Payment of Taxes Related to Income or Principal

National Act
Section 505
and Comments
16374
      (a) A tax required to be paid by a trustee based on receipts allocated to income shall be paid from income.
      (b) A tax required to be paid by a trustee based on receipts allocated to principal shall 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 shall be paid proportionately as follows:
           (1) From income to the extent that receipts from the entity are allocated to income.
           (2) From principal to the extent that both of the following apply:
                (A) Receipts from the entity are allocated to principal.
                (B) The trust's share of the entity's taxable income exceeds the total receipts described in paragraph (1) and subparagraph (A).
      (d) For purposes of this section, receipts allocated to principal or income shall be reduced by the amount distributed to a beneficiary from principal or income for which the trust receives a deduction in calculating the tax.

Nature of Taxable Income Distributed to Beneficiaries

16374.5
Unless otherwise provided by the governing instrument, determined by the trustee, or ordered by the court, distributions to beneficiaries shall be considered paid in the following order from the following sources:
      (a) From net taxable income other than capital gains.
      (b) From net realized short-term capital gains.
      (c) From net realized long-term capitalized gains.
      (d) From tax-exempt and other income.
      (e) From principal of the trust.

Adjustments Between Principal And Income Because Of Taxes

National Act
Section 506
and Comments
16375
      (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 that arise from any of the following:
           (1) Elections and decisions, other than those described in subdivision (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.
           (3) The ownership by a decedent's 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 a decedent' s estate, trust, or beneficiary are decreased, each estate, trust, or beneficiary that benefits from the decrease 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 reimbursement 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.