00 HOUSE CS FOR SENATE BILL NO. 87(JUD) 01 "An Act relating to principal and income in the administration of trusts and decedents' 02 estates and the mental health trust fund; adopting a version of the Uniform Principal 03 and Income Act; and providing for an effective date." 04 BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF ALASKA: 05  * Section 1. AS 13.36.335 is amended to read: 06 Sec. 13.36.335. Application of special distribution provisions. The asset 07 distribution provisions of AS 13.16.540 - 13.16.545 [AS 13.16.540 - 13.16.550], 08 13.16.560, and the provisions of AS 13.38 [AS 13.38.030(a)] apply to the 09 administration of a revocable trust following the death of the settlor of the trust, unless 10 the terms of the trust indicate a different intention. 11  * Sec. 2. AS 13.38 is amended by adding new sections to read:  12 Article 1. Preliminary Provisions; Power to Adjust.  13 Sec. 13.38.200. Fiduciary duties; general principles. (a) In allocating 14 receipts and disbursements to or between principal and income and with respect to any 01 matter within the scope of this chapter, a fiduciary 02 (1) shall administer a trust or estate in accordance with the governing 03 instrument, even if there is a different provision in this chapter; 04 (2) may administer a trust or estate by the exercise of a discretionary 05 power of administration regarding a matter within the scope of this chapter given to 06 the fiduciary by the governing instrument, even if the exercise of the power produces a 07 result different from a result required or permitted by this chapter; an inference that 08 the fiduciary has improperly exercised the discretionary power does not arise from the 09 fact that the fiduciary has made an allocation contrary to a provision of this chapter; 10 (3) shall administer a trust or estate in accordance with this chapter if 11 the governing instrument does not contain a different provision or does not give the 12 fiduciary a discretionary power of administration regarding a matter within the scope 13 of this chapter; and 14 (4) shall add a receipt or charge a disbursement to principal to the 15 extent that the governing instrument and this chapter do not provide a rule for 16 allocating the receipt or disbursement to or between principal and income. 17 (b) In exercising a discretionary power of administration regarding a matter 18 within the scope of this chapter, whether granted by the governing instrument or this 19 chapter, including AS 13.38.210 and 13.38.300 - 13.38.410, a fiduciary shall 20 administer a trust or estate impartially based on what is fair and reasonable to all of the 21 beneficiaries, except to the extent that the governing instrument clearly manifests an 22 intention that the fiduciary shall or may favor one or more of the beneficiaries. A 23 determination in accordance with this chapter is presumed to be fair and reasonable to 24 all of the beneficiaries. 25 Sec. 13.38.210. Trustee's power to adjust. (a) Subject to (c) and (f) of this 26 section, a trustee may adjust between principal and income by allocating an amount of 27 income to principal or an amount of principal to income to the extent the trustee 28 considers appropriate if 29 (1) the governing instrument describes what may or shall be distributed 30 to a beneficiary by referring to the trust's income; 31 (2) the trustee determines, after applying the rules in AS 13.38.200(a), 01 that the trustee is unable to comply with AS 13.38.200(b); and 02 (3) the trustee determines to follow an investment policy seeking a 03 total return for the investments held by the trust, whether the return is to be derived 04 from 05 (A) appreciation of capital; 06 (B) earnings and distributions from capital; or 07 (C) both (A) and (B) of this paragraph. 08 (b) In deciding whether and to what extent to exercise the power conferred by 09 (a) of this section, a trustee may consider, among other things, 10 (1) the size of the trust; 11 (2) the nature and estimated duration of the trust; 12 (3) the liquidity and distribution requirements of the trust; 13 (4) the need for regular distributions and preservation and appreciation 14 of capital; 15 (5) the expected tax consequences of an adjustment; 16 (6) the net amount allocated to income under the other sections of this 17 chapter and the increase or decrease in the value of the principal assets, which the 18 trustee may estimate as to assets for which market values are not readily available; 19 (7) the assets held in the trust; the extent to which the assets consist of 20 financial assets, interests in closely held enterprises, tangible and intangible personal 21 property, or real property; the extent to which an asset is used by a beneficiary; and 22 whether an asset was purchased by the trustee or received from the settlor or testator; 23 (8) to the extent reasonably known to the trustee, the need of the 24 beneficiaries for present and future distributions authorized or required by the 25 governing instrument; 26 (9) whether and to what extent the governing instrument gives the 27 trustee the power to invade principal or accumulate income or prohibits the trustee 28 from invading principal or accumulating income, and the extent to which the trustee 29 has exercised a power from time to time to invade principal or accumulate income; 30 (10) the intent of the settlor or testator; and 31 (11) the actual and anticipated effect of economic conditions on 01 principal and income and the effects of inflation and deflation. 02 (c) A trustee may not make an adjustment under this section if 03 (1) the adjustment would diminish the income interest in a trust that 04 requires all of the income to be paid at least annually to a spouse and for which a 05 federal estate tax or gift tax marital deduction would be allowed, in whole or in part, if 06 the trustee did not have the power to make the adjustment; the prohibition in this 07 paragraph does not apply to a trust after the trustee determines that the marital 08 deduction has not been claimed or has not been allowed; 09 (2) the adjustment would reduce the actuarial value of the income 10 interest in a trust to which a person transfers property with the intent to qualify for a 11 federal gift tax exclusion; 12 (3) the adjustment would change the amount payable to a beneficiary 13 as a fixed annuity or a fixed fraction of the value of the trust assets; 14 (4) the adjustment is from any amount that is permanently set aside for 15 charitable purposes under the governing instrument and for which a federal estate or 16 gift tax charitable deduction has been taken, unless both income and principal are 17 permanently set aside for charitable purposes under the governing instrument; 18 (5) possessing or exercising the power to make an adjustment would 19 cause an individual to be treated as the owner of all or part of the trust for federal 20 income tax purposes, and the individual would not be treated as the owner if the 21 trustee did not possess the power to make an adjustment; 22 (6) possessing or exercising the power to make an adjustment would 23 cause all or part of the trust assets to be subject to federal estate or gift tax with respect 24 to an individual, and the assets would not be subject to federal estate or gift tax with 25 respect to the individual if the trustee did not possess the power to make an 26 adjustment; 27 (7) the trustee is a beneficiary of the trust; or 28 (8) the trust has been converted to a unitrust under AS 13.38.300 - 29 13.38.410. 30 (d) If (c)(5), (6), or (7) of this section applies to a trustee and there is more 31 than one trustee, a co-trustee to whom the provision does not apply may make the 01 adjustment unless the exercise of the power by the remaining trustee or trustees is 02 prohibited by the governing instrument. 03 (e) A trustee may release the entire power conferred by (a) of this section, the 04 power to adjust from income to principal, or the power to adjust from principal to 05 income if the trustee is uncertain about whether possessing or exercising the power 06 will cause a result described in (c)(1) - (6) of this section, or if the trustee determines 07 that possessing or exercising the power will or may deprive the trust of a tax benefit or 08 impose a tax burden not described in (c) of this section. The release may be 09 permanent or for a specified period, including a period measured by the life of an 10 individual. 11 (f) A governing instrument that limits the power of a trustee to make an 12 adjustment between principal and income does not affect the application of this 13 section unless it is clear from the governing instrument that it is intended to deny the 14 trustee the power of adjustment conferred by (a) of this section. 15 Sec. 13.38.220. Judicial control of discretionary powers. (a) A court may 16 not change a fiduciary's decision to exercise or not to exercise a discretionary power 17 conferred by this chapter unless the court determines that the decision was an abuse of 18 the fiduciary's discretion. 19 (b) If a court determines that a fiduciary has abused the fiduciary's discretion 20 regarding a discretionary power conferred by this chapter, the remedy is to restore the 21 income and remainder beneficiaries to the positions they would have occupied if the 22 fiduciary had not abused the fiduciary's discretion, according to the following rules: 23 (1) to the extent that the abuse of discretion has not resulted in a 24 distribution to a beneficiary or has resulted in a distribution that is too small, the court 25 shall require the fiduciary to distribute from the trust an amount to the beneficiary that 26 the court determines will restore the beneficiary, in whole or in part, to the 27 beneficiary's appropriate position; 28 (2) to the extent that the abuse of discretion has resulted in a 29 distribution to a beneficiary that is too large, the court shall restore the beneficiaries, 30 the trust, or both, in whole or in part, to their appropriate positions by requiring the 31 fiduciary to withhold an amount from one or more future distributions to the 01 beneficiary who received the distribution that was too large or by requiring that 02 beneficiary or that beneficiary's estate to return some or all of the distribution to the 03 trust, notwithstanding a spendthrift or similar provision; 04 (3) if the abuse of discretion concerns the power to convert a trust into 05 a unitrust, the court shall require the trustee either to convert into a unitrust or to 06 reconvert from a unitrust; 07 (4) to the extent that the court is unable, after applying (1) - (3) of this 08 subsection, to restore the beneficiaries, the trust, or both to the positions they would 09 have occupied if the fiduciary had not abused the fiduciary's discretion, the court may 10 require the fiduciary to pay an appropriate amount from the fiduciary's own funds to 11 one or more of the beneficiaries, the trust, or both. 12 Article 2. Conversion to Unitrust.  13 Sec. 13.38.300. Power to convert to unitrust. Unless expressly prohibited 14 by the governing instrument, a trustee may release the power to adjust under 15 AS 13.38.210 and may convert a trust into a unitrust as described in AS 13.38.300 - 16 13.38.410 if 17 (1) the trustee determines that the conversion will enable the trustee to 18 better carry out the intent of the settlor or testator and the purposes of the trust; 19 (2) the trustee gives written notice of the trustee's intention to release 20 the power to adjust, of the trustee's intention to convert the trust into a unitrust, and of 21 how the unitrust will operate, including what initial decisions the trustee will make 22 under this section, to all the sui juris beneficiaries who 23 (A) are currently eligible to receive income from the trust; 24 (B) would be eligible, if a power of appointment were not 25 exercised, to receive income from the trust if the interest of all of the 26 beneficiaries eligible to receive income under (A) of this paragraph were to 27 terminate immediately before the giving of the notice; and 28 (C) would, if a power of appointment were not exercised, 29 receive a distribution of principal if the trust were to terminate immediately 30 before the giving of the notice; 31 (3) there are at least one sui juris beneficiary under (2)(A) of this 01 section and at least one sui juris beneficiary under (2)(B) or (C) of this section; and 02 (4) a sui juris beneficiary does not object to the conversion to a unitrust 03 in a writing delivered to the trustee within 60 days after the mailing of the notice under 04 (2) of this section. 05 Sec. 13.38.310. Judicially approved conversion. (a) A trustee may petition 06 the court to approve the conversion to a unitrust if 07 (1) a beneficiary timely objects to the conversion to a unitrust; or 08 (2) there is not a sui juris beneficiary who is eligible under 09 AS 13.38.300(2)(A), and there is not a sui juris beneficiary who is eligible under 10 AS 13.38.300(2)(B) or (C). 11 (b) A beneficiary may request a trustee to convert to a unitrust. If the trustee 12 does not convert, the beneficiary may petition the superior court to order the 13 conversion. 14 (c) The superior court shall approve the conversion or direct the requested 15 conversion if the court concludes that the conversion will enable the trustee to better 16 carry out the intent of the settlor or testator and the purposes of the trust. 17 Sec. 13.38.320. Factors to be considered. In deciding whether to exercise 18 the power conferred by AS 13.38.300, a trustee may consider, among other things, 19 (1) the size of the trust; 20 (2) the nature and estimated duration of the trust; 21 (3) the liquidity and distribution requirements of the trust; 22 (4) the need for regular distributions and preservation and appreciation 23 of capital; 24 (5) the expected tax consequences of the conversion; 25 (6) the assets held in the trust; the extent to which they consist of 26 financial assets, interests in closely held enterprises, tangible and intangible personal 27 property, or real property; and the extent to which an asset is used by a beneficiary; 28 (7) to the extent reasonably known to the trustee, the need of the 29 beneficiaries for present and future distributions authorized or required by the 30 governing instrument; 31 (8) whether and to what extent the governing instrument gives the 01 trustee the power to invade principal or accumulate income or prohibits the trustee 02 from invading principal or accumulating income and the extent to which the trustee 03 has exercised a power from time to time to invade principal or accumulate income; 04 (9) the actual and anticipated effect of economic conditions on 05 principal and income and the effects of inflation and deflation. 06 Sec. 13.38.330. Directions after conversion. (a) After a trust is converted to 07 a unitrust, the trustee shall 08 (1) follow an investment policy seeking a total return for the 09 investments held by the trust, whether the return is to be derived from 10 (A) appreciation of capital; 11 (B) earnings and distributions from capital; or 12 (C) both (A) and (B) of this paragraph; and 13 (2) make regular distributions in accordance with the governing 14 instrument construed in accordance with the provisions of this section. 15 (b) After a trust has been converted to a unitrust, "income" in the governing 16 instrument means an annual distribution equal to four percent of the net fair market 17 value, as determined annually, of the trust's assets, whether the assets would be 18 considered income or principal under other provisions of this chapter. 19 (c) After a trust has been administered as a unitrust for three years, the four 20 percent amount referred to in (b) of this section shall be averaged over the three 21 preceding years of the trust. 22 Sec. 13.38.340. Discretion of trustee regarding conversion. The trustee 23 may in the trustee's discretion, from time to time, determine 24 (1) the effective date of a conversion to a unitrust; 25 (2) the provisions for prorating a unitrust distribution for a short year 26 in which a beneficiary's right to payments commences or ceases; 27 (3) the frequency of unitrust distributions during the year; 28 (4) the effect of other payments from or contributions to the trust on 29 the trust's valuation; 30 (5) whether to value the trust's assets annually or more frequently; 31 (6) what valuation dates to use; 01 (7) how frequently to value nonliquid assets and whether to estimate 02 their value; 03 (8) whether to omit trust property occupied or possessed by a 04 beneficiary from the calculations; and 05 (9) other matters necessary for the proper functioning of the unitrust. 06 Sec. 13.38.350. Unitrust deductions and distributions. (a) Expenses that 07 would be deducted from income if the trust were not a unitrust may not be deducted 08 from the unitrust distribution. 09 (b) Unless otherwise provided by the governing instrument, a unitrust 10 distribution shall be considered to have been paid from net income as net income 11 would be determined if the trust were not a unitrust. To the extent net income is 12 insufficient, the unitrust distribution shall be considered to have been paid from net 13 realized short-term capital gains. To the extent income and net realized short-term 14 capital gains are insufficient, the unitrust distribution shall be considered to have been 15 paid from net realized long-term capital gains. To the extent income and net realized 16 short-term and long-term capital gains are insufficient, the unitrust distribution shall 17 be paid from the principal of the trust. 18 Sec. 13.38.360. Court orders regarding unitrust. The trustee or, if the 19 trustee declines to petition the court, a beneficiary may petition the court to 20 (1) select a payout percentage different than four percent; 21 (2) provide for a distribution of net income, as would be determined if 22 the trust were not a unitrust, in excess of the unitrust distribution if the distribution is 23 necessary to preserve a tax benefit; 24 (3) average the valuation of the trust's net assets over a period other 25 than three years. 26 Sec. 13.38.370. Effects of conversion. A conversion to a unitrust does not 27 affect a provision in the governing instrument directing or authorizing the trustee to 28 distribute principal or authorizing a beneficiary to withdraw a portion or all of the 29 principal. 30 Sec. 13.38.380. Prohibited conversions; exception. (a) A trustee may not 31 convert a trust into a unitrust if 01 (1) payment of the unitrust distribution would change the amount 02 payable to a beneficiary as a fixed annuity or a fixed fraction of the value of the trust 03 assets; 04 (2) the unitrust distribution would be made from an amount that is 05 permanently set aside for charitable purposes under the governing instrument and for 06 which a federal estate or gift tax deduction has been taken; 07 (3) possessing or exercising the power to convert would cause an 08 individual to be treated as the owner of all or part of the trust for federal income tax 09 purposes, and the individual would not be treated as the owner if the trustee did not 10 possess the power to convert; 11 (4) possessing or exercising the power to convert would cause all or 12 part of the trust assets to be subject to federal estate or gift tax with respect to an 13 individual, and the assets would not be subject to federal estate or gift tax with respect 14 to the individual if the trustee did not possess the power to convert; 15 (5) the conversion would result in the disallowance of a federal estate 16 tax or gift tax marital deduction that would be allowed if the trustee did not have the 17 power to convert; or 18 (6) the trustee is a beneficiary of the trust. 19 (b) Notwithstanding (a)(2) of this section, a trustee may elect to convert a trust 20 to a unitrust if both the income and principal of the trust being converted to a unitrust 21 are permanently set aside for charitable purposes and if the provisions of 22 AS 13.38.440 - 13.38.490 are followed. 23 Sec. 13.38.390. Permissible conversion where otherwise prohibited. (a) If 24 AS 13.38.380(a)(3), (4), or (6) applies to a trustee and there is more than one trustee, a 25 co-trustee to whom the provision does not apply may convert the trust, unless the 26 exercise of the power by the remaining trustee is prohibited by the governing 27 instrument. 28 (b) If AS 13.38.380(a)(3), (4), or (6) applies to all the trustees, the trustees 29 may petition the court to direct a conversion. 30 Sec. 13.38.400. Reconversion from a unitrust. A trustee may reconvert a 31 trust that has been converted into a unitrust under AS 13.38.300 by following the same 01 procedures provided in AS 13.38.300 - 13.38.410 for converting a trust into a unitrust. 02 If a unitrust is reconverted under this section, the trustee's power to adjust under 03 AS 13.38.210 applies to the trustee after the reconversion. 04 Sec. 13.38.410. Release of power to convert to unitrust. (a) A trustee may 05 release the power conferred by AS 13.38.300 to convert to a unitrust if the trustee 06 (1) is uncertain about whether possessing or exercising the power will 07 cause a result described in AS 13.38.380(a)(3), (4), or (5); or 08 (2) determines that possessing or exercising the power will or may 09 deprive the trust of a tax benefit or impose a tax burden not described in 10 AS 13.38.380. 11 (b) The release of a power under (a) of this section may be permanent or for a 12 specified period, including a period measured by the life of an individual. 13 Article 3. Charitable Trust Election. 14 Sec. 13.38.440. Charitable trust election. The trustee of a trust held 15 exclusively for charitable purposes may elect to be governed by AS 13.38.440 - 16 13.38.490 unless the governing instrument expressly provides that the election 17 provided by AS 13.38.440 - 13.38.490 is not available. 18 Sec. 13.38.450. Eligibility for charitable trust election. To make an election 19 under AS 13.38.440 - 13.38.490, the trustee shall adopt and follow an investment 20 policy seeking a total return for the investments held by the trust, whether the return is 21 to be derived from appreciation of capital or earnings and distributions with respect to 22 capital or both. The policy constituting the election must be in writing, must be 23 maintained as part of the permanent records of the trust, and must recite that it 24 constitutes an election to be governed by AS 13.38.440 - 13.38.490. 25 Sec. 13.38.460. Selection of percentage after charitable trust election. (a)  26 After a trustee has elected under AS 13.38.440 for the trust to be governed by 27 AS 13.38.440 - 13.38.490, the trustee shall, in a writing maintained as part of the 28 permanent records of the trust, select the percentage of the value of the trust that will 29 be considered income and determine that it is consistent with the long-term 30 preservation of the real value of the principal of the trust, but the percentage may not 31 be less than two percent or more than seven percent each year of the principal value of 01 the trust. The trustee may elect to change a percentage previously selected if the 02 trustee determines that the new percentage is consistent with the long-term 03 preservation of the real value of the principal of the trust, but may not change the 04 percentage more frequently than once every 10 years. 05 (b) For a charitable trust required by 26 U.S.C. 4942 (Internal Revenue Code) 06 to distribute a higher amount than the percentage selected under (a) of this section, the 07 amount required by 26 U.S.C. 4942 (Internal Revenue Code) controls over the 08 percentage selected. 09 Sec. 13.38.470. Revocation of charitable trust election. The trustee may 10 revoke an election to be governed by AS 13.38.440 - 13.38.490 if the revocation is 11 made as part of an alternative investment policy seeking the long-term preservation of 12 the real value of the principal of the trust. The revocation and alternative investment 13 policy must be in writing and maintained as part of the permanent records of the trust. 14 Sec. 13.38.480. Value determination. For the purposes of applying 15 AS 13.38.440 - 13.38.490, the value of the trust is the fair market value of the cash 16 and other assets held by the trustee with respect to the trust, whether these assets 17 would be considered income or principal under the other provisions of this chapter, 18 determined at least annually. In the discretion of the trustee, the value of the trust may 19 be averaged over a period of three or more preceding years when the trust has been 20 administered as a unitrust under this section for at least three years. 21 Sec. 13.38.490. Definitions. In AS 13.38.440 - 13.38.490, except as 22 otherwise expressly stated in AS 13.38.440 - 13.38.490, 23 (1) "income" means the percentage of the value of the trust computed 24 under AS 13.38.440 - 13.38.490; 25 (2) "principal" means all assets other than those identified as income in 26 (1) of this section that are held by the trustee with respect to the trust. 27 Article 4. Decedent's Estate or Terminating Income Interest.  28 Sec. 13.38.500. Determination and distribution of net income. After a 29 decedent dies in the case of an estate, or after an income interest in a trust ends, a 30 fiduciary 31 (1) of an estate or of a terminating income interest shall determine the 01 amount of net income and net principal receipts received from property specifically 02 given to a beneficiary under (5) of this section and the provisions applicable to trustees 03 in AS 13.38.550 - 13.38.860; the fiduciary shall distribute the net income and net 04 principal receipts to the beneficiary who is to receive the specific property; 05 (2) shall distribute to a beneficiary or trust that receives a pecuniary 06 amount a share of net income equal to the beneficiary's or trust's fractional interest in 07 undistributed principal assets as determined under AS 13.38.510; the share accrues 08 from the date of death of a decedent, in the case of an estate, or the date of death of a 09 settlor or specified event, in the case of a revocable or irrevocable trust; 10 (3) shall determine the remaining net income of a decedent's estate or a 11 terminating income interest under the provisions applicable to trustees in 12 AS 13.38.550 - 13.38.860 and by 13 (A) including in net income all income from property used to 14 discharge liabilities; and 15 (B) paying from principal the debts, the funeral expenses, the 16 costs of disposition of remains, the family allowance under AS 13.12.404, fees 17 of personal representatives and their attorneys and accountants, and the taxes, 18 related interest, and penalties described in AS 13.38.810(a)(7) that are 19 apportioned to the estate or terminating income interest by the governing 20 instrument or applicable law; 21 (4) shall distribute the net income remaining after distributions 22 required by (2) of this section in the manner described in AS 13.38.510 to all other 23 beneficiaries; 24 (5) may not reduce principal or income receipts from property 25 described in (1) of this section because of a payment described in AS 13.38.710 or 26 13.38.720 to the extent that the governing instrument or applicable law requires the 27 fiduciary to make the payment from assets other than the property or to the extent that 28 the fiduciary recovers or expects to recover the payment from a third party; the net 29 income and principal receipts from the property are determined by 30 (A) including all of the amounts the fiduciary receives or pays 31 with respect to the property, whether those amounts accrued or became due 01 before, on, or after the date of a decedent's death or an income interest's 02 terminating event; and 03 (B) making a reasonable provision for amounts that the 04 fiduciary believes the estate or terminating income interest may become 05 obligated to pay after the property is distributed. 06 Sec. 13.38.510. Distribution to residuary and remainder beneficiaries. (a) 07 Each beneficiary described in AS 13.38.500(4) is entitled to receive a portion of the 08 net income equal to the beneficiary's fractional interest in undistributed principal 09 assets, using values as of the distribution date. If a fiduciary makes more than one 10 distribution of assets to beneficiaries to whom this section applies, each beneficiary, 11 including one who does not receive part of the distribution, is entitled, as of each 12 distribution date, to the net income the fiduciary has received after the date of death or 13 terminating event or earlier distribution date but has not distributed as of the current 14 distribution date. 15 (b) In determining a beneficiary's share of net income, the following rules 16 apply: 17 (1) the beneficiary is entitled to receive a portion of the net income 18 equal to the beneficiary's fractional interest in the undistributed principal assets 19 immediately before the distribution date, including assets that later may be sold or 20 applied to meet principal obligations; 21 (2) the beneficiary's fractional interest in the undistributed principal 22 assets shall be calculated without regard to property specifically given to a beneficiary 23 and property required to pay pecuniary amounts; 24 (3) the beneficiary's fractional interest in the undistributed principal 25 assets shall be calculated on the basis of the aggregate value of those assets as of the 26 distribution date without reducing the value by any unpaid principal obligation. 27 (c) If a fiduciary does not distribute all of the collected but undistributed net 28 income to each person as of a distribution date, the fiduciary shall maintain 29 appropriate records showing the interest of each beneficiary in that net income. 30 (d) To the extent that the fiduciary considers it appropriate, if this section 31 applies to the income from an asset, the fiduciary may apply the rules in this section to 01 net gain or loss from the disposition of a principal asset realized after the date of death 02 or terminating event or an earlier distribution date. 03 (e) For the purposes of this section, the distribution date may be the date as of 04 which the fiduciary calculates the value of the assets if that date is reasonably near the 05 date on which assets are actually distributed. 06 Article 5. Apportionment at Beginning and End of Income Interest. 07 Sec. 13.38.550. When right to income begins and ends. (a) An income 08 beneficiary is entitled to net income from the date on which the income interest 09 begins. An income interest begins 10 (1) on the date specified in the governing instrument; or 11 (2) if a date is not specified, on the date an asset becomes subject to a 12 trust or successive income interest. 13 (b) An asset becomes subject to a trust 14 (1) on the date it is transferred to the trust, in the case of an asset that is 15 transferred to a trust during the transferor's life; 16 (2) on the date of a testator's death, in the case of an asset that becomes 17 subject to a trust by reason of a will, even if there is an intervening period of 18 administration of the testator's estate; or 19 (3) on the date of an individual's death, in the case of an asset that is 20 transferred to a fiduciary by a third party because of the individual's death. 21 (c) An asset becomes subject to a successive income interest on the day after 22 the preceding income interest ends, as determined under (d) of this section, even if 23 there is an intervening period of administration to wind up the preceding income 24 interest. 25 (d) An income interest ends on 26 (1) the day before an income beneficiary dies or another terminating 27 event occurs; or 28 (2) the last day of a period during which there is not a beneficiary to 29 whom a trustee may distribute income. 30 Sec. 13.38.560. Apportionment of receipts and disbursements when  31 decedent dies or income interest begins. (a) Unless AS 13.38.500(1) applies, a 01 trustee shall allocate an income receipt or disbursement to principal if its due date 02 occurs before 03 (1) a decedent dies, in the case of an estate; or 04 (2) an income interest begins, in the case of a trust or successive 05 income interest. 06 (b) A trustee shall allocate an income receipt or disbursement to income if its 07 due date occurs on or after the date on which a decedent dies or an income interest 08 begins and its due date is periodic. An income receipt or disbursement shall be treated 09 as accruing from day to day if its due date is not periodic or it does not have a due 10 date. The portion of the receipt or disbursement accruing before the date on which a 11 decedent dies or an income interest begins shall be allocated to principal, and the 12 balance shall be allocated to income. 13 (c) An item of income or an obligation is due on the date the payor is required 14 to make a payment. If a payment date is not stated, there is not a due date for the 15 purposes of this chapter. Distributions to shareholders or other owners from an entity 16 to which AS 13.38.600 applies are considered to be due on the date fixed by the entity 17 for determining who is entitled to receive the distribution or, if a date is not fixed, on 18 the declaration date for the distribution. A due date is periodic for receipts or 19 disbursements that must be paid at regular intervals under a lease or an obligation to 20 pay interest or if an entity customarily makes distributions at regular intervals. 21 Sec. 13.38.570. Apportionment when income interest ends. (a) When a 22 mandatory income interest ends, the trustee shall pay to a mandatory income 23 beneficiary who survives that date, or the estate of a deceased mandatory income 24 beneficiary whose death causes the interest to end, the beneficiary's share of the 25 undistributed income that is not disposed of under the governing instrument unless the 26 beneficiary has an unqualified power to revoke more than five percent of the trust 27 immediately before the income interest ends. In the case of the beneficiary who has an 28 unqualified power to revoke more than five percent of the trust immediately before the 29 income interest ends, the undistributed income from the portion of the trust that may 30 be revoked shall be added to principal. 31 (b) When a trustee's obligation to pay a fixed annuity or a fixed fraction of the 01 value of the trust's assets ends, the trustee shall prorate the final payment if and to the 02 extent required by applicable law to accomplish a purpose of the trust or its settlor or 03 testator relating to income, gift, estate, or other tax requirements. 04 (c) In this section, "undistributed income" means net income received before 05 the date on which an income interest ends, but does not include an item of income or 06 expense that is due or accrued or net income that has been added or is required to be 07 added to principal under the governing instrument. 08 Article 6. Allocation of Receipts during Administration of Trust.  09 Sec. 13.38.600. Character of receipts. (a) Except as otherwise provided in 10 this section, a trustee shall allocate to income money received from an entity, 11 including reinvested cash dividends. 12 (b) A trustee shall allocate the following receipts from an entity to principal: 13 (1) property other than money excluding reinvested cash dividends; 14 (2) money received in one distribution or a series of related 15 distributions in exchange for part or all of a trust's interest in the entity; 16 (3) money received in total or partial liquidation of the entity; 17 (4) money received from an entity that is a regulated investment 18 company or a real estate investment trust if the money distributed is a short-term or 19 long-term capital gain dividend for federal income tax purposes. 20 (c) Money is received in partial liquidation 21 (1) to the extent that the entity, at or near the time of a distribution, 22 indicates that it is a distribution in partial liquidation; or 23 (2) if the total amount of money and property received in a distribution 24 or series of related distributions is greater than 20 percent of the entity's gross assets, 25 as shown by the entity's year-end financial statements immediately preceding the 26 initial receipt. 27 (d) Money is not received in partial liquidation, and it may not be taken into 28 account under (c)(2) of this section, to the extent that it does not exceed the amount of 29 income tax that a trustee or beneficiary must pay on taxable income of the entity that 30 distributes the money. 31 (e) A trustee may rely upon a statement made by an entity about the source or 01 character of a distribution if the statement is made at or near the time of distribution by 02 the entity's board of directors or other person or group of persons authorized to 03 exercise powers to pay money or transfer property comparable to those of a 04 corporation's board of directors. 05 (f) In this section, "entity" means a corporation, partnership, limited liability 06 company, regulated investment company, real estate investment trust, common trust 07 fund, or another organization in which a trustee has an interest, but does not include 08 (1) a trust or estate to which AS 13.38.610 applies; 09 (2) a business or activity to which AS 13.38.620 applies; 10 (3) a payment to which AS 13.38.690 applies; or 11 (4) an asset-backed security to which AS 13.38.750 applies. 12 Sec. 13.38.610. Distribution from trust or estate. (a) A trustee shall 13 allocate to income an amount received as a distribution of income from a trust or an 14 estate in which the trust has an interest other than a purchased interest. 15 (b) A trustee shall allocate to principal an amount received as a distribution of 16 principal from a trust or estate in which the trust has an interest other than a purchased 17 interest. 18 (c) If a trustee purchases an interest in a trust that is an investment entity, or a 19 decedent or donor transfers an interest in a trust that is an investment entity to a 20 trustee, AS 13.38.600 or 13.38.750 applies to a receipt from the trust. 21 Sec. 13.38.620. Business and other activities conducted by trustee. (a) If a 22 trustee that conducts a business or other activity determines that it is in the best 23 interest of all the beneficiaries to account separately for the business or other activity 24 instead of accounting for it as part of the trust's general accounting records, the trustee 25 may maintain separate accounting records for the transactions of the business or other 26 activity, whether or not the assets of the business or other activity are segregated from 27 other trust assets. 28 (b) A trustee who accounts separately for a business or other activity may 29 determine the extent to which 30 (1) its net cash receipts are retained for working capital, the acquisition 31 or replacement of fixed assets, and other reasonably foreseeable needs of the business 01 or activity; and 02 (2) the remaining net cash receipts are accounted for as principal or 03 income in the trust's general accounting records. 04 (c) If a trustee sells assets of the business or other activity, other than in the 05 ordinary course of the business or activity, the trustee shall account for the net amount 06 received as principal in the trust's general accounting records to the extent the trustee 07 determines that the amount received is not required any longer in the conduct of the 08 business. 09 (d) Activities for which a trustee may maintain separate accounting records 10 include 11 (1) retail, manufacturing, service, and other traditional business 12 activities; 13 (2) farming; 14 (3) raising and selling livestock and other animals; 15 (4) management of rental properties; 16 (5) extraction of minerals and other natural resources; 17 (6) timber operations; and 18 (7) activities to which AS 13.38.740 applies. 19 Sec. 13.38.630. Principal receipts. A trustee shall allocate to principal any of 20 the following: 21 (1) to the extent not allocated to income under this chapter, assets 22 received from 23 (A) a transferor during the transferor's lifetime; 24 (B) a decedent's estate; 25 (C) a trust with a terminating income interest; or 26 (D) a payor under a contract naming the trust or its trustee as 27 beneficiary; 28 (2) money or other property received from a principal asset's sale, 29 exchange, liquidation, or change in form, including realized profit subject to 30 AS 13.38.600 -13.38.750; 31 (3) amounts recovered from third parties to reimburse the trust because 01 of disbursements described in AS 13.38.810(a)(8) or for other reasons, to the extent 02 not based on the loss of income, except that a separate award made for the loss of 03 income with respect to an accounting period during which a current income 04 beneficiary had a mandatory income interest is income; 05 (4) net income received in an accounting period during which there is 06 not a beneficiary to whom a trustee may or must distribute income; 07 (5) other receipts as provided in AS 13.38.680 - 13.38.750. 08 Sec. 13.38.640. Rental property. (a) To the extent that a trustee accounts for 09 receipts from rental property under this section, the trustee shall allocate an amount 10 received as rent of real or personal property to income, including an amount received 11 for cancellation or renewal of a lease. 12 (b) An amount received as a refundable deposit, including a security deposit 13 or a deposit that is to be applied as rent for future periods, 14 (1) shall be added to principal; 15 (2) shall be held subject to the terms of the lease; and 16 (3) is not available for distribution to a beneficiary until the trustee's 17 contractual obligations have been satisfied with respect to that amount. 18 Sec. 13.38.650. Obligation to pay money. (a) An amount received as 19 interest, whether determined at a fixed, variable, or floating rate, on an obligation to 20 pay money to the trustee, including an amount received as consideration for prepaying 21 principal, shall be allocated to income without any provision for amortization of 22 premium. 23 (b) A trustee shall allocate to principal an amount received from the sale, 24 redemption, or other disposition of an obligation to pay money to the trustee more than 25 one year after it is purchased or acquired by the trustee, including an obligation if the 26 purchase price or value of the obligation when it is acquired is less than its value at 27 maturity. If the obligation matures within one year after it is purchased or acquired by 28 the trustee, an amount received in excess of its purchase price or its value when 29 acquired by the trust shall be allocated to income. 30 (c) This section does not apply to an obligation to which AS 13.38.690, 31 13.38.700, 13.38.710, 13.38.720, 13.38.730, 13.38.740, or 13.38.750 applies. 01 Sec. 13.38.660. Insurance policies and similar contracts. (a) Except as 02 otherwise provided in (b) or (c) of this section, a trustee shall allocate to principal the 03 proceeds of a life insurance policy or other contract in which the trust or its trustee is 04 named as beneficiary, including a contract that insures the trust or its trustee against 05 loss for damage to, destruction of, or loss of title to a trust asset. If the premiums on 06 the policy or contract are paid from income, the trustee shall allocate dividends on the 07 policy or contract to income. If the premiums on the policy or contract are paid from 08 principal, the trustee shall allocate dividends on the policy or contract to principal. 09 (b) Except as provided in (c) of this section, a trustee shall allocate to income 10 proceeds of a contract that insures the trustee against 11 (1) loss of occupancy or other use by an income beneficiary; 12 (2) loss of income; or 13 (3) subject to AS 13.38.620, loss of profits from a business. 14 (c) This section does not apply to a contract to which AS 13.38.690 applies. 15 Sec. 13.38.670. Special rules for charitable remainder unitrusts. 16 Notwithstanding the other provisions of this chapter, if a charitable remainder unitrust, 17 as defined in 26 U.S.C. 664 (Internal Revenue Code), owns an obligation described in 18 (2) of this section, the following rules apply, unless varied by the governing 19 instrument: 20 (1) an obligation for the payment of money is principal at its inventory 21 value except as provided in (2) of this section; the trustee may not make a provision 22 for amortization of a premium or for accumulation for discount; 23 (2) except to the extent otherwise provided in the governing 24 instrument, an increase in the value of the following above inventory value is 25 distributable as income: 26 (A) a zero coupon bond; 27 (B) an annuity contract before annuitization; 28 (C) a life insurance contract before the death of the insured; 29 (D) an interest in a common trust fund; in this subparagraph, 30 "common trust fund" has the meaning given in 26 U.S.C. 584 (Internal 31 Revenue Code); 01 (E) an interest in a limited liability company, limited liability 02 partnership, or limited partnership; and 03 (F) another obligation for the payment of money if the money 04 is payable at a future time under a fixed, variable, or discretionary schedule of 05 appreciation and if the payment exceeds the price at which the obligation was 06 issued; 07 (3) the increase in value of the obligations described in (2) of this 08 section is distributable to the beneficiary who was the income beneficiary at the time 09 of the increase; the increase is distributable from the first cash available from the 10 principal or, if cash is not available from the principal, when cash is first available 11 from the principal due to a sale, a redemption, or another disposition; when an 12 unrealized increase is distributed as income from principal, the principal shall be 13 reimbursed when the increase is realized; 14 (4) the increase in value of an obligation described in (2) of this 15 section is not available for distribution unless the trustee receives cash on account of 16 the obligation; 17 (5) notwithstanding a provision in this section to the contrary, a 18 distribution from a partnership or limited liability company attributable to the cash 19 flow or income derived from operations regularly carried on by the partnership or 20 limited liability company is income, except to the extent otherwise provided in the 21 governing instrument. 22 Sec. 13.38.680. Insubstantial allocations not required. If a trustee 23 determines that an allocation between principal and income required by AS 13.38.690, 24 13.38.700, 13.38.710, 13.38.720, or 13.38.750 is insubstantial, the trustee may allocate 25 the entire amount to principal unless one of the circumstances described in 26 AS 13.38.210(c) applies to the allocation. This power may be exercised by a co- 27 trustee in the circumstances described in AS 13.38.210(d) and may be released for the 28 reasons and in the manner described in AS 13.38.210(e). An allocation is presumed to 29 be insubstantial if 30 (1) the amount of the allocation would increase or decrease net income 31 in an accounting period, as determined before the allocation, by less than five percent; 01 or 02 (2) the value of the asset producing the receipt for which the allocation 03 would be made is less than five percent of the total value of the trust's assets at the 04 beginning of the accounting period. 05 Sec. 13.38.690. Retirement benefits, individual retirement accounts,  06 deferred compensation, annuities, and similar payments. (a) The trustee shall 07 allocate to income the greater of the portion of a payment characterized by the payor 08 as interest or a dividend, as a remittance in place of interest or a dividend, or as 09 imputed interest for federal income tax purposes. The balance of the payment shall be 10 allocated to principal. 11 (b) If a part of a payment under a contract calling for equal installments over a 12 fixed period of time is not allocable to income under the provisions of (a) of this 13 section, the difference between the trust's acquisition value of the contract and the total 14 expected return shall be considered to be interest. The trustee shall allocate to income 15 the portion of each payment equivalent to interest on the then unpaid principal balance 16 at the rate specified in the contract or at a rate necessary to amortize the difference 17 between the expected return and the acquisition value, where that rate is readily 18 ascertainable by the trustee. 19 (c) If there is not a portion of a payment from a separate fund held exclusively 20 for the benefit of the trust that is allocable to income under (a) or (b) of this section, 21 but the internal net income of the fund determined as if the fund were a separate trust 22 subject to AS 13.38.500 - 13.38.860 is readily ascertainable by the trustee, the portion 23 of the payment equal to the then undistributed net income of the fund realized since 24 the trust acquired its interest in the fund is considered to be a distribution of income 25 and shall be allocated to the trust income account. The balance of the payment 26 described in this subsection shall be allocated to principal. 27 (d) A trustee shall allocate 10 percent of the part of the payment that is 28 required to be made during the accounting period to income and the balance to 29 principal if there is not a part of the payment that is allocable to income under (a) - (c) 30 of this section and all or part of the payment is required to be made. The trustee shall 31 allocate the entire payment to principal if a part of a payment is not required to be 01 made or the payment received is the entire amount to which the trustee is entitled. In 02 this subsection, a payment is not "required to be made" to the extent that it is made 03 because the trustee exercises a right of withdrawal. 04 (e) If, to obtain a federal estate or gift tax marital deduction for a trust, the 05 trustee must allocate more of a payment to income than provided for by this section, 06 the trustee shall allocate the additional amount necessary to obtain the marital 07 deduction to income. 08 (f) This section does not apply to payments to which AS 13.38.700 applies. 09 (g) In this section, "payment" means a payment that a trustee may receive over 10 a fixed period of time or during the life of one or more individuals because of services 11 rendered or property transferred to the payor in exchange for future payments, and 12 includes 13 (1) a payment made in money or property from the payor's general 14 assets or from a separate fund created by the payor or another person; 15 (2) a payment on or from 16 (A) an installment contract or note; 17 (B) a private or commercial annuity; 18 (C) a deferred compensation agreement; 19 (D) an employee death benefit; 20 (E) an individual retirement account; or 21 (F) a pension plan, profit-sharing plan, stock plan, bonus plan, 22 or stock-ownership plan. 23 Sec. 13.38.700. Liquidating asset. (a) A trustee shall allocate 10 percent of 24 the receipts from a liquidating asset to income and the balance to principal. 25 (b) In this section, "liquidating asset" 26 (1) means 27 (A) an asset the value of which will diminish or terminate 28 because the asset is expected to produce receipts for a period of limited 29 duration; or 30 (B) a leasehold, patent, copyright, royalty right, and right to 31 receive payments during a period of more than one year under an arrangement 01 that does not provide for the payment of interest on the unpaid balance; 02 (2) does not include 03 (A) an obligation subject to AS 13.38.670; 04 (B) a payment subject to AS 13.38.690; 05 (C) resources subject to AS 13.38.710; 06 (D) timber subject to AS 13.38.720; 07 (E) an activity subject to AS 13.38.740; 08 (F) an asset subject to AS 13.38.750; or 09 (G) an asset for which the trustee establishes a reserve for 10 depreciation under AS 13.38.830. 11 Sec. 13.38.710. Minerals, water, and other natural resources. (a) To the 12 extent that a trustee accounts for receipts from an interest in minerals or other natural 13 resources under this section, the trustee shall allocate them as follows: 14 (1) if received as nominal delay rent or nominal annual rent on a lease, 15 a receipt shall be allocated to income; 16 (2) if received from a production payment, a receipt shall be allocated 17 to income if and to the extent that the agreement creating the production payment 18 provides a factor for interest or its equivalent; the balance shall be allocated to 19 principal; 20 (3) if an amount received as a royalty, shut-in-well payment, take-or- 21 pay payment, bonus, or delay rental is more than nominal, 90 percent shall be 22 allocated to principal, and the balance shall be allocated to income; 23 (4) if an amount is received from a working interest or any other 24 interest not provided for in (1) - (3) of this subsection, 90 percent of the net amount 25 received shall be allocated to principal, and the balance shall be allocated to income. 26 (b) An amount received on account of an interest in renewable water shall be 27 allocated to income. An amount received on account of an interest in nonrenewable 28 water shall be allocated as follows: 29 (1) 90 percent of the amount shall be allocated to principal; and 30 (2) the balance shall be allocated to income. 31 (c) This chapter applies whether or not a decedent or donor was extracting 01 minerals, water, or other natural resources before the interest became subject to the 02 trust. 03 Sec. 13.38.720. Timber. (a) To the extent that a trustee accounts for receipts 04 from the sale of timber and related products under this section, the trustee shall 05 allocate the net receipts 06 (1) to income, to the extent that the amount of timber removed from 07 the land does not exceed the rate of growth of the timber during the accounting periods 08 in which a beneficiary has a mandatory income interest; 09 (2) to principal, to the extent that the amount of timber removed from 10 the land exceeds the rate of growth of the timber, or the net receipts are from the sale 11 of standing timber; 12 (3) between income and principal, by determining the amount of 13 timber removed from the land under the lease or contract and applying the rules in (1) 14 and (2) of this subsection if the net receipts are from the lease of timberland or a 15 contract to cut timber from land owned by a trust; 16 (4) to principal to the extent that advance payments, bonuses, and other 17 payments are not allocated under (1) - (3) of this subsection. 18 (b) In determining net receipts to be allocated under (a) of this section, a 19 trustee shall deduct and transfer to principal a reasonable amount for depletion. 20 (c) This chapter applies whether or not a decedent or transferor was harvesting 21 timber from the property before it became subject to the trust. 22 Sec. 13.38.730. Property not productive of income. (a) If a federal estate or 23 gift tax marital deduction is allowed for all or part of a trust whose income is required 24 to be paid to the settlor's or testator's spouse and whose assets consist substantially of 25 property that does not provide the spouse with sufficient income from or use of the 26 trust assets, and if the amounts that the trustee transfers from principal to income 27 under AS 13.38.210 and that the trustee distributes to the spouse from principal under 28 the governing instrument are insufficient to provide the spouse with the beneficial 29 enjoyment required to obtain the marital deduction, the spouse may require the trustee 30 to make property productive of income, convert property within a reasonable time, or 31 exercise the power conferred by AS 13.38.210(a). The trustee may decide which 01 action or combination of actions to take. 02 (b) In cases not governed by (a) of this section, proceeds from the sale or other 03 disposition of an asset are principal without regard to the amount of income the asset 04 produces during any accounting period. 05 Sec. 13.38.740. Derivatives and options. (a) To the extent that a trustee 06 does not account under AS 13.38.620 for transactions in derivatives, the trustee shall 07 allocate receipts from and disbursements made in connection with those transactions 08 to principal. 09 (b) If a trustee grants an option to buy property from the trust, whether or not 10 the trust owns the property when the option is granted, grants an option that permits 11 another person to sell property to the trust, or acquires an option to buy property for 12 the trust or an option to sell an asset owned by the trust, and the trustee or other owner 13 of the asset is required to deliver the asset if the option is exercised, an amount 14 received for granting the option shall be allocated to principal. An amount paid to 15 acquire the option shall be paid from principal. A gain or loss realized upon the 16 exercise of an option, including an option granted to a settlor or testator of the trust for 17 services rendered, shall be allocated to principal. 18 (c) In this section, "derivative" means a contract or financial instrument or a 19 combination of contracts and financial instruments that gives a trust the right or 20 obligation to participate in some or all changes in the price of a tangible or intangible 21 asset or group of assets, or changes in a rate, an index of prices or rates, or another 22 market indicator for an asset or a group of assets. 23 Sec. 13.38.750. Asset-backed securities. (a) If a trust receives a payment 24 from interest or other current return and from other proceeds of the collateral financial 25 assets, the trustee shall allocate the portion of the payment that the payor identifies as 26 being from interest or other current return to income, and the trustee shall allocate the 27 balance of the payment to principal. 28 (b) If a trust receives one or more payments in exchange for the trust's entire 29 interest in an asset-backed security in one accounting period, the trustee shall allocate 30 the payments to principal. If a payment is one of a series of payments that will result 31 in the liquidation of the trust's interest in the security over more than one accounting 01 period, the trustee shall allocate 10 percent of the payment to income and the balance 02 to principal. 03 (c) In this section, "asset-backed security" 04 (1) means an asset whose value is based on the right it gives the owner 05 to receive distributions from the proceeds of financial assets that provide collateral for 06 the security; 07 (2) includes an asset that gives the owner the right to receive from the 08 collateral financial assets only the interest or other current return or only the proceeds 09 other than interest or current return; 10 (3) does not include an asset to which AS 13.38.600 or 13.38.690 11 applies. 12 Article 7. Allocation of Disbursements During Administration of Trust.  13 Sec. 13.38.800. Mandatory disbursements from income. A trustee shall 14 make the following disbursements from income: 15 (1) interest, except interest on taxes described in AS 13.38.810(a)(7); 16 (2) ordinary repairs; 17 (3) real estate and other regularly recurring taxes assessed against 18 principal; 19 (4) recurring premiums on fire or other insurance covering the loss of a 20 principal asset or the loss of income from or use of the asset. 21 Sec. 13.38.810. Mandatory disbursements from principal. (a) A trustee 22 shall make the following disbursements from principal: 23 (1) extraordinary expenses incurred in connection with the 24 administration, management, or preservation of trust property and the distribution of 25 income; 26 (2) extraordinary repairs; 27 (3) compensation for legal services to the trustee; 28 (4) expenses in connection with accountings and judicial or other 29 proceedings, including proceedings to construe, modify, or reform the trust or to 30 protect the trust or its property; 31 (5) payments on the principal of a trust debt; 01 (6) premiums paid on a policy of insurance not described in 02 AS 13.38.800(4) if the trust is the owner and beneficiary; 03 (7) estate, inheritance, and other transfer taxes, including interest and 04 penalties, apportioned to the trust; 05 (8) disbursements related to environmental matters, including 06 (A) reclamation; 07 (B) assessing environmental conditions; 08 (C) remedying and removing environmental contamination; 09 (D) monitoring remedial activities and the release of 10 substances; 11 (E) preventing future releases of substances; 12 (F) collecting amounts from persons liable or potentially liable 13 for the costs of those activities; 14 (G) penalties imposed under environmental statutes or 15 regulations and other payments made to comply with those statutes or 16 regulations; 17 (H) statutory or common law claims by third parties; 18 (I) defending claims based on environmental matters. 19 (b) If a principal asset is encumbered with an obligation that requires income 20 from that asset to be paid directly to the creditor, the trustee shall transfer from 21 principal to income an amount equal to the income paid to the creditor in reduction of 22 the principal balance of the obligation. 23 Sec. 13.38.820. Discretionary allocation of disbursements. Subject to 24 AS 13.38.800 and 13.38.810, a trustee may, in the trustee's discretion, allocate to 25 income or principal or partly to each ordinary expenses incurred in connection with 26 the administration, management, or preservation of trust property and the distribution 27 of income, including the compensation of the trustee and of a person providing 28 investment advisory, custodial, or income tax return preparation services to the trustee. 29 Sec. 13.38.830. Transfers from income to principal for depreciation. (a) 30 A trustee may transfer to principal a reasonable amount of the net cash receipts from a 31 principal asset that is subject to depreciation. However, a trustee may not transfer any 01 amount for depreciation 02 (1) of that portion of real property used or available for use by a 03 beneficiary as a residence or of tangible personal property held or made available for 04 the personal use or enjoyment of a beneficiary; 05 (2) during the administration of a decedent's estate; or 06 (3) under this section if the trustee is accounting under AS 13.38.620 07 for the business or activity in which the asset is used. 08 (b) An amount transferred to principal is not required to be held as a separate 09 fund. 10 (c) In this section, "depreciation" means a reduction in value due to wear, tear, 11 decay, corrosion, or gradual obsolescence of a fixed asset having a useful life of more 12 than one year. 13 Sec. 13.38.840. Transfers from income to reimburse principal. (a) A 14 trustee may transfer an appropriate amount from income to principal in one or more 15 accounting periods to reimburse principal or to provide a reserve for future 16 disbursements if the trustee makes or expects to make a disbursement from principal 17 that is allocable to income under AS 13.38.800 or 13.38.820 and that is paid from 18 principal because it is unusually large, or is made to prepare property for rental, 19 including tenant allowances, leasehold improvements, and broker's commissions. 20 (b) If the asset whose ownership gives rise to the disbursements becomes 21 subject to a successive income interest after an income interest ends, a trustee may 22 continue to transfer amounts from income to principal as provided in (a) of this 23 section. 24 (c) This section does not apply to the extent the trustee has been or expects to 25 be reimbursed by a third party. 26 Sec. 13.38.850. Income taxes. (a) A tax required to be paid by a trustee 27 based on receipts allocated to income shall be paid from income. 28 (b) A tax required to be paid by a trustee based on receipts allocated to 29 principal shall be paid from principal, even if the tax is called an income tax by the 30 taxing authority. 31 (c) A tax required to be paid by a trustee on the trust's share of an entity's 01 taxable income shall be paid proportionately from 02 (1) income, to the extent that receipts from the entity are allocated to 03 income; and 04 (2) principal, to the extent that 05 (A) receipts from the entity are allocated to principal; and 06 (B) the trust's share of the entity's taxable income exceeds the 07 total receipts described in (1) of this subsection and (A) of this paragraph. 08 (d) For the purposes of this section, receipts allocated to principal or income 09 shall be reduced by the amount distributed to a beneficiary from principal or income 10 for which the trust receives a deduction in calculating the tax. 11 Sec. 13.38.860. Adjustments between principal and income because of  12 taxes. A trustee may make adjustments between principal and income to offset the 13 shifting of economic interests or tax benefits between income beneficiaries and 14 remainder beneficiaries that arise from 15 (1) an election or decision that the trustee makes regarding tax matters; 16 (2) an income tax or any other tax that is imposed on the trustee or a 17 beneficiary as a result of a transaction involving the trust or distribution from the trust; 18 or 19 (3) the ownership by a trust of an interest in an entity whose taxable 20 income, whether or not distributed, is includable in the taxable income of the trust or a 21 beneficiary. 22 Article 8. General Provisions.  23 Sec. 13.38.900. Not applicable to mental health trust. This chapter does not 24 apply to the trust established under the Alaska Mental Health Enabling Act of 1956, 25 P.L. 84-830, 70 Stat. 709. 26 Sec. 13.38.910. Uniformity of application and construction. In applying 27 and construing this chapter, consideration shall be given to the need to promote 28 uniformity of the law with respect to its subject matter among states that enact it. 29 Sec. 13.38.980. Definitions. In this chapter, unless the context clearly 30 indicates otherwise, 31 (1) "accounting period" means a calendar year, unless another 12- 01 month period is selected by a fiduciary, and includes a portion of a calendar year or 02 other 12-month period that begins when an income interest begins or ends when an 03 income interest ends; 04 (2) "beneficiary" includes, in the case of 05 (A) a decedent's estate, an heir, legatee, or devisee; and 06 (B) a trust, an income beneficiary and a remainder beneficiary; 07 (3) "fiduciary" means a personal representative or a trustee; 08 (4) "income" means money or property that a fiduciary receives as 09 current return from a principal asset, and includes a portion of receipts from a sale, 10 exchange, or liquidation of a principal asset, to the extent provided in AS 13.38.600 - 11 13.38.750; 12 (5) "income beneficiary" means a person to whom net income of a 13 trust is or may be payable; 14 (6) "income interest" means the right of an income beneficiary to 15 receive all or part of net income, whether the governing instrument requires it to be 16 distributed or authorizes it to be distributed in the trustee's discretion; 17 (7) "mandatory income interest" means the right of an income 18 beneficiary to receive net income that the governing instrument requires the fiduciary 19 to distribute; 20 (8) "net income" means the total receipts allocated to income during an 21 accounting period, minus disbursements made from income during the period, and 22 plus or minus transfers under this chapter to or from income during the period; 23 (9) "person" means an individual, a corporation, a business trust, an 24 estate, a trust, a partnership, a limited liability company, an association, a joint 25 venture, a government, a governmental subdivision, an agency or instrumentality, a 26 public corporation, or another legal or commercial entity; 27 (10) "principal" means property held in trust for distribution to a 28 remainder beneficiary when the trust terminates, or property held in trust in perpetuity; 29 (11) "remainder beneficiary" means a person entitled to receive 30 principal when an income interest ends; 31 (12) "sui juris beneficiary" includes 01 (A) a court-appointed guardian of an incapacitated beneficiary; 02 (B) an agent for an incompetent beneficiary; and 03 (C) a court-appointed guardian of a minor beneficiary's estate; 04 (13) "trust" includes a revocable trust, an irrevocable trust, and a legal 05 life estate arrangement; 06 (14) "trustee" includes an original, additional, or successor trustee, 07 whether or not appointed or confirmed by a court; 08 (15) "unitrust" means a trust from which a fixed percentage of the net 09 fair market value of the trust's assets, valued annually, is paid not less often than 10 annually to a beneficiary. 11 Sec. 13.38.990. Short title. This chapter may be cited as the Alaska Principal 12 and Income Act. 13  * Sec. 3. AS 37.14.031(d) is amended to read: 14 (d) The authority shall adopt regulations providing for the determination  15 of [PROVISIONS OF AS 13.38 APPLY TO DETERMINE] amounts attributable to 16 [THE] principal under (b)(2) of this section. The regulations must provide for the  17 allocation between principal and income of money received from the  18 management of mental health trust land, and the manner of allocation must be in  19 the long-term best interest of the trust and its beneficiaries. 20  * Sec. 4. AS 13.16.550; AS 13.38.010, 13.38.020, 13.38.030, 13.38.040, 13.38.050, 21 13.38.060, 13.38.070, 13.38.080, 13.38.090, 13.38.100, 13.38.110, 13.38.120, 13.38.130, and 22 13.38.140 are repealed. 23  * Sec. 5. The uncodified law of the State of Alaska is amended by adding a new section to 24 read: 25 APPLICABILITY. AS 13.38.200 - 13.38.990, enacted by sec. 2 of this Act, apply, 26 except as otherwise expressly provided in the governing instrument, and except as provided 27 by AS 13.38.900, enacted by sec. 2 of this Act, to a trust existing on or after the effective date 28 of this Act, and to the estate of a decedent who dies on or after the effective date of this Act. 29  * Sec. 6. This Act takes effect September 1, 2003.