Trust Apportionment
When a trustee receives a distribution, it can be difficult to determine whether he should pay it to the beneficiary or add it to the “corpus” (the trust property). Questions also can surface as to who is responsible for certain expenses that arise during administration of the trust. Of course, the trustor (the person making the trust) may make other provision for receipts or expenses.
Generally, income is paid to the beneficiary while principal is added to the corpus.
Income
Ordinary receipts from the use or investment of trust property are considered income. This includes interest on bonds, bank accounts, money loaned, and rent received for rental of trust property. Cash dividends are income as are stock dividends and stock splits up to a certain percent as established by state law. Receipts from a depletable natural resource such as oil or gas are income minus a depletion deduction used in calculating taxable income for federal tax purposes. Although there is no fixed rule for other depletable assets such as leaseholds, patents, and copyrights, in many jurisdictions an equitable or fair division is made between income and principal.
Expenses chargeable to income include:
- Income taxes
- Ordinary property taxes
- Ordinary repairs
- Maintenance expenses
- Insurance premiums
Principal
Extraordinary receipts from the use or investment of trust property are considered principal. All money received upon the sale or exchange of a trust asset is principal, including bond redemption and capital gains. Stock dividends and stock splits over a certain percent as established by state law are principal. Stock subscription rights, stock purchase options, and receipts upon liquidation are also attributed to principal. The amount of gross receipts from natural resources allowed as a depletion deduction (mentioned above) is added to principal.
Expenses chargeable to principal include:
- Capital improvements and special tax assessments
- Payments on indebtedness
- Capital gains taxes
- Cost of investing and reinvesting principal (including the cost of preparing property for sale)
- Court costs and attorneys’ fees incurred to establish the trust and to protect the principal
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