CHAPTER 61 HOUSE BILL No. 2501 An Act enacting the uniform principal and income act (1997); repealing K.S.A. 58-901, 58-
902, 58-903, 58-904, 58-904a, 58-905, 58-906, 58-907, 58-909, 58-909a, 58-910, 58-911,
58-912, 58-914, 58-915, 58-916 and 58-917.
Be it enacted by the Legislature of the State of Kansas:

      Section  1. This act shall be known and may be cited as the uniform
principal and income act (1997).

      Sec.  2. As used in this act:

      (1) ``Accounting period'' means a calendar year unless another 12-
month period is selected by a fiduciary. The term includes a portion of a
calendar year or other 12-month period that begins when an income in-
terest begins or ends when an income interest ends.

      (2) ``Beneficiary'' includes, in the case of a decedent's estate, an heir,
legatee, and devisee and, in the case of a trust, an income beneficiary and
a remainder beneficiary.

      (3) ``Fiduciary'' means a personal representative or a trustee. The
term includes an executor, administrator, successor personal represen-
tative, special administrator, and a person performing substantially the
same function.

      (4) ``Income'' means money or property that a fiduciary receives as
current return from a principal asset. The term includes a portion of
receipts from a sale, exchange, or liquidation of a principal asset, to the
extent provided in part 4.

      (5) ``Income beneficiary'' means a person to whom net income of a
trust is or may be payable.

      (6) ``Income interest'' means the right of an income beneficiary to
receive all or part of net income, whether the terms of the trust require
it to be distributed or authorize it to be distributed in the trustee's dis-
cretion.

      (7) ``Mandatory income interest'' means the right of an income ben-
eficiary to receive net income that the terms of the trust require the
fiduciary to distribute.

      (8) ``Net income'' means the total receipts allocated to income during
an accounting period minus the disbursements made from income during
the period, plus or minus transfers under this act to or from income
during the period.

      (9) ``Person'' means an individual, corporation, business trust, estate,
trust, partnership, limited liability company, association, joint venture,
government; governmental subdivision, agency, or instrumentality; public
corporation, or any other legal or commercial entity.

      (10) ``Principal'' means property held in trust for distribution to a
remainder beneficiary when the trust terminates.

      (11) ``Remainder beneficiary'' means a person entitled to receive
principal when an income interest ends.

      (12) ``Terms of a trust'' means the manifestation of the intent of a
settlor or decedent with respect to the trust, expressed in a manner that
admits of its proof in a judicial proceeding, whether by written or spoken
words or by conduct.

      (13) ``Trustee'' includes an original, additional, or successor trustee,
whether or not appointed or confirmed by a court.

      Sec.  3. (a) In allocating receipts and disbursements to or between
principal and income, and with respect to any matter within the scope of
parts 2 and 3, a fiduciary:

      (1) Shall administer a trust or estate in accordance with the terms of
the trust or the will, even if there is a different provision in this act;

      (2) may administer a trust or estate by the exercise of a discretionary
power of administration given to the fiduciary by the terms of the trust
or the will, even if the exercise of the power produces a result different
from a result required or permitted by this act;

      (3) shall administer a trust or estate in accordance with this act if the
terms of the trust or the will do not contain a different provision or do
not give the fiduciary a discretionary power of administration; and

      (4) shall add a receipt or charge a disbursement to principal to the
extent that the terms of the trust and this act do not provide a rule for
allocating the receipt or disbursement to or between principal and in-
come.

      (b) In exercising the power to adjust under subsection (a) of section
4, and amendments thereto, or a discretionary power of administration
regarding a matter within the scope of this act, whether granted by the
terms of a trust, a will, or this act, a fiduciary shall administer a trust or
estate impartially, based on what is fair and reasonable to all of the ben-
eficiaries, except to the extent that the terms of the trust or the will clearly
manifest an intention that the fiduciary shall or may favor one or more
of the beneficiaries. A determination in accordance with this act is pre-
sumed to be fair and reasonable to all of the beneficiaries.

      Sec.  4. (a) A trustee may adjust between principal and income to the
extent the trustee considers necessary if the trustee invests and manages
trust assets as a prudent investor, pursuant to K.S.A. 17-5004, and amend-
ments thereto, the terms of the trust describe the amount that may or
must be distributed to a beneficiary by referring to the trust's income,
and the trustee determines, after applying the rules in subsection (a) of
section 3, and amendments thereto, that the trustee is unable to comply
with subsection (b) of section 3, and amendments thereto.

      (b) In deciding whether and to what extent to exercise the power
conferred by subsection (a), a trustee shall consider all factors relevant to
the trust and its beneficiaries, including the following factors to the extent
they are relevant:

      (1) The nature, purpose, and expected duration of the trust;

      (2) the intent of the settlor;

      (3) the identity and circumstances of the beneficiaries;

      (4) the needs for liquidity, regularity of income, and preservation
and appreciation of capital;

      (5) the assets held in the trust; the extent to which they consist of
financial assets, interests in closely held enterprises, tangible and intan-
gible personal property, or real property; the extent to which an asset is
used by a beneficiary; and whether an asset was purchased by the trustee
or received from the settlor;

      (6) the net amount allocated to income under the other sections of
this act and the increase or decrease in the value of the principal assets,
which the trustee may estimate as to assets for which market values are
not readily available;

      (7) whether and to what extent the terms of the trust give the trustee
the power to invade principal or accumulate income or prohibit the trus-
tee from invading principal or accumulating income, and the extent to
which the trustee has exercised a power from time to time to invade
principal or accumulate income;

      (8) the actual and anticipated effect of economic conditions on prin-
cipal and income and effects of inflation and deflation; and

      (9) the anticipated tax consequences of an adjustment.

      (c) A trustee may not make an adjustment:

      (1) That diminishes the income interest in a trust that requires all of
the income to be paid at least annually to a spouse and for which an estate
tax or gift tax marital deduction would be allowed, in whole or in part, if
the trustee did not have the power to make the adjustment;

      (2) that reduces the actuarial value of the income interest in a trust
to which a person transfers property with the intent to qualify for a gift
tax exclusion;

      (3) that changes the amount payable to a beneficiary as a fixed an-
nuity or a fixed fraction of the value of the trust assets;

      (4) from any amount that is permanently set aside for charitable
purposes under a will or the terms of a trust unless both income and
principal are so set aside;

      (5) if possessing or exercising the power to make an adjustment
causes an individual to be treated as the owner of all or part of the trust
for income tax purposes, and the individual would not be treated as the
owner if the trustee did not possess the power to make an adjustment;

      (6) if possessing or exercising the power to make an adjustment
causes all or part of the trust assets to be included for estate tax purposes
in the estate of an individual who has the power to remove a trustee or
appoint a trustee, or both, and the assets would not be included in the
estate of the individual if the trustee did not possess the power to make
an adjustment;

      (7) if the trustee is a beneficiary of the trust; or

      (8) if the trustee is not a beneficiary, but the adjustment would ben-
efit the trustee directly or indirectly.

      (d) If subsection (c)(5), (6), (7), or (8) applies to a trustee and there
is more than one trustee, a cotrustee to whom the provision does not
apply may make the adjustment unless the exercise of the power by the
remaining trustee or trustees is not permitted by the terms of the trust.

      (e) A trustee may release the entire power conferred by subsection
(a) or may release only the power to adjust from income to principal or
the power to adjust from principal to income if the trustee is uncertain
about whether possessing or exercising the power will cause a result de-
scribed in subsection (c)(1) through (6) or (c)(8) or if the trustee deter-
mines that possessing or exercising the power will or may deprive the
trust of a tax benefit or impose a tax burden not described in subsection
(c). The release may be permanent or for a specified period, including a
period measured by the life of an individual.

      (f) Terms of a trust that limit the power of a trustee to make an
adjustment between principal and income do not affect the application
of this section unless it is clear from the terms of the trust that the terms
are intended to deny the trustee the power of adjustment conferred by
subsection (a).

      Sec.  5. After a decedent dies, in the case of an estate, or after an
income interest in a trust ends, the following rules apply:

      (1) A fiduciary of an estate or of a terminating income interest shall
determine the amount of net income and net principal receipts received
from property specifically given to a beneficiary under the rules in parts
3 through 5 which apply to trustees and the rules in subsection (5). The
fiduciary shall distribute the net income and net principal receipts to the
beneficiary who is to receive the specific property.

      (2) A fiduciary shall determine the remaining net income of a de-
cedent's estate or a terminating income interest under the rules in parts
3 through 5 which apply to trustees and by:

      (A) including in net income all income from property used to dis-
charge liabilities;

      (B) paying from income or principal, in the fiduciary's discretion,
fees of attorneys, accountants, and fiduciaries; court costs and other ex-
penses of administration; and interest on death taxes, but the fiduciary
may pay those expenses from income of property passing to a trust for
which the fiduciary claims an estate tax marital or charitable deduction
only to the extent that the payment of those expenses from income will
not cause the reduction or loss of the deduction; and

      (C) paying from principal all other disbursements made or incurred
in connection with the settlement of a decedent's estate or the winding
up of a terminating income interest, including debts, funeral expenses,
disposition of remains, family allowances, and death taxes and related
penalties that are apportioned to the estate or terminating income interest
by the will, the terms of the trust, or applicable law.

      (3) A fiduciary shall distribute to a beneficiary who receives a pe-
cuniary amount outright the interest or any other amount provided by
the will, the terms of the trust, or applicable law from net income deter-
mined under subsection (2) or from principal to the extent that net in-
come is insufficient. If a beneficiary is to receive a pecuniary amount
outright from a trust after an income interest ends and no interest or
other amount is provided for by the terms of the trust or applicable law,
the fiduciary shall distribute the interest or other amount to which the
beneficiary would be entitled under applicable law if the pecuniary
amount were required to be paid under a will.

      (4) A fiduciary shall distribute the net income remaining after dis-
tributions required by subsection (3) in the manner described in section
6, and amendments thereto, to all other beneficiaries, including a bene-
ficiary who receives a pecuniary amount in trust, even if the beneficiary
holds an unqualified power to withdraw assets from the trust or other
presently exercisable general power of appointment over the trust.

      (5) A fiduciary may not reduce principal or income receipts from
property described in subsection (1) because of a payment described in
section 5 or 26, and amendments thereto, to the extent that the will, the
terms of the trust, or applicable law requires the fiduciary to make the
payment from assets other than the property or to the extent that the
fiduciary recovers or expects to recover the payment from a third party.
The net income and principal receipts from the property are determined
by including all of the amounts the fiduciary receives or pays with respect
to the property, whether those amounts accrued or became due before,
on, or after the date of a decedent's death or an income interest's ter-
minating event, and by making a reasonable provision for amounts that
the fiduciary believes the estate or terminating income interest may be-
come obligated to pay after the property is distributed.

      Sec.  6. (a) Each beneficiary described in subsection (4) of section 5,
and amendments thereto, is entitled to receive a portion of the net income
equal to the beneficiary's fractional interest in undistributed principal
assets, using values as of the distribution date. If a fiduciary makes more
than one distribution of assets to beneficiaries to whom this section ap-
plies, each beneficiary, including one who does not receive part of the
distribution, is entitled, as of each distribution date, to the net income
the fiduciary has received after the date of death or terminating event or
earlier distribution date but has not distributed as of the current distri-
bution date.

      (b) In determining a beneficiary's share of net income, the following
rules apply:

      (1) The beneficiary is entitled to receive a portion of the net income
equal to the beneficiary's fractional interest in the undistributed principal
assets immediately before the distribution date, including assets that later
may be sold to meet principal obligations.

      (2) The beneficiary's fractional interest in the undistributed principal
assets must be calculated without regard to property specifically given to
a beneficiary and property required to pay pecuniary amounts not in trust.

      (3) The beneficiary's fractional interest in the undistributed principal
assets must be calculated on the basis of the aggregate value of those
assets as of the distribution date without reducing the value by any unpaid
principal obligation.

      (4) The distribution date for purposes of this section may be the date
as of which the fiduciary calculates the value of the assets if that date is
reasonably near the date on which assets are actually distributed.

      (c) If a fiduciary does not distribute all of the collected but undis-
tributed net income to each person as of a distribution date, the fiduciary
shall maintain appropriate records showing the interest of each benefi-
ciary in that net income.

      (d) A fiduciary may apply the rules in this section, to the extent that
the fiduciary considers it appropriate, to net gain or loss realized after the
date of death or terminating event or earlier distribution date from the
disposition of a principal asset if this section applies to the income from
the asset.

      Sec.  7. (a) An income beneficiary is entitled to net income from the
date on which the income interest begins. An income interest begins on
the date specified in the terms of the trust or, if no date is specified, on
the date an asset becomes subject to a trust or successive income interest.

      (b) An asset becomes subject to a trust:

      (1) On the date it is transferred to the trust in the case of an asset
that is transferred to a trust during the transferor's life;

      (2) on the date of a testator's death in the case of an asset that
becomes subject to a trust by reason of a will, even if there is an inter-
vening period of administration of the testator's estate; or

      (3) on the date of an individual's death in the case of an asset that is
transferred to a fiduciary by a third party because of the individual's death.

      (c) An asset becomes subject to a successive income interest on the
day after the preceding income interest ends, as determined under sub-
section (d), even if there is an intervening period of administration to
wind up the preceding income interest.

      (d) An income interest ends on the day before an income beneficiary
dies or another terminating event occurs, or on the last day of a period
during which there is no beneficiary to whom a trustee may distribute
income.

      Sec.  8. (a) A trustee shall allocate an income receipt or disbursement
other than one to which subsection (1) of section 5, and amendments
thereto, applies to principal if its due date occurs before a decedent dies
in the case of an estate or before an income interest begins in the case
of a trust or successive income interest.

      (b) A trustee shall allocate an income receipt or disbursement to
income if its due date occurs on or after the date on which a decedent
dies or an income interest begins and it is a periodic due date. An income
receipt or disbursement must be treated as accruing from day to day if
its due date is not periodic or it has no due date. The portion of the
receipt or disbursement accruing before the date on which a decedent
dies or an income interest begins must be allocated to principal and the
balance must be allocated to income.

      (c) An item of income or an obligation is due on the date the payer
is required to make a payment. If a payment date is not stated, there is
no due date for the purposes of this act. Distributions to shareholders or
other owners from an entity to which section 10, and amendments
thereto, applies are deemed to be due on the date fixed by the entity for
determining who is entitled to receive the distribution or, if no date is
fixed, on the declaration date for the distribution. A due date is periodic
for receipts or disbursements that must be paid at regular intervals under
a lease or an obligation to pay interest or if an entity customarily makes
distributions at regular intervals.

      Sec.  9. (a) As used in this section, ``undistributed income'' means net
income received before the date on which an income interest ends. The
term does not include an item of income or expense that is due or accrued
or net income that has been added or is required to be added to principal
under the terms of the trust.

      (b) When a mandatory income interest ends, the trustee shall pay to
a mandatory income beneficiary who survives that date, or the estate of
a deceased mandatory income beneficiary whose death causes the interest
to end, the beneficiary's share of the undistributed income that is not
disposed of under the terms of the trust unless the beneficiary has an
unqualified power to revoke more than five percent of the trust imme-
diately before the income interest ends. In the latter case, the undistri-
buted income from the portion of the trust that may be revoked must be
added to principal.

      (c) When a trustee's obligation to pay a fixed annuity or a fixed frac-
tion of the value of the trust's assets ends, the trustee shall prorate the
final payment if and to the extent required by applicable law to accomplish
a purpose of the trust or its settlor relating to income, gift, estate, or other
tax requirements.

      Sec.  10. (a) As used in this section, ``entity'' means a corporation,
partnership, limited liability company, regulated investment company,
real estate investment trust, common trust fund, or any other organization
in which a trustee has an interest other than a trust or estate to which
section 11, and amendments thereto, applies, a business or activity to
which section 12, and amendments thereto, applies, or an asset-backed
security to which section 24, and amendments thereto, applies.

      (b) Except as otherwise provided in this section, a trustee shall al-
locate to income money received from an entity.

      (c) A trustee shall allocate the following receipts from an entity to
principal:

      (1) Property other than money;

      (2) money received in one distribution or a series of related distri-
butions in exchange for part or all of a trust's interest in the entity;

      (3) money received in total or partial liquidation of the entity; and

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

      (d) Money is received in partial liquidation:

      (1) To the extent that the entity, at or near the time of a distribution,
indicates that it is a distribution in partial liquidation; or

      (2) if the total amount of money and property received in a distri-
bution or series of related distributions is greater than 20 percent of the
entity's gross assets, as shown by the entity's year-end financial statements
immediately preceding the initial receipt.

      (e) Money is not received in partial liquidation, nor may it be taken
into account under subsection (d)(2), to the extent that it does not exceed
the amount of income tax that a trustee or beneficiary must pay on taxable
income of the entity that distributes the money.

      (f) A trustee may rely upon a statement made by an entity about the
source or character of a distribution if the statement is made at or near
the time of distribution by the entity's board of directors or other person
or group of persons authorized to exercise powers to pay money or trans-
fer property comparable to those of a corporation's board of directors.

      Sec.   11. A trustee shall allocate to income an amount received as a
distribution of income from a trust or an estate in which the trust has an
interest other than a purchased interest, and shall allocate to principal an
amount received as a distribution of principal from such a trust or estate.
If a trustee purchases an interest in a trust that is an investment entity,
or a decedent or donor transfers an interest in such a trust to a trustee,
section 10 or 24, and amendments thereto, applies to a receipt from the
trust.

      Sec.  12. (a) If a trustee who conducts a business or other activity
determines that it is in the best interest of all the beneficiaries to account
separately for the business or activity instead of accounting for it as part
of the trust's general accounting records, the trustee may maintain sep-
arate accounting records for its transactions, whether or not its assets are
segregated from other trust assets.

      (b) A trustee who accounts separately for a business or other activity
may determine the extent to which its net cash receipts must be retained
for working capital, the acquisition or replacement of fixed assets, and
other reasonably foreseeable needs of the business or activity, and the
extent to which the remaining net cash receipts are accounted for as
principal or income in the trust's general accounting records. If a trustee
sells assets of the business or other activity, other than in the ordinary
course of the business or activity, the trustee shall account for the net
amount received as principal in the trust's general accounting records to
the extent the trustee determines that the amount received is no longer
required in the conduct of the business.

      (c) Activities for which a trustee may maintain separate accounting
records include:

      (1) Retail, manufacturing, service, and other traditional business ac-
tivities;

      (2) farming;

      (3) raising and selling livestock and other animals;

      (4) management of rental properties;

      (5) extraction of minerals and other natural resources;

      (6) timber operations; and

      (7) activities to which section 23, and amendments thereto, applies.

      Sec.  13. A trustee shall allocate to principal:

      (1) To the extent not allocated to income under this act, assets re-
ceived from a transferor during the transferor's lifetime, a decedent's
estate, a trust with a terminating income interest, or a payer under a
contract naming the trust or its trustee as beneficiary;

      (2) money or other property received from the sale, exchange, li-
quidation, or change in form of a principal asset, including realized profit,
subject to this part;

      (3) amounts recovered from third parties to reimburse the trust be-
cause of disbursements described in subsection (a)(7) of section 26 and
amendments thereto or for other reasons to the extent not based on the
loss of income;

      (4) proceeds of property taken by eminent domain, but a separate
award made for the loss of income with respect to an accounting period
during which a current income beneficiary had a mandatory income in-
terest is income;

      (5) net income received in an accounting period during which there
is no beneficiary to whom a trustee may or must distribute income; and

      (6) other receipts as provided in sections 17 through 24 and amend-
ments thereto.

      Sec.  14. To the extent that a trustee accounts for receipts from rental
property pursuant to this section, the trustee 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. An amount received as a
refundable deposit, including a security deposit or a deposit that is to be
applied as rent for future periods, must be added to principal and held
subject to the terms of the lease and is not available for distribution to a
beneficiary until the trustee's contractual obligations have been satisfied
with respect to that amount.

      Sec.  15. (a) An amount received as interest, whether determined at
a fixed, variable, or floating rate, on an obligation to pay money to the
trustee, including an amount received as consideration for prepaying prin-
cipal, must be allocated to income without any provision for amortization
of premium.

      (b) A trustee shall allocate to principal an amount received from the
sale, redemption, or other disposition of an obligation to pay money to
the trustee more than one year after it is purchased or acquired by the
trustee, including an obligation whose purchase price or value when it is
acquired is less than its value at maturity. If the obligation matures within
one year after it is purchased or acquired by the trustee, an amount re-
ceived in excess of its purchase price or its value when acquired by the
trust must be allocated to income.

      (c) This section does not apply to an obligation to which section 18,
19, 20, 21, 23 or 24 and amendments thereto applies.

      Sec.  16. (a) Except as otherwise provided in subsection (b), a trustee
shall allocate to principal the proceeds of a life insurance policy or other
contract in which the trust or its trustee is named as beneficiary, including
a contract that insures the trust or its trustee against loss for damage to,
destruction of, or loss of title to a trust asset. The trustee shall allocate
dividends on an insurance policy to income if the premiums on the policy
are paid from income, and to principal if the premiums are paid from
principal.

      (b) A trustee shall allocate to income proceeds of a contract that
insures the trustee against loss of occupancy or other use by an income
beneficiary, loss of income, or, subject to section 12 and amendments
thereto, loss of profits from a business.

      (c) This section does not apply to a contract to which section 18 and
amendments thereto applies.

      Sec.  17. If a trustee determines that an allocation between principal
and income required by section 18, 19, 20, 21 or 24 and amendments
thereto is insubstantial, the trustee may allocate the entire amount to
principal unless one of the circumstances described in subsection (c) of
section 4 and amendments thereto applies to the allocation. This power
may be exercised by a cotrustee in the circumstances described in sub-
section (d) of section 4 and amendments thereto and may be released for
the reasons and in the manner described in subsection (e) of section 4
and amendments thereto. An allocation is presumed to be insubstantial
if:

      (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; or

      (2) the value of the asset producing the receipt for which the allo-
cation would be made is less than 10 percent of the total value of the
trust's assets at the beginning of the accounting period.

      Sec.  18. (a) As used in this section, ``payment'' means a payment that
a trustee may receive over a fixed number of years or during the life of
one or more individuals because of services rendered or property trans-
ferred to the payer in exchange for future payments. The term includes
a payment made in money or property from the payer's general assets or
from a separate fund created by the payer, including a private or com-
mercial annuity, an individual retirement account, and a pension, profit-
sharing, stock-bonus, or stock-ownership plan.

      (b) To the extent that a payment is characterized as interest or a
dividend or a payment made in lieu of interest or a dividend, a trustee
shall allocate it to income. The trustee shall allocate to principal the bal-
ance of the payment and any other payment received in the same ac-
counting period that is not characterized as interest, a dividend, or an
equivalent payment.

      (c) If no part of a payment is characterized as interest, a dividend,
or an equivalent payment, and all or part of the payment is required to
be made, a trustee shall allocate to income 10 percent of the part that is
required to be made during the accounting period and the balance to
principal. If no part of a payment is required to be made or the payment
received is the entire amount to which the trustee is entitled, the trustee
shall allocate the entire payment to principal. For purposes of this sub-
section, a payment is not ``required to be made'' to the extent that it is
made because the trustee exercises a right of withdrawal.

      (d) If, to obtain an estate tax marital deduction for a trust, a trustee
must allocate more of a payment to income than provided for by this
section, the trustee shall allocate to income the additional amount nec-
essary to obtain the marital deduction.

      (e) This section does not apply to payments to which section 19 and
amendments thereto applies.

      Sec.  19. (a) As used in this section, ``liquidating asset'' means an asset
whose value will diminish or terminate because the asset is expected to
produce receipts for a period of limited duration. 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. The term
does not include a payment subject to section 18 and amendments
thereto, resources subject to section 20 and amendments thereto, timber
subject to section 21 and amendments thereto, an activity subject to sec-
tion 23 and amendments thereto, an asset subject to section 24 and
amendments thereto, or any asset for which the trustee establishes a re-
serve for depreciation under section 27 and amendments thereto.

      (b) A trustee shall allocate to income 10 percent of the receipts from
a liquidating asset and the balance to principal.

      Sec.  20. (a) To the extent that a trustee accounts for receipts from
an interest in minerals or other natural resources pursuant to this section,
the trustee shall allocate them as follows:

      (1) If received as nominal delay rental or nominal annual rent on a
lease, a receipt must be allocated to income.

      (2) If received from a production payment, a receipt must be allo-
cated to income if and to the extent that the agreement creating the
production payment provides a factor for interest or its equivalent. The
balance must be allocated to principal.

      (3) If an amount received as a royalty, shut-in-well payment, take-
or-pay payment, bonus, or delay rental is more than nominal, 90 percent
must be allocated to principal and the balance to income.

      (4) If an amount is received from a working interest or any other
interest not provided for in subsection (1), (2), or (3), 90 percent of the
net amount received must be allocated to principal and the balance to
income.

      (b) An amount received on account of an interest in water that is
renewable must be allocated to income. If the water is not renewable, 90
percent of the amount must be allocated to principal and the balance to
income.

      (c) This act applies whether or not a decedent or donor was extract-
ing minerals, water, or other natural resources before the interest became
subject to the trust.

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

      Sec.  21. (a) To the extent that a trustee accounts for receipts from
the sale of timber and related products pursuant to this section, the trus-
tee shall allocate the net receipts:

      (1) To income to the extent that the amount of timber removed from
the land does not exceed the rate of growth of the timber during the
accounting periods in which a beneficiary has a mandatory income inter-
est;

      (2) to principal to the extent that the amount of timber removed
from the land exceeds the rate of growth of the timber or the net receipts
are from the sale of standing timber;

      (3) to or between income and principal if the net receipts are from
the lease of timberland or from a contract to cut timber from land owned
by a trust, by determining the amount of timber removed from the land
under the lease or contract and applying the rules in subsections (1) and
(2); or

      (4) to principal to the extent that advance payments, bonuses, and
other payments are not allocated pursuant to subsection (1), (2), or (3).

      (b) In determining net receipts to be allocated pursuant to subsec-
tion (a), a trustee shall deduct and transfer to principal a reasonable
amount for depletion.

      (c) This act applies whether or not a decedent or transferor was
harvesting timber from the property before it became subject to the trust.

      (d) If a trust owns an interest in timberland on the effective date of
this act, the trustee may allocate net receipts from the sale of timber and
related products as provided in this act or in the manner used by the
trustee before the effective date of this act. If the trust acquires an interest
in timberland after the effective date of this act, the trustee shall allocate
net receipts from the sale of timber and related products as provided in
this act.

      Sec.  22. (a) If a marital deduction is allowed for all or part of a trust
whose assets consist substantially of property that does not provide the
spouse with sufficient income from or use of the trust assets, and if the
amounts that the trustee transfers from principal to income under section
4 and amendments thereto and distributes to the spouse from principal
pursuant to the terms of the trust are insufficient to provide the spouse
with the beneficial enjoyment required to obtain the marital deduction,
the spouse may require the trustee to make property productive of in-
come, convert property within a reasonable time, or exercise the power
conferred by subsection (a) of section 4 and amendments thereto. The
trustee may decide which action or combination of actions to take.

      (b) In cases not governed by subsection (a), proceeds from the sale
or other disposition of an asset are principal without regard to the amount
of income the asset produces during any accounting period.

      Sec.  23. (a) As used in this section, ``derivative'' means a contract or
financial instrument or a combination of contracts and financial instru-
ments which gives a trust the right or obligation to participate in some or
all changes in the price of a tangible or intangible asset or group of assets,
or changes in a rate, an index of prices or rates, or other market indicator
for an asset or a group of assets.

      (b) To the extent that a trustee does not account under section 12
and amendments thereto for transactions in derivatives, the trustee shall
allocate to principal receipts from and disbursements made in connection
with those transactions.

      (c) If a trustee grants an option to buy property from the trust,
whether or not the trust owns the property when the option is granted,
grants an option that permits another person to sell property to the trust,
or acquires an option to buy property for the trust or an option to sell an
asset owned by the trust, and the trustee or other owner of the asset is
required to deliver the asset if the option is exercised, an amount received
for granting the option must be allocated to principal. An amount paid to
acquire the option must be paid from principal. A gain or loss realized
upon the exercise of an option, including an option granted to a settlor
of the trust for services rendered, must be allocated to principal.

      Sec.  24. (a) As used in this section, ``asset-backed security'' means an
asset whose value is based upon the right it gives the owner to receive
distributions from the proceeds of financial assets that provide collateral
for the security. The term includes an asset that gives the owner the right
to receive from the collateral financial assets only the interest or other
current return or only the proceeds other than interest or current return.
The term does not include an asset to which section 10 or 18 and amend-
ments thereto applies.

      (b) If a trust receives a payment from interest or other current return
and from other proceeds of the collateral financial assets, the trustee shall
allocate to income the portion of the payment which the payer identifies
as being from interest or other current return and shall allocate the bal-
ance of the payment to principal.

      (c) If a trust receives one or more payments in exchange for the
trust's entire interest in an asset-backed security in one accounting period,
the trustee shall allocate the payments to principal. If a payment is one
of a series of payments that will result in the liquidation of the trust's
interest in the security over more than one accounting period, the trustee
shall allocate 10 percent of the payment to income and the balance to
principal.

      Sec.  25. A trustee shall make the following disbursements from in-
come to the extent that they are not disbursements to which subsection
(2)(B) or (C) of section 5 and amendments thereto applies:

      (1) One-half of the regular compensation of the trustee and of any
person providing investment advisory or custodial services to the trustee;

      (2) one-half of all expenses for accountings, judicial proceedings, or
other matters that involve both the income and remainder interests;

      (3) all of the other ordinary expenses incurred in connection with
the administration, management, or preservation of trust property and
the distribution of income, including interest, ordinary repairs, regularly
recurring taxes assessed against principal, and expenses of a proceeding
or other matter that concerns primarily the income interest; and

      (4) recurring premiums on insurance covering the loss of a principal
asset or the loss of income from or use of the asset.

      Sec.  26. (a) A trustee shall make the following disbursements from
principal:

      (1) The remaining one-half of the disbursements described in sub-
sections (1) and (2) of section 25 and amendments thereto;

      (2) all of the trustee's compensation calculated on principal as a fee
for acceptance, distribution, or termination, and disbursements made to
prepare property for sale;

      (3) payments on the principal of a trust debt;

      (4) expenses of a proceeding that concerns primarily principal, in-
cluding a proceeding to construe the trust or to protect the trust or its
property;

      (5) premiums paid on a policy of insurance not described in subsec-
tion (4) of section 25 and amendments thereto of which the trust is the
owner and beneficiary;

      (6) estate, inheritance, and other transfer taxes, including penalties,
apportioned to the trust; and

      (7) disbursements related to environmental matters, including rec-
lamation, assessing environmental conditions, remedying and removing
environmental contamination, monitoring remedial activities and the re-
lease of substances, preventing future releases of substances, collecting
amounts from persons liable or potentially liable for the costs of those
activities, penalties imposed under environmental laws or regulations and
other payments made to comply with those laws or regulations, statutory
or common law claims by third parties, and defending claims based on
environmental matters.

      (b) If a principal asset is encumbered with an obligation that requires
income from that asset to be paid directly to the creditor, the trustee shall
transfer from principal to income an amount equal to the income paid to
the creditor in reduction of the principal balance of the obligation.

      Sec.  27. (a) As used in this section, ``depreciation'' means a reduction
in value due to wear, tear, decay, corrosion, or gradual obsolescence of a
fixed asset having a useful life of more than one year.

      (b) A trustee may transfer to principal a reasonable amount of the
net cash receipts from a principal asset that is subject to depreciation,
but may not transfer any amount for depreciation:

      (1) Of that portion of real property used or available for use by a
beneficiary as a residence or of tangible personal property held or made
available for the personal use or enjoyment of a beneficiary;

      (2) during the administration of a decedent's estate; or

      (3) under this section if the trustee is accounting under section 12
for the business or activity in which the asset is used.

      (c) An amount transferred to principal need not be held as a separate
fund.

      Sec.  28. (a) If a trustee makes or expects to make a principal dis-
bursement described in this section, the trustee may transfer an appro-
priate amount from income to principal in one or more accounting per-
iods to reimburse principal or to provide a reserve for future principal
disbursements.

      (b) Principal disbursements to which subsection (a) applies include
the following, but only to the extent that the trustee has not been and
does not expect to be reimbursed by a third party:

      (1) An amount chargeable to income but paid from principal because
it is unusually large, including extraordinary repairs;

      (2) a capital improvement to a principal asset, whether in the form
of changes to an existing asset or the construction of a new asset, including
special assessments;

      (3) disbursements made to prepare property for rental, including
tenant allowances, leasehold improvements, and broker's commissions;

      (4) periodic payments on an obligation secured by a principal asset
to the extent that the amount transferred from income to principal for
depreciation is less than the periodic payments; and

      (5) disbursements described in subsection (a)(7) of section 26 and
amendments thereto.

      (c) If the asset whose ownership gives rise to the disbursements
becomes subject to a successive income interest after an income interest
ends, a trustee may continue to transfer amounts from income to principal
as provided in subsection (a).

      Sec.  29. (a) A tax required to be paid by a trustee based on receipts
allocated to income must be paid from income.

      (b) A tax required to be paid by a trustee based on receipts allocated
to principal must be paid from principal, even if the tax is called an income
tax by the taxing authority.

      (c) A tax required to be paid by a trustee on the trust's share of an
entity's taxable income must be paid proportionately:

      (1) From income to the extent that receipts from the entity are al-
located to income; and

      (2) from principal to the extent that:

      (A) Receipts from the entity are allocated to principal; and

      (B) the trust's share of the entity's taxable income exceeds the total
receipts described in subsections (1) and (2)(A).

      (d) For purposes of this section, receipts allocated to principal or
income must be reduced by the amount distributed to a beneficiary from
principal or income for which the trust receives a deduction in calculating
the tax.

      Sec.  30. (a) A fiduciary may make adjustments between principal and
income to offset the shifting of economic interests or tax benefits between
income beneficiaries and remainder beneficiaries which arise from:

      (1) Elections and decisions, other than those described in subsection
(b), that the fiduciary makes from time to time regarding tax matters;

      (2) an income tax or any other tax that is imposed upon the fiduciary
or a beneficiary as a result of a transaction involving or a distribution from
the estate or trust; or

      (3) the ownership by an estate or trust of an interest in an entity
whose taxable income, whether or not distributed, is includable in the
taxable income of the estate, trust, or a beneficiary.

      (b) If the amount of an estate tax marital deduction or charitable
contribution deduction is reduced because a fiduciary deducts an amount
paid from principal for income tax purposes instead of deducting it for
estate tax purposes, and as a result estate taxes paid from principal are
increased and income taxes paid by an estate, trust, or beneficiary are
decreased, each estate, trust, or beneficiary that benefits from the de-
crease in income tax shall reimburse the principal from which the increase
in estate tax is paid. The total reimbursement must equal the increase in
the estate tax to the extent that the principal used to pay the increase
would have qualified for a marital deduction or charitable contribution
deduction but for the payment. The proportionate share of the reim-
bursement for each estate, trust, or beneficiary whose income taxes are
reduced must be the same as its proportionate share of the total decrease
in income tax. An estate or trust shall reimburse principal from income.

      Sec.  31. Except as expressly provided in a will or terms of the trust
or this act, this act applies to every trust or decendent's estate existing on
the effective date of this act.

      Sec.  32.  In applying and construing this uniform act, consideration
must be given to the need to promote uniformity of the law with respect
to its subject matter among states that enact it.

      Sec.  33. If any provision of this act or its application to any person
or circumstance is held invalid, the invalidity does not affect other pro-
visions 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.

 Sec.  34. K.S.A. 58-901, 58-902, 58-903, 58-904, 58-904a, 58-905, 58-
906, 58-907, 58-909, 58-909a, 58-910, 58-911, 58-912, 58-914, 58-915,
58-916 and 58-917 are hereby repealed.
  Sec.  35. This act shall take effect and be in force from and after its
publication in the statute book.

Approved April 5, 2000.
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