Article 5 - Allocation of Disbursements

California Probate Code — §§ 16360-16367

Sections (8)

Repealed and added by Stats. 2023, Ch. 28, Sec. 2. (SB 522) Effective January 1, 2024.

Subject to Section 16363, and except as otherwise provided in paragraph (2) or (3) of subdivision (c) of Section 16370, a fiduciary shall disburse from income all of the following:

(a)One-half of both of the following:

(1)The regular compensation of the fiduciary and any person providing investment advisory, custodial, or other services to the fiduciary, to the extent income is sufficient.

(2)An expense for an accounting, judicial, or nonjudicial proceeding, or other matter that involves both income and successive interests, to the extent income is sufficient.

(b)The

balance of the disbursements described in paragraph (1) of subdivision (a), to the extent a fiduciary that is an independent person determines that making those disbursements from income would be in the interests of the beneficiaries.

(c)Another ordinary expense incurred in connection with administration, management, or preservation of property and distribution of income, including interest, an ordinary repair, regularly recurring tax assessed against principal, and an expense of an accounting, judicial or nonjudicial proceeding, or other matter that involves primarily an income interest, to the extent income is sufficient.

(d)A premium on insurance covering loss of a principal asset or income from or use of the asset.

§ 16361

Repealed and added by Stats. 2023, Ch. 28, Sec. 2. (SB 522) Effective January 1, 2024.

(a)Subject to Section 16364, and except as otherwise provided in paragraph (2) of subdivision (c) of Section 16370, a fiduciary shall disburse from principal all of the following:

(1)The balance of the disbursements described in paragraph (1) of subdivision (a) of, and subdivision (c) of, Section 16360, after application of subdivision (b) of Section 16360.

(2)The fiduciary’s compensation calculated on principal as a fee for acceptance, distribution, or termination.

(3)A payment of an expense to prepare for or execute a sale or other disposition of property.

(4)A payment on the principal of a trust debt.

(5)A payment of an expense of an accounting, judicial or nonjudicial proceeding, or other matter that involves primarily principal, including a proceeding to construe the terms of the trust or protect property.

(6)A payment of a premium for insurance, including title insurance, not described in subdivision (d) of Section 16360, of which the fiduciary is the owner and beneficiary.

(7)A payment of an estate or inheritance tax or other tax imposed because of the death of a decedent, including penalties, apportioned to the trust.

(8)The following payments:

(A)A payment related to environmental matters, including:

(i)Reclamation.

(ii) Assessment of environmental conditions.

(iii) Remedying and removing environmental contamination.

(iv) Monitoring remedial activities and the release of substances.

(v)Preventing future releases of substances.

(vi) Collecting amounts from persons liable or potentially liable for the costs of activities described in clauses (i) to (v), inclusive.

(vii) Penalties imposed under environmental laws or regulations.

(viii) Other actions to comply with environmental laws or

regulations.

(ix) Statutory or common law claims by third parties.

(x)Defending claims based on environmental matters.

(B) A payment for a premium for insurance for matters described in subparagraph (A).

(9)Payments representing extraordinary repairs or expenses incurred in making a capital improvement to trust property, including special assessments.

(b)If a principal asset is encumbered with an obligation that requires income from the asset to be paid directly to a creditor, the fiduciary 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.

§ 16362

Repealed and added by Stats. 2023, Ch. 28, Sec. 2. (SB 522) Effective January 1, 2024.

(a)For purposes of this section, “depreciation” means a reduction in value due to wear, tear, decay, corrosion, or gradual obsolescence of a tangible asset having a useful life of more than one year.

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

(1)Of the part of real property used or available for use by a beneficiary as a residence.

(2)Of tangible personal property held or made available for the personal use or enjoyment of a beneficiary.

(3)Under this section, to the extent the fiduciary accounts under either of the following:

(A)Section 16349, for the asset.

(B)Section 16342, for the business or other activity in which the asset is used.

(c)An amount transferred to principal under this section need not be separately held.

§ 16363

Repealed and added by Stats. 2023, Ch. 28, Sec. 2. (SB 522) Effective January 1, 2024.

(a)If a fiduciary makes or expects to make an income disbursement described in subdivision (b), the fiduciary may transfer an appropriate amount from principal to income in one or more accounting periods to reimburse income.

(b)To the extent the fiduciary has not been, and does not expect to be, reimbursed by a third party, income disbursements to which subdivision (a) applies include all of the following:

(1)An amount chargeable to principal, but paid from income because principal is illiquid.

(2)A disbursement made to prepare property for sale, including improvements and commissions.

(3)A disbursement described in Section 16360.

(c)If an asset whose ownership gives rise to an income disbursement becomes subject to a successive interest after an income interest ends, the fiduciary may continue to make transfers under subdivision (a).

§ 16364

Repealed and added by Stats. 2023, Ch. 28, Sec. 2. (SB 522) Effective January 1, 2024.

(a)If a fiduciary makes or expects to make a principal disbursement described in subdivision (b), the fiduciary may transfer an appropriate amount from income to principal in one or more accounting periods to reimburse principal or provide a reserve for future principal disbursements.

(b)To the extent a fiduciary has not been, and does not expect to be, reimbursed by a third party, principal disbursements to which subdivision (a) applies include all of the following:

(1)An amount chargeable to income but paid from principal because income is not sufficient.

(2)The cost of an improvement to principal, whether a

change to an existing asset or the construction of a new asset, including a special assessment.

(3)A disbursement made to prepare property for rental, including tenant allowances, leasehold improvements, and commissions.

(4)A periodic payment on an obligation secured by a principal asset, to the extent the amount transferred from income to principal for depreciation is less than the periodic payment.

(5)A disbursement described in subdivision (a) of Section 16361.

(c)If an asset whose ownership gives rise to a principal disbursement becomes subject to a successive interest after an income interest ends, the fiduciary may continue to make transfers under subdivision (a).

§ 16365

Repealed and added by Stats. 2023, Ch. 28, Sec. 2. (SB 522) Effective January 1, 2024.

(a)A tax required to be paid by a fiduciary that is based on receipts allocated to income shall be paid from income.

(b)A tax required to be paid by a fiduciary that is 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)Subject to subdivision (d) and Sections 16363, 16364, and 16366, a tax required to be paid by a fiduciary on a share of an entity’s taxable income in an accounting period shall be paid from the following:

(1)Income and principal, proportionately to the allocation between income and principal of receipts from

the entity in the period.

(2)Principal, to the extent the tax exceeds the receipts from the entity in the period.

(d)After applying subdivisions (a) to (c), inclusive, a fiduciary shall adjust income or principal receipts, to the extent the taxes the fiduciary pays are reduced because of a deduction for a payment made to a beneficiary.

§ 16366

Repealed and added by Stats. 2023, Ch. 28, Sec. 2. (SB 522) Effective January 1, 2024.

(a)A fiduciary may make an adjustment between income and principal to offset the shifting of economic interests or tax benefits between current income beneficiaries and successor beneficiaries that arises from any of the following:

(1)An election or decision the fiduciary makes regarding a tax matter, other than a decision to claim an income tax deduction to which subdivision (b) applies.

(2)An income tax or other tax imposed on the fiduciary or a beneficiary as a result of a transaction involving the fiduciary or a distribution by the fiduciary.

(3)Ownership by the fiduciary of an interest in an entity, a part

of whose taxable income, whether or not distributed, is includable in the taxable income of the fiduciary or a beneficiary.

(b)If the amount of an estate tax marital or charitable 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 the fiduciary or a beneficiary are decreased, the fiduciary shall charge each beneficiary that benefits from the decrease in income tax to reimburse the principal from which the increase in estate tax is paid. The total reimbursement shall equal the increase in the estate tax, to the extent the principal used to pay the increase would have qualified for a marital or charitable deduction but for the payment. The share of the reimbursement for each fiduciary or beneficiary whose income taxes are reduced shall be the same as its

share of the total decrease in income tax.

(c)A fiduciary that charges a beneficiary under subdivision (b) may offset the charge by obtaining payment from the beneficiary, withholding an amount from future distributions to the beneficiary, or adopting another method or combination of methods.

§ 16367

Repealed and added by Stats. 2023, Ch. 28, Sec. 2. (SB 522) Effective January 1, 2024.

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 capital gains.

(d)From tax-exempt and other income.

(e)From principal of the trust.