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(a) For purposes of this section, "payment" means either of the following: (1) A payment that a trustee may receive over a fixed number of years or during the life of an individual because of services rendered or property transferred to the payer in exchange for future payments. (2) A payment that a trustee may receive pursuant to an income tax advantaged contractual, custodial, or trust arrangement, including, but not limited to, a private or commercial annuity, a pension or profit-sharing plan, an individual retirement account, Roth IRA, or any similar arrangement, regardless of whether the payment is made from an "entity" as defined in Section 16350. (b) To the extent that a payment is characterized by the payer 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 balance of the payment and any other payment received in the same accounting 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, the trustee shall allocate the payment as follows: (1) If the payment is received from an individual account, the trustee shall allocate the payment to income to the extent that the payment, when combined with all other payments received from the individual account during that same accounting period, which may be referred to as the "cumulative amount received," does not exceed 4 percent of the account value, which may be referred to as the "income allocation amount." To the extent that any portion of a payment causes the cumulative amount received to exceed the income allocation amount, that portion, together with all further amounts received from the individual account during that accounting period, shall be allocated to principal. (A) As used in this section, the term "individual account" means an individual account plan as defined in the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1001 et seq.), as amended from time to time, and any other plan, account, or arrangement whose terms enable the trustee to identify the fair market value of the participant's or owner's interest therein. (B) As used in this section, the term "account value" means the fair market value of the individual account as of the later of the last day of the trust's preceding accounting period and the date when the right to receive payments from the individual account first became subject to the trust. (C) If an accounts (sic) period consists of less than 365 days, the income allocation amount shall be prorated on a daily basis. (2) If the payment is received from a plan, account or other arrangement that is not an individual account, the trustee shall allocate the payment as follows: (A) If all or part of the payment is required to be made to the trustee, the 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. (B) If no part of a payment is required to be made to the trustee or the payment received is the entire amount to which the trustee is entitled, the trustee shall allocate the entire payment to principal. (C) 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 by this section, the trustee shall allocate to income the additional amount necessary to obtain the marital deduction.
Liquidating Assets: Patents, Copyrights, Royalties, etc.
(a) 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 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 16361, resources subject to Section 16363, timber subject to Section 16364, an activity subject to Section 16366, an asset subject to Section 16367, or any asset for which the trustee establishes a reserve for depreciation under Section 16372. (b) A trustee shall allocate to income 10 percent of the receipts from a liquidating asset and the balance to principal.
Mineral Interests, Water, Other Natural Resources
(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 a nominal bonus, nominal delay rental, or nominal annual rent on a lease, a receipt shall be allocated to income. (2) If received from a production payment, a receipt shall be allocated to income if and to the extent that the agreement creating the production payment provides a factor for interest or its equivalent. The balance shall 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 shall be allocated to principal and the balance to income. (4) If an amount is received from a working interest or any other interest in mineral or other natural resources not described in paragraph (1), (2), or (3), 90 percent of the net amount received shall be allocated to principal and the balance to income. (b) An amount received on account of an interest in water that is renewable shall be allocated to income. If the water is not renewable, 90 percent of the amount shall be allocated to principal and the balance to income. (c) This chapter applies whether or not a decedent or donor was extracting minerals, water, or other natural resources before the interest became subject to the trust.
Timber Harvest
(a) To the extent that a trustee accounts for receipts from the sale of timber and related products pursuant to this section, the trustee shall allocate the net receipts as follows: (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 interest. (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 paragraphs (1) and (2). (4) To principal to the extent that advance payments, bonuses, and other payments are not allocated pursuant to paragraph (1), (2), or (3). (b) In determining net receipts to be allocated under subdivision (a), a trustee shall deduct and transfer to principal a reasonable amount for depletion. (c) This chapter applies whether or not a decedent or transferor was harvesting timber from the property before it became subject to the trust.
Additional Requirements: Marital Deduction Trusts
(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 16336 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 income or convert it into productive property or exercise the power under subdivision (a) of Section 16336 within a reasonable time. The trustee may decide which action or combination of actions to take. (b) In cases not governed by subdivision (a), proceeds from the sale or other disposition of a trust asset are principal without regard to the amount of income the asset produces during any accounting period.
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