extent premiums on the policy are paid from principal.

(c)A fiduciary shall allocate to income proceeds of a contract that insures the fiduciary against loss of

any of the following:

(1)Occupancy or other use by a current income beneficiary.

(2)Income.

(3)Subject to Section 16342, profits from a business.

§ 16347

Repealed and added by Stats. 2023, Ch. 28, Sec. 2. (SB 522) Effective January 1, 2024.

(a)If a fiduciary determines that an allocation between income and principal required by Section 16348, 16349, 16350, 16351, or 16354 is insubstantial, the fiduciary may allocate the entire amount to principal, unless subdivision (e) of Section 16327 applies to the allocation.

(b)A fiduciary may presume an allocation is insubstantial under subdivision (a) if both of the following conditions are met:

(1)The amount of the allocation would increase or decrease net income in an accounting period, as determined before the allocation, by less than 10 percent.

(2)The asset producing the receipt to be allocated has a

fair market value of less than 10 percent of the total fair market value of the assets owned or held by the fiduciary at the beginning of the accounting period.

(c)The power to make a determination under subdivision (a) may be either of the following:

(1)Exercised by a cofiduciary in the manner described in subdivision (f) of Section 16327.

(2)Released or delegated for a reason described in subdivision (g) of Section 16327, and in the manner described in subdivision (h) of Section 16327.

(d)This section does not impose a duty on the trustee to make an allocation under this section, and the trustee is not liable for failure to make an allocation under this section.

§ 16348

Added by Stats. 2023, Ch. 28, Sec. 2. (SB 522) Effective January 1, 2024.

(a)The following definitions apply for purposes of this section:

(1)“Internal income of a separate fund” means the amount determined under subdivision (b).

(2)“Marital trust” means a trust that meets all the following criteria:

(A)The settlor’s surviving spouse is the only current income beneficiary and is entitled to a distribution of all the current net income of the trust.

(B)The trust qualifies for a marital deduction with respect to the settlor’s estate under Section 2056 of the Internal Revenue Code of 1986 (26 U.S.C. Sec. 2056) because of

either of the following:

(i)An election to qualify for a marital deduction under Section 2056(b)(7) of the Internal Revenue Code of 1986 (26 U.S.C. Sec. 2056(b)(7)) has been made.

(ii) The trust qualifies for a marital deduction under Section 2056(b)(5) of the Internal Revenue Code of 1986 (26 U.S.C. Sec. 2056(b)(5)).

(3)“Payment” means an amount a fiduciary may receive over a fixed number of years or during the life of one or more individuals because of services rendered or property transferred to the payor in exchange for future amounts the fiduciary may receive. The term includes an amount received in money or property from the payor’s general assets or from a separate fund created by the payor.

(4)“Separate fund” includes a private or commercial

annuity, an individual retirement account, and a pension, profit-sharing, stock bonus, or stock ownership plan.

(b)For each accounting period, the following rules apply to a separate fund:

(1)The fiduciary shall determine the internal income of the separate fund as if the separate fund were a trust subject to this chapter.

(2)If the fiduciary cannot determine the internal income of the separate fund under paragraph (1), the internal income of the separate fund is deemed to equal 4 percent of the value of the separate fund, according to the most recent statement of value preceding the beginning of the accounting period.

(3)If the fiduciary cannot determine the value of the separate fund under paragraph (2), the value of the separate fund is deemed to

equal the present value of the expected future payments, as determined under Section 7520 of the Internal Revenue Code of 1986 (26 U.S.C. Sec. 7520) for the month preceding the beginning of the accounting period for which the computation is made.

(c)A fiduciary shall allocate a payment received from a separate fund during an accounting period to income, to the extent of the internal income of the separate fund during the period, and the balance to principal.

(d)The fiduciary of a marital trust shall do all of the following:

(1)Withdraw from a separate fund the amount the current income beneficiary of the trust requests the fiduciary to withdraw, not greater than the amount by which the internal income of the separate fund during the accounting period exceeds the amount the fiduciary otherwise receives from the

separate fund during the period.

(2)Transfer from principal to income the amount the current income beneficiary requests the fiduciary to transfer, not greater than the amount by which the internal income of the separate fund during the period exceeds the amount the fiduciary receives from the separate fund during the period after the application of paragraph (1).

(3)Distribute all of the following to the current income beneficiary as income:

(A)The amount of the internal income of the separate fund received or withdrawn during the period.

(B)The amount transferred from principal to income under paragraph (2).

(e)For a trust, other than a marital trust, of which one or more current

income beneficiaries are entitled to a distribution of all the current net income, the fiduciary shall transfer from principal to income the amount by which the internal income of a separate fund during the accounting period exceeds the amount the fiduciary receives from the separate fund during the period.

§ 16349

Added by Stats. 2023, Ch. 28, Sec. 2. (SB 522) Effective January 1, 2024.

(a)For purposes of this section, “liquidating asset” means an asset whose value will diminish or terminate because the asset is expected to produce receipts for a limited time. The term includes a leasehold, patent, copyright, royalty right, and right to receive payments during a period of more than one year under an arrangement that does not provide for the payment of interest on the unpaid balance.

(b)This section does not apply to a receipt subject to Section 16340, 16348, 16350, 16351, 16353, 16354, 16355, or 16362.

(c)A fiduciary shall make allocations in the following manner:

(1)To income:

(A)A receipt produced by a liquidating asset, to the extent the receipt does not exceed 4 percent of the value of the asset.

(B)If the fiduciary cannot determine the value of the asset, 10 percent of the receipt.

(2)To principal, the balance of the receipt.

§ 16350

Repealed and added by Stats. 2023, Ch. 28, Sec. 2. (SB 522) Effective January 1, 2024.

(a)To the extent a fiduciary does not account for a receipt from an interest in minerals, water, or other natural resources as a business under Section 16432, the fiduciary shall allocate the receipt in the following manner:

(1)To income, to the extent received:

(A)As delay rental or annual rent on a lease.

(B)As a factor for interest or the equivalent of interest under an agreement creating a production payment.

(C)On account of an interest in renewable water.

(2)To principal, if

received from a production payment, to the extent subparagraph (B) of paragraph (1) does not apply.

(3)Between income and principal in a reasonable manner, to the extent received:

(A)On account of an interest in nonrenewable water.

(B)As a royalty, shut-in-well payment, take-or-pay payment, or bonus.

(C)From a working interest or any other interest not provided for in subparagraph (A) or (B), or paragraph (1) or (2).

(b)This section applies to an interest owned or held by a fiduciary whether or not a settlor was extracting minerals, water, or other natural resources before the fiduciary owned or held the interest.

(c)An

allocation of a receipt under paragraph (3) of subdivision (a) is presumed to be reasonable if the amount allocated to principal is equal to the amount allowed by the Internal Revenue Code of 1986, as amended (Title 26 of the United States Code, as amended), as a deduction for depletion of the interest.

(d)If a fiduciary owns or holds an interest in minerals, water, or other natural resources before the effective date of this chapter, the fiduciary may allocate receipts from the interest as provided in this section or in the manner used by the fiduciary before the effective date of this chapter. If the fiduciary acquires an interest in minerals, water, or other natural resources on or after the effective date of this chapter, the fiduciary shall allocate receipts from the interest as provided in this section.

§ 16351

Repealed and added by Stats. 2023, Ch. 28, Sec. 2. (SB 522) Effective January 1, 2024.

(a)To the extent a fiduciary does not account for receipts from the sale of timber and related products as a business under Section 16342, the fiduciary shall allocate the net receipts:

(1)To income, to the extent the amount of timber cut from the land does not exceed the rate of growth of the timber.

(2)To principal, to the extent the amount of timber cut from the land exceeds the rate of growth of the timber or the net receipts are from the sale of standing timber.

(3)Between income and principal, if the net receipts are from the lease of land used for growing and cutting timber or from a contract to cut

timber from land, by determining the amount of timber cut from the land under the lease or contract and applying the rules in paragraphs (1) and (2).

(4)To principal, to the extent advance payments, bonuses, and other payments are not allocated under paragraph (1), (2), or (3).

(b)In determining net receipts to be allocated under subdivision (a), a fiduciary shall deduct and transfer to principal a reasonable amount for depletion.

(c)This section applies to land owned or held by a fiduciary whether or not a settlor was cutting timber from the land before the fiduciary owned or held the property.

(d)If a fiduciary owns or holds an interest in land used for growing and cutting timber before the effective date of this chapter, the fiduciary may

allocate net receipts from the sale of timber and related products as provided in this section or in the manner used by the fiduciary before the effective date of this chapter. If the fiduciary acquires an interest in land used for growing and cutting timber on or after the effective date of this chapter, the fiduciary shall allocate net receipts from the sale of timber and related products as provided in this section.

§ 16352

Repealed and added by Stats. 2023, Ch. 28, Sec. 2. (SB 522) Effective January 1, 2024.

(a)If a trust received property for which a gift or estate tax marital deduction was allowed and the settlor’s spouse holds a mandatory income interest in the trust, the spouse may require the trustee, to the extent the trust assets otherwise do not provide the spouse with sufficient income from or use of the trust assets to qualify for the deduction, to do any of the following:

(1)Make property productive of income.

(2)Convert property to property productive of income within a reasonable time.

(3)Exercise the power to adjust under Section 16327.

(b)The trustee may decide which action or combination of actions in subdivision (a) to take.

§ 16353

Added by Stats. 2023, Ch. 28, Sec. 2. (SB 522) Effective January 1, 2024.

(a)For purposes of this section, “derivative” means a contract, instrument, other arrangement, or combination of contracts, instruments, or other arrangements, the value, rights, and obligations of which are, in whole or in part, dependent on or derived from an underlying tangible or intangible asset, group of tangible or intangible assets, index, or occurrence of an event. The term includes stocks, fixed-income securities, and financial instruments and arrangements based on indices, commodities, interest rates, weather-related events, and credit default events.

(b)To the extent a fiduciary does not account for a transaction in derivatives as a business under Section 16342, the fiduciary shall allocate 10 percent of receipts from the

transaction and 10 percent of disbursements made in connection with the transaction to income and the balance to principal.

(c)Subdivision (d) applies under the following circumstances:

(1)If a fiduciary does any of the following:

(A)Grants an option to buy property from a trust, whether or not the trust owns the property when the option is granted.

(B)Grants an option that permits another person to sell property to the trust.

(C)Acquires an option to buy property for the trust or an option to sell an asset owned by the trust.

(2)The fiduciary or other owner of the asset is required to deliver the asset if the option is

exercised.

(d)If this subdivision applies, the fiduciary shall allocate 10 percent to income and the balance to principal of the following amounts:

(1)An amount received for granting the option.

(2)An amount paid to acquire the option.

(3)Gain or loss realized on the exercise, exchange, settlement, offset, closing, or expiration of the option.

§ 16354

Added by Stats. 2023, Ch. 28, Sec. 2. (SB 522) Effective January 1, 2024.

(a)Except as otherwise provided in subdivision (b), a fiduciary shall allocate to income a receipt from or related to an asset-backed security, to the extent the payor identifies the payment as being from interest or other current return, and to principal the balance of the receipt.

(b)If a fiduciary receives one or more payments in exchange for part or all of the fiduciary’s interest in an asset-backed security, including a liquidation or redemption of the fiduciary’s interest in the security, the fiduciary shall allocate to income 10 percent of receipts from the transaction and 10 percent of disbursements made in connection with the transaction, and to principal the balance of the receipts and disbursements.

§ 16355

Repealed and added by Stats. 2023, Ch. 28, Sec. 2. (SB 522) Effective January 1, 2024.

A fiduciary shall allocate receipts from, or related to, a financial instrument or arrangement not otherwise addressed by this chapter. The allocation shall be consistent with the principles of Sections 16353 and 16354.