REPRESENTATIVES Willamowski, Seitz

To amend sections 1340.35, 2109.67, and 2109.68, to

1

enact sections 1340.40 to 1340.42, 1340.46,

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1340.47, 1340.51 to 1340.53, 1340.57 to 1340.59,

3

1340.63 to 1340.66, 1340.70 to 1340.77, 1340.81 to

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1340.86, 1340.90, and 1340.91 and to repeal

5

sections 1340.01, 1340.02, 1340.03, 1340.031,

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1340.04, 1340.05, 1340.06, 1340.07, 1340.08,

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1340.09, 1340.10, 1340.11, 1340.12, and 1340.13 of

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the Revised Code to revise Fiduciary Law by

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adopting the Uniform Principal and Income Act

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(1997) regarding the apportionment and distribution

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of income to trust beneficiaries and regarding a

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fiduciary's allocation of receipts and

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disbursements to or between principal and income,

14

and by specifying the extent of a trustee's

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liability with respect to authorized adjustments

16

between principal and income.

17

BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF OHIO:

Section 1. That sections 1340.35, 2109.67, and 2109.68 be	18
amended and sections 1340.40, 1340.41, 1340.42, 1340.46, 1340.47,	19
1340.51, 1340.52, 1340.53, 1340.57, 1340.58, 1340.59, 1340.63,	20
1340.64, 1340.65, 1340.66, 1340.70, 1340.71, 1340.72, 1340.73,	21
1340.74, 1340.75, 1340.76, 1340.77, 1340.81, 1340.82, 1340.83,	22
1340.84, 1340.85, 1340.86, 1340.90, and 1340.91 of the Revised	23
Code be enacted to read as follows:	24

Sec. 1340.35.  Nothing in section 2109.67, sections 1340.01	25
1340.40 to 1340.131340.91, or any other section of the Revised	26
Code limits or restricts the definition of income in division (A)	27
of section 1340.32 of the Revised Code or limits or restricts a	28
governing board of an institution from requesting, or a trustee	29
from making, distributions from an institutional trust fund in	30
accordance with sections 1340.31 to 1340.37 of the Revised Code.	31

Sec. 1340.40. As used in sections 1340.40 to 1340.91 of the	32
Revised Code:	33

(A) "Accounting period" means a calendar year unless another	34
twelve-month period is selected by a fiduciary. "Accounting	35
period" includes a portion of a calendar year or other	36
twelve-month period that begins when an income interest begins or	37
ends when an income interest ends.	38

(B) "Beneficiary" includes, in the case of a decedent's	39
estate, an heir, legatee, and devisee and, in the case of a trust,	40
an income beneficiary and a remainder beneficiary.	41

(C) "Fiduciary" means a personal representative or a	42
trustee. The term includes an executor, administrator, successor	43
personal representative, special administrator, and a person	44
performing substantially the same function.	45

(D) "Income" means money or property that a fiduciary	46
receives as current return from a principal asset. "Income"	47
includes a portion of receipts from a sale, exchange, or	48
liquidation of a principal asset, to the extent provided in	49
sections 1340.57 to 1340.77 of the Revised Code.	50

(E) "Income beneficiary" means a person to whom net income	51
of a trust is or may be payable.	52

(F) "Income interest" means the right of an income	53
beneficiary to receive all or part of net income, whether the	54
terms of the trust require or authorize it to be distributed in	55
the trustee's discretion.	56

(G) "Mandatory income interest" means the right of an income	57
beneficiary to receive net income that the terms of the trust	58
require the fiduciary to distribute.	59

(H) "Net income" means the total receipts allocated to	60
income during an accounting period minus the disbursements made	61
from income during the period, plus or minus transfers under	62
sections 1340.40 to 1340.91 of the Revised Code to or from income	63
during the period.	64

(I) "Person" means an individual, corporation, business	65
trust, estate, trust, partnership, limited liability company,	66
association, joint venture, or government; governmental	67
subdivision, agency, or instrumentality; public corporation; or	68
any other legal or commercial entity.	69

(J) "Principal" means property held in trust for	70
distribution to a remainder beneficiary when the trust terminates.	71

(K) "Remainder beneficiary" means a person entitled to	72
receive principal when an income interest ends.	73

(L) "Terms of a trust" means the manifestation of the intent	74
of a settlor or decedent with respect to the trust, expressed in a	75
manner that admits of its proof in a judicial proceeding, whether	76
by written or spoken words or by conduct.	77

(M) "Trustee" includes an original, additional, or successor	78
trustee, whether or not appointed or confirmed by a court.	79

Sec. 1340.41. (A) In allocating receipts and disbursements	80
to or between principal and income, and with respect to any matter	81
within the scope of sections 1340.46 to 1340.53 of the Revised	82
Code, all of the following apply:	83

(1) A fiduciary shall administer a trust or estate in	84
accordance with the terms of the trust or the will, even if there	85
is a different provision in sections 1340.40 to 1340.91 of the	86
Revised Code.	87

(2) A fiduciary may administer a trust or estate by the	88
exercise of a discretionary power of administration given to the	89
fiduciary by the terms of the trust or the will, even if the	90
exercise of the power produces a result different from a result	91
required or permitted by any provision of sections 1340.40 to	92
1340.91 of the Revised Code.	93

(3) A fiduciary shall administer a trust or estate in	94
accordance with sections 1340.40 to 1340.91 of the Revised Code if	95
the terms of the trust or the will do not contain a different	96
provision or do not give the fiduciary a discretionary power of	97
administration.	98

(4) A fiduciary shall add a receipt, or charge a	99
disbursement, to principal to the extent that the terms of the	100
trust and any provision of sections 1340.40 to 1340.91 of the	101
Revised Code do not provide for allocating the receipt or	102
disbursement to or between principal and income.	103

(B) In exercising the power to adjust under division (A) of	104
section 1340.42 of the Revised Code or a discretionary power of	105
administration regarding a matter within the scope of sections	106
1340.40 to 1340.91 of the Revised Code, whether granted by the	107
terms of a trust, a will, or a provision of any such section, a	108
fiduciary shall administer a trust or estate impartially, based on	109
what is fair and reasonable to all of the beneficiaries, except to	110
the extent that the terms of the trust or the will clearly	111
manifest an intention that the fiduciary shall or may favor one or	112
more of the beneficiaries. A determination in accordance with	113
sections 1340.40 to 1340.91 of the Revised Code is presumed to be	114
fair and reasonable to all of the beneficiaries.	115

Sec. 1340.42. (A) A trustee may adjust between principal and	116
income to the extent the trustee considers necessary if the	117
trustee invests and manages the trust assets as a prudent	118
investor, the terms of the trust describe the amount that may or	119
must be distributed to a beneficiary by referring to the trust's	120
income, and the trustee determines, after applying division (A) of	121
section 1340.41 of the Revised Code, that the trustee is unable to	122
comply with division (B) of that section.	123

(B) In deciding whether and to what extent to exercise the	124
power conferred by division (A) of this section, a trustee shall	125
consider all factors relevant to the trust and its beneficiaries,	126
including all of the following factors to the extent they are	127
relevant:	128

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

129

(2) The intent of the settlor;

130

(3) The identity and circumstances of the beneficiaries;

131

(4) The needs for liquidity, regularity of income, and	132
preservation and appreciation of capital;	133

(5) The assets held in the trust; the extent to which they	134
consist of financial assets, interests in closely held	135
enterprises, tangible and intangible personal property, or real	136
property; the extent to which an asset is used by a beneficiary;	137
and whether an asset was purchased by the trustee or received from	138
the settlor;	139

(6) The net amount allocated to income under sections	140
1340.40, 1340.41, and sections 1340.46 to 1340.91 of the Revised	141
Code; and the increase or decrease in the value of the principal	142
assets, which the trustee may estimate as to assets for which	143
market values are not readily available;	144

(7) Whether and to what extent the terms of the trust give	145
the trustee the power to invade principal or accumulate income or	146
prohibit the trustee from invading principal or accumulating	147
income, and the extent to which the trustee has exercised a power	148
from time to time to invade principal or accumulate income;	149

(8) The actual and anticipated effect of economic conditions	150
on principal and income and effects of inflation and deflation;	151

(9) The anticipated tax consequences of an adjustment.

152

(C) A trustee shall not make an adjustment if any of the	153
following applies:	154

(1) The adjustment diminishes the income interest in a trust	155
that requires all of the income to be paid at least annually to a	156
surviving spouse and for which an estate tax or gift tax marital	157
deduction would be allowed, in whole or in part, if the trustee	158
did not have the power to make the adjustment.	159

(2) The adjustment reduces the actuarial value of the income	160
interest in a trust to which a person transfers property with the	161
intent to qualify for a gift tax exclusion.	162

(3) The adjustment changes the amount payable to a	163
beneficiary as a fixed annuity or a fixed fraction of the value of	164
the trust assets.	165

(4) The adjustment is from any amount that is permanently	166
set aside for charitable purposes under a will or the terms of a	167
trust unless both income and principal are so set aside.	168

(5) If possessing or exercising the power to make the	169
adjustment causes an individual to be treated as the owner of all	170
or part of the trust for income tax purposes, and the individual	171
would not be treated as the owner if the trustee did not possess	172
the power to make the adjustment;	173

(6) If possessing or exercising the power to make the	174
adjustment causes all or part of the trust assets to be included	175
for estate tax purposes in the estate of an individual who has the	176
power to remove a trustee or appoint a trustee, or both, and the	177
assets would not be included in the estate of the individual if	178
the trustee did not possess the power to make the adjustment;	179

(7) If the trustee is a beneficiary of the trust;

180

(8) If the trustee is not a beneficiary, but the adjustment	181
would benefit the trustee directly or indirectly.	182

(D) If division (C)(5), (6), (7), or (8) of this section	183
applies to a trustee and there is more than one trustee, a	184
cotrustee to whom the provision does not apply may make the	185
adjustment unless the exercise of the power by the remaining	186
trustee or trustees is not permitted by the terms of the trust.	187

(E) A trustee may release the entire power conferred by	188
division (A) of this section or may release only the power to	189
adjust from income to principal or the power to adjust from	190
principal to income if the trustee is uncertain about whether	191
possessing or exercising the power will cause a result described	192
in division (C)(1), (2), (3), (4), (5), (6), or (8) of this	193
section or if the trustee determines that possessing or exercising	194
the power will or may deprive the trust of a tax benefit or impose	195
a tax burden not described in division (C) of this section. The	196
release may be permanent or for a specified period, including a	197
period measured by the life of an individual.	198

(F) Terms of a trust that limit the power of a trustee to	199
make an adjustment between principal and income do not affect the	200
application of this section unless it is clear from the terms of	201
the trust that the terms are intended to deny the trustee the	202
power of adjustment conferred by division (A) of this section.	203

(G) The liability of a trustee relative to the exercise of	204
adjustment authority conferred by divisions (A) to (F) of this	205
section shall be limited in the following manner:	206

(1) Unless a court determines that a trustee has acted in	207
bad faith, no trustee shall be held liable for damages for	208
choosing not to make an adjustment.	209

(2) Unless a court determines that a trustee has acted in	210
bad faith with respect to an adjustment, the sole remedy to be	211
ordered by a court shall be a prospective correction of the	212
adjustment.	213

(3) For purposes of this section, and subject to division	214
(C) of this section, a trustee may make a safe-harbor adjustment	215
to increase net trust accounting income up to and including an	216
annual unitrust payment of four per cent of the trust's fair	217
market value determined as of the beginning of each year. If a	218
trustee determines to make this safe-harbor adjustment, the	219
propriety of this adjustment shall be conclusively presumed.	220
Nothing in division (G)(3) of this section prohibits any other	221
type of adjustment authorized under any provision of this section.	222

Sec. 1340.46. After a decedent dies, in the case of an	223
estate, or after an income interest in a trust ends, all of the	224
following apply:	225

(A) The fiduciary of the estate or of the terminating income	226
interest shall determine, under the provisions of sections 1340.51	227
to 1340.86 of the Revised Code that apply to trustees and under	228
division (E) of this section, the amount of net income and net	229
principal receipts received from property specifically given to a	230
beneficiary. The fiduciary shall distribute the net income and	231
net principal receipts to the beneficiary that is to receive the	232
specific property.	233

(B) A fiduciary shall determine the remaining net income of	234
a decedent's estate or a terminating income interest under the	235
provisions of sections 1340.51 to 1340.86 of the Revised Code that	236
apply to trustees and by doing all of the following:	237

(1) Including in net income all income from property used to	238
discharge liabilities;	239

(2) Paying from income or principal, in the fiduciary's	240
discretion, fees of attorneys, accountants, and fiduciaries; court	241
costs and other expenses of administration; and interest on death	242
taxes. However, the fiduciary may pay those expenses from income	243
of property passing to a trust for which the fiduciary claims an	244
estate tax marital or charitable deduction only to the extent that	245
the payment of those expenses from income will not cause the	246
reduction or loss of the deduction.	247

(3) Paying from principal all other disbursements made or	248
incurred in connection with the settlement of a decedent's estate	249
or the winding up of a terminating income interest, including	250
debts, funeral expenses, disposition of remains, family	251
allowances, and death taxes and related penalties that are	252
apportioned to the estate or terminating income interest by the	253
will, the terms of the trust, or applicable law.	254

(C) A fiduciary shall distribute to a beneficiary that	255
receives a pecuniary amount outright the interest or any other	256
amount provided by the will, the terms of the trust, or applicable	257
law from net income determined under division (B) of this section	258
or from principal to the extent that net income is insufficient.	259
If a beneficiary is to receive a pecuniary amount outright from a	260
trust after an income interest ends and no interest or other	261
amount is provided for by the terms of the trust or applicable	262
law, the fiduciary shall distribute the interest or other amount	263
to which the beneficiary would be entitled under applicable law if	264
the pecuniary amount were required to be paid under a will.	265

(D) A fiduciary shall distribute the net income remaining	266
after distributions required by division (C) of this section, in	267
the manner described in section 1340.47 of the Revised Code, to	268
all other beneficiaries, including a beneficiary that receives a	269
pecuniary amount in trust, even if the beneficiary holds an	270
unqualified power to withdraw assets from the trust or other	271
presently exercisable, general power of appointment over the	272
trust.	273

(E) A fiduciary shall not reduce principal or income	274
receipts from property described in division (A) of this section	275
because of a payment described in section 1340.81 or 1340.82 of	276
the Revised Code to the extent that the will, the terms of the	277
trust, or applicable law requires the fiduciary to make the	278
payment from assets other than the property or to the extent that	279
the fiduciary recovers or expects to recover the payment from a	280
third party. The net income and principal receipts from the	281
property are determined by including all of the amounts the	282
fiduciary receives or pays with respect to the property, whether	283
those amounts accrued or became due before, on, or after the date	284
of a decedent's death or an income interest's terminating event,	285
and by making a reasonable provision for amounts that the	286
fiduciary believes the estate or terminating income interest may	287
become obligated to pay after the property is distributed.	288

Sec. 1340.47. (A) Each beneficiary described in division (D)	289
of section 1340.46 of the Revised Code is entitled to receive a	290
portion of the net income equal to the beneficiary's fractional	291
interest in undistributed principal assets, using values as of the	292
distribution date. If a fiduciary makes more than one	293
distribution of assets to beneficiaries to whom this section	294
applies, each beneficiary, including one that does not receive	295
part of the distribution, is entitled, as of each distribution	296
date, to the net income the fiduciary has received after the date	297
of the decedent's death or terminating event or earlier	298
distribution date but has not distributed as of the current	299
distribution date.	300

(B) In determining a beneficiary's share of net income for	301
the purpose of this section, all of the following apply:	302

(1) The beneficiary is entitled to receive a portion of the	303
net income equal to the beneficiary's fractional interest in the	304
undistributed principal assets immediately before the distribution	305
date, including assets that later may be sold to meet principal	306
obligations.	307

(2) The beneficiary's fractional interest in the	308
undistributed principal assets must be calculated without regard	309
to property specifically given to a beneficiary and property	310
required to pay pecuniary amounts not in trust.	311

(3) The beneficiary's fractional interest in the	312
undistributed principal assets must be calculated on the basis of	313
the aggregate value of those assets as of the distribution date	314
without reducing the value by any unpaid principal obligation.	315

(4) The distribution date for purposes of this section may	316
be the date as of which the fiduciary calculates the value of the	317
assets if that date is reasonably near the date on which assets	318
are actually distributed.	319

(C) If a fiduciary does not distribute all of the collected	320
but undistributed net income described in divisions (A) and (B) of	321
this section to each person as of a distribution date, the	322
fiduciary shall maintain appropriate records showing the interest	323
of each.	324

(D) To the extent that a trustee considers it appropriate,	325
the trustee may apply the provisions of divisions (A) to (C) of	326
this section to any net gain or loss, realized after the date of	327
the decedent's death or an income interest termination or earlier	328
distribution date, from the disposition of a principal asset to	329
which such provisions apply.	330

Sec. 1340.51. (A) An income beneficiary is entitled to net	331
income from the date on which the income interest begins. An	332
income interest begins on the date specified in the terms of the	333
trust or, if no date is specified, on the date an asset becomes	334
subject to a trust or successive income interest.	335

(B) An asset becomes subject to a trust on any of the	336
following dates:	337

(1) The date it is transferred to the trust, in the case of	338
an asset that is transferred to a trust during the transferor's	339
life;	340

(2) The date of a testator's death, in the case of an asset	341
that becomes subject to a trust by reason of a will, even if there	342
is an intervening period of administration of the testator's	343
estate;	344

(3) The date of an individual's death, in the case of an	345
asset that is transferred to a fiduciary by a third party because	346
of the individual's death.	347

(C) An asset becomes subject to a successive income interest	348
on the day after the preceding income interest ends, as determined	349
under division (D) of this section, even if there is an	350
intervening period of administration to wind up the preceding	351
income interest.	352

(D) An income interest ends on the day before an income	353
beneficiary dies or another terminating event occurs, or on the	354
last day of a period during which there is no beneficiary to whom	355
a trustee may distribute income.	356

Sec. 1340.52. (A) A trustee shall allocate to principal an	357
income receipt or disbursement other than one to which division	358
(A) of section 1340.46 of the Revised Code applies, if its due	359
date occurs before a decedent dies in the case of an estate or	360
before an income interest begins in the case of a trust or	361
successive income interest.	362

(B) A trustee shall allocate an income receipt or	363
disbursement to income if its due date occurs on or after the date	364
on which a decedent dies or an income interest begins and if it is	365
a periodic due date. An income receipt or disbursement shall be	366
treated as accruing from day to day if its due date is not	367
periodic or it has no due date. The portion of the receipt or	368
disbursement accruing before the date on which a decedent dies or	369
an income interest begins shall be allocated to principal, and the	370
balance shall be allocated to income.	371

(C) For the purposes of this section, an item of income or	372
an obligation is due on the date the payer is required to make a	373
payment. If a payment date is not stated, there is no due date.	374
Distributions to shareholders or other owners from an entity to	375
which section 1340.57 of the Revised Code applies are deemed to be	376
due on the date fixed by the entity for determining who is	377
entitled to receive the distribution or, if no date is fixed, on	378
the declaration date for the distribution. A due date is periodic	379
for receipts or disbursements that must be paid at regular	380
intervals under a lease or an obligation to pay interest or if an	381
entity customarily makes distributions at regular intervals.	382

Sec. 1340.53. (A) As used in this section, "undistributed	383
income" means net income received before the date on which an	384
income interest ends. "Undistributed income" excludes an item of	385
income or expense that is due or accrued or net income that has	386
been added or is required to be added to principal under the terms	387
of the trust.	388

(B) When a mandatory income interest ends, the trustee shall	389
pay to a mandatory income beneficiary that survives that date, or	390
the estate of a deceased mandatory income beneficiary whose death	391
causes the interest to end, the beneficiary's share of the	392
undistributed income that is not disposed of under the terms of	393
the trust, unless the beneficiary has an unqualified power to	394
revoke more than five per cent of the trust immediately before the	395
income interest ends. If the beneficiary has such power, the	396
undistributed income from the portion of the trust that may be	397
revoked shall be added to principal.	398

(C) When a trustee's obligation to pay a fixed annuity or a	399
fixed fraction of the value of the trust's assets ends, the	400
trustee shall prorate the final payment if and to the extent	401
required by applicable law to accomplish a purpose of the trust or	402
its settlor relating to income, gift, estate, or other tax	403
requirements.	404

Sec. 1340.57. (A) As used in this section, "entity" means a	405
corporation, partnership, limited liability company, regulated	406
investment company, real estate investment trust, common trust	407
fund, or any other organization in which a trustee has an interest	408
other than a trust or estate to which section 1340.58 of the	409
Revised Code applies, a business or activity to which section	410
1340.59 of the Revised Code applies, or an asset-backed security	411
to which section 1340.77 of the Revised Code applies.	412

(B) Except as otherwise provided in this section, a trustee	413
shall allocate to income money received from an entity.	414

(C) A trustee shall allocate all of the following receipts	415
from an entity to principal:	416

(1) Property other than money;

417

(2) Money received in one distribution or a series of related	418
distributions in exchange for part or all of a trust's interest in	419
the entity;	420

(3) Money received in total or partial liquidation of the	421
entity;	422

(4) Money received from an entity that is a regulated	423
investment company or a real estate investment trust if the money	424
distributed is a capital gain dividend for federal income tax	425
purposes.	426

(D) Money is received in partial liquidation in either of the	427
following circumstances:	428

(1) To the extent that the entity, at or near the time of a	429
distribution, indicates that it is a distribution in partial	430
liquidation;	431

(2) If the total amount of money and property received in a	432
distribution or series of related distributions is greater than	433
twenty per cent of the entity's gross assets, as shown by the	434
entity's year-end financial statements immediately preceding the	435
initial receipt.	436

(E) Money is not received in partial liquidation, nor shall	437
it be taken into account under division (D)(2) of this section, to	438
the extent that it does not exceed the amount of income tax that a	439
trustee or beneficiary must pay on taxable income of the entity	440
that distributes the money.	441

(F) A trustee may rely upon a statement made by an entity	442
about the source or character of a distribution if the statement	443
is made at or near the time of distribution by the entity's board	444
of directors or other person or group of persons authorized to	445
exercise powers to pay money or transfer property comparable to	446
those of a corporation's board of directors.	447

Sec. 1340.58. A trustee shall allocate to income an amount	448
received as a distribution of income from a trust or an estate in	449
which the trust has an interest other than a purchased interest,	450
and shall allocate to principal an amount received as a	451
distribution of principal from such a trust or estate. If a	452
trustee purchases an interest in a trust that is an investment	453
entity, or a decedent or donor transfers an interest in such a	454
trust to a trustee, section 1340.57 or 1340.77 of the Revised Code	455
applies to a receipt from the trust.	456

Sec. 1340.59. (A) If a trust that conducts a business or	457
other activity determines that it is in the best interest of all	458
the beneficiaries to account separately for the business or	459
activity instead of accounting for it as part of the trust's	460
general accounting records, the trustee may maintain separate	461
accounting records for its transactions, whether or not its assets	462
are segregated from other trust assets.	463

(B) A trustee that accounts separately for a business or	464
other activity may determine the extent to which its net cash	465
receipts must be retained for working capital, the acquisition or	466
replacement of fixed assets, and other reasonably foreseeable	467
needs of the business or activity, and the extent to which the	468
remaining net cash receipts are accounted for as principal or	469
income in the trust's general accounting records. If a trustee	470
sells assets of the business or other activity, other than in the	471
ordinary course of the business or activity, the trustee shall	472
account for the net amount received as principal in the trust's	473
general accounting records to the extent the trustee determines	474
that the amount received is no longer required in the conduct of	475
the business.	476

(C) Activities for which a trustee may maintain separate	477
accounting records under this section include all of the	478
following:	479

(1) Retail, manufacturing, service, and other traditional	480
business activities;	481

(2) Farming;

482

(3) Raising and selling livestock and other animals;

483

(4) Management of rental properties;

484

(5) Extraction of minerals and other natural resources;

485

(6) Timber operations;

486

(7) Activities to which section 1340.76 of the Revised Code	487
applies.	488

Sec. 1340.63. A trustee shall allocate to principal all of	489
the following:	490

(A) To the extent not allocated to income under sections	491
1340.40 to 1340.91 of the Revised Code, assets received from a	492
transferor during the transferor's lifetime, a decedent's estate,	493
a trust with a terminating income interest, or a payer under a	494
contract naming the trust or its trustee as beneficiary;	495

(B) Money or other property received from the sale, exchange,	496
liquidation, or change in form of a principal asset, including	497
realized profit, subject to sections 1340.57 to 1340.77 of the	498
Revised Code;	499

(C) Amounts recovered from third parties to reimburse the	500
trust because of disbursements described in division (A)(7) of	501
section 1340.82 of the Revised Code or for other reasons to the	502
extent not based on the loss of income;	503

(D) Proceeds of property taken by eminent domain, but a	504
separate award made for the loss of income with respect to an	505
accounting period during which a current income beneficiary had a	506
mandatory income interest is income;	507

(E) Net income received in an accounting period during which	508
there is no beneficiary to whom a trustee may or must distribute	509
income;	510

(F) Other receipts as provided in sections 1340.70 to 1340.77	511
of the Revised Code.	512

Sec. 1340.64. To the extent that a trustee accounts for	513
receipts from rental property pursuant to this section, the	514
trustee shall allocate to income an amount received as rent of	515
real or personal property, including an amount received for	516
cancellation or renewal of a lease. An amount received as a	517
refundable deposit, including a security deposit or a deposit that	518
is to be applied as rent for future periods, shall be added to	519
principal and held subject to the terms of the lease and shall not	520
be available for distribution to a beneficiary until the trustee's	521
contractual obligations have been satisfied with respect to that	522
amount.	523

Sec. 1340.65. (A) An amount received as interest, whether	524
determined at a fixed, variable, or floating rate, on an	525
obligation to pay money to the trustee, including an amount	526
received as consideration for prepaying principal, shall be	527
allocated to income without any provision for amortization of	528
premium.	529

(B) A trustee shall allocate to principal an amount received	530
from the sale, redemption, or other disposition of an obligation	531
to pay money to the trustee more than one year after the date it	532
is purchased or acquired by the trustee, including an obligation	533
whose purchase price or value when it is acquired is less than its	534
value at maturity. If the obligation matures within one year	535
after the date it is purchased or acquired by the trustee, an	536
amount received in excess of its purchase price or its value when	537
acquired by the trust shall be allocated to income.	538

(C) This section does not apply to an obligation to which	539
section 1340.71, 1340.72, 1340.73, 1340.74, 1340.76, or 1340.77 of	540
the Revised Code applies.	541

Sec. 1350.66. (A) Except as otherwise provided in division	542
(B) of this section, a trustee shall allocate to principal the	543
proceeds of a life insurance policy or other contract in which the	544
trust or its trustee is named as beneficiary, including a contract	545
that insures the trust or its trustee against loss for damage to,	546
destruction of, or loss of title to a trust asset. The trustee	547
shall allocate dividends on an insurance policy to income if the	548
premiums on the policy are paid from income, and to principal if	549
the premiums are paid from principal.	550

(B) A trustee shall allocate to income proceeds of a	551
contract that insures the trustee against loss of occupancy or	552
other use by an income beneficiary, loss of income, or, subject to	553
section 1340.59 of the Revised Code, loss of profits from a	554
business.	555

(C) This section does not apply to a contract to which	556
section 1340.71 of the Revised Code applies.	557

Sec. 1340.70. If a trustee determines that an allocation	559
between principal and income required by section 1340.71, 1340.72,	560
1340.73, 1340.74, or 1340.77 of the Revised Code is insubstantial,	561
the trustee may allocate the entire amount to principal unless one	562
of the circumstances described in division (C) of section 1340.42	563
of the Revised Code applies to the allocation. This power may be	564
exercised by a cotrustee in the circumstances described in	565
division (D) of that section and may be released for the reasons	566
and in the manner described in division (E) of the section. An	567
allocation is presumed to be insubstantial if either of the	568
following applies:	569

(A) The amount of the allocation would increase or decrease	570
net income in an accounting period, as determined before the	571
allocation, by less than ten per cent.	572

(B) The value of the asset producing the receipt for which	573
the allocation would be made is less than ten per cent of the	574
total value of the trust's assets at the beginning of the	575
accounting period.	576

Sec. 1340.71. (A) As used in this section, "payment" means a	577
payment that a trustee may receive over a fixed number of years or	578
during the life of one or more individuals because of services	579
rendered or property transferred to the payer in exchange for	580
future payments. "Payment" includes a payment made in money or	581
property from the payer's general assets or from a separate fund	582
created by the payer, including a private or commercial annuity,	583
an individual retirement account, or a pension, profit-sharing,	584
stock-bonus, or stock-ownership plan.	585

(B) To the extent that a payment is characterized as	586
interest or a dividend or a payment made in lieu of interest or a	587
dividend, a trustee shall allocate it to income. The trustee	588
shall allocate to principal the balance of the payment and any	589
other payment received in the same accounting period that is not	590
characterized as interest, a dividend, or an equivalent payment.	591

(C) If no part of a payment is characterized as interest, a	592
dividend, or an equivalent payment, and all or part of the payment	593
is required to be made, a trustee shall allocate to income ten per	594
cent of the part that is required to be made during the accounting	595
period and the balance to principal. If no part of a payment is	596
required to be made or the payment received is the entire amount	597
to which the trustee is entitled, the trustee shall allocate the	598
entire payment to principal. For purposes of this division, a	599
payment is not "required to be made" to the extent that it is made	600
because the trustee exercises a right of withdrawal.	601

(D) If, to obtain an estate tax marital deduction for a	602
trust, a trustee must allocate more of a payment to income than is	603
provided for by this section, the trustee shall allocate to income	604
the additional amount necessary to obtain the marital deduction.	605

(E) This section does not apply to payments to which section	606
1340.72 of the Revised Code applies.	607

Sec. 1340.72. (A) As used in this section, "liquidating	608
asset" means an asset whose value will diminish or terminate	609
because the asset is expected to produce receipts for a period of	610
limited duration. "Liquidating asset" includes a leasehold,	611
patent, copyright, royalty right, and right to receive payments	612
during a period of more than one year under an arrangement that	613
does not provide for the payment of interest on the unpaid	614
balance. "Liquidating asset" excludes a payment subject to	615
section 1340.71 of the Revised Code, resources subject to section	616
1340.73 of the Revised Code, timber subject to section 1340.74 of	617
the Revised Code, an activity subject to section 1340.76 of the	618
Revised Code, an asset subject to section 1340.77 of the Revised	619
Code, or any asset for which the trustee establishes a reserve for	620
depreciation under section 1340.83 of the Revised Code.	621

(B) A trustee shall allocate to income ten per cent of the	622
receipts from a liquidating asset and the balance to principal.	623

Sec. 1340.73.  (A) To the extent that a trustee accounts for	624
receipts from an interest in minerals or other natural resources	625
pursuant to this section, the trustee shall allocate the receipts	626
in accordance with all of the following:	627

(1) If received as nominal delay rental or nominal annual	628
rent on a lease, a receipt shall be allocated to income.	629

(2) If received from a production payment, a receipt shall be	630
allocated to income if and to the extent that the agreement	631
creating the production payment provides a factor for interest or	632
its equivalent. The balance shall be allocated to principal.	633

(3) If an amount received as a royalty, shut-in-well payment,	634
take-or-pay payment, bonus, or delay rental is more than nominal,	635
ninety per cent shall be allocated to principal and the balance to	636
income.	637

(4) If an amount is received from a working interest or any	638
other interest not provided for in division (A)(1), (2), or (3) of	639
this section, ninety per cent of the net amount received shall be	640
allocated to principal and the balance to income.	641

(B) An amount received on account of an interest in water	642
that is renewable shall be allocated to income. If the water is	643
not renewable, ninety per cent of the amount shall be allocated to	644
principal and the balance to income.	645

(C) This section applies whether or not a decedent or donor	646
was extracting minerals, water, or other natural resources before	647
the interest became subject to the trust.	648

(D) If a trust owns an interest in minerals, water, or other	649
natural resources on the effective date of this section, the	650
trustee may allocate receipts from the interest as provided in	651
this section or in the manner used by the trustee before that	652
date. If the trust acquires an interest in minerals, water, or	653
other natural resources after the effective date of this section,	654
the trustee shall allocate receipts from the interest as provided	655
in this section.	656

Sec. 1340.74.  (A) To the extent that a trustee accounts for	657
receipts from the sale of timber and related products pursuant to	658
this section, the trustee shall allocate the net receipts in	659
accordance with all of the following:	660

(1) To income, to the extent that the amount of timber	661
removed from the land does not exceed the rate of growth of the	662
timber during the accounting periods in which a beneficiary has a	663
mandatory income interest;	664

(2) To principal, to the extent that the amount of timber	665
removed from the land exceeds the rate of growth of the timber or	666
the net receipts are from the sale of standing timber;	667

(3) To or between income and principal, if the net receipts	668
are from the lease of timberland or from a contract to cut timber	669
from land owned by a trust, by determining the amount of timber	670
removed from the land under the lease or contract and applying	671
divisions (A)(1) and (2) of this section;	672

(4) To principal, to the extent that advance payments,	673
bonuses, and other payments are not allocated pursuant to division	674
(A)(1), (2), or (3) of this section.	675

(B) In determining net receipts to be allocated pursuant to	676
division (A) of this section, a trustee shall deduct and transfer	677
to principal a reasonable amount for depletion.	678

(C) This section applies whether or not a decedent or	679
transferor was harvesting timber from the property before it	680
become subject to the trust.	681

(D) If a trust owns an interest in timberland on the	682
effective date of this section, the trustee may allocate net	683
receipts from the sale of timber and related products as provided	684
in this section or in the manner used by the trustee before that	685
date. If the trust acquires an interest in timberland after the	686
effective date of this section, the trustee shall allocate net	687
receipts from the sale of timber and related products as provided	688
in this section.	689

Sec. 1340.75.  (A) If a marital deduction is allowed for all	690
or part of a trust whose assets consist substantially of property	691
that does not provide the surviving spouse with sufficient income	692
from or use of the trust assets, and if the amounts that the	693
trustee transfers from principal to income under section 1340.42	694
of the Revised Code and distributes to the spouse from principal	695
pursuant to the terms of the trust are insufficient to provide the	696
spouse with the beneficial enjoyment required to obtain the	697
marital deduction, the spouse may require the trustee to make	698
property productive of income, convert property within a	699
reasonable time, or exercise the power conferred by division (A)	700
of that section. The trustee may decide which action or	701
combination of actions to take.	702

(B) In cases not governed by division (A) of this section,	703
proceeds from the sale or other disposition of an asset shall be	704
principal without regard to the amount of income the asset	705
produces during any accounting period.	706

Sec. 1340.76.  (A) As used in this section, "derivative"	707
means a contract or financial instrument or a combination of	708
contracts and financial instruments that gives a trust the right	709
or obligation to participate in some or all changes in the price	710
of a tangible or intangible asset or group of assets, or changes	711
in a rate, an index of prices or rates, or other market indicator	712
for an asset or a group of assets.	713

(B) To the extent that a trustee does not account under	714
section 1340.59 of the Revised Code for transactions in	715
derivatives, the trustee shall allocate to principal receipts from	716
and disbursements made in connection with those transactions.	717

(C) If a trustee grants an option to buy property from the	718
trust, whether or not the trust owns the property when the option	719
is granted, grants an option that permits another person to sell	720
property to the trust, or acquires an option to buy property for	721
the trust or an option to sell an asset owned by the trust, and	722
the trustee or other owner of the asset is required to deliver the	723
asset if the option is exercised, an amount received for granting	724
the option shall be allocated to principal. An amount paid to	725
acquire the option shall be paid from principal. A gain or loss	726
realized upon the exercise of an option, including an option	727
granted to a settlor of the trust for services rendered, shall be	728
allocated to principal.	729

Sec. 1340.77.  (A) As used in this section, "asset-backed	730
security" means an asset whose value is based upon the right it	731
gives the owner to receive distributions from the proceeds of	732
financial assets that provide collateral for the security.	733
"Asset-backed security" includes an asset that gives the owner the	734
right to receive from the collateral financial assets only the	735
interest or other current return or only the proceeds other than	736
interest or current return. "Asset-backed security" excludes an	737
asset to which section 1340.57 or 1340.71 of the Revised Code	738
applies.	739

(B) If a trust receives a payment from interest or other	740
current return and from other proceeds of the collateral financial	741
assets, the trustee shall allocate to income the portion of the	742
payment that the payer identifies as being from interest or other	743
current return and shall allocate the balance of the payment to	744
principal.	745

(C) If a trust receives one or more payments in exchange for	746
the trust's entire interest in an asset-backed security in one	747
accounting period, the trustee shall allocate the payments to	748
principal. If a payment is one of a series of payments that will	749
result in the liquidation of the trust's interest in the security	750
over more than one accounting period, the trustee shall allocate	751
ten per cent of the payment to income and the balance to	752
principal.	753

Sec. 1340.81.  A trustee shall make all of the following	754
disbursements from income to the extent that they are not	755
disbursements to which division (B)(2) or (3) of section 1340.46	756
of the Revised Code applies:	757

(A) One-half of the regular compensation of the trustee and	758
of any person providing investment advisory or custodial services	759
to the trustee;	760

(B) One-half of all expenses for accountings, judicial	761
proceedings, or other matters that involve both the income and	762
remainder interests;	763

(C) All of the other ordinary expenses incurred in connection	764
with the administration, management, or preservation of trust	765
property and the distribution of income, including interest,	766
ordinary repairs, regularly recurring taxes assessed against	767
principal, and expenses of a proceeding or other matter that	768
concerns primarily the income interest;	769

(D) Recurring premiums on insurance covering the loss of a	770
principal asset or the loss of income from or use of the asset.	771

Sec. 1340.82.  (A) A trustee shall make all of the following	772
disbursements from principal:	773

(1) The remaining one-half of the disbursements described in	774
divisions (A) and (B) of section 1340.81 of the Revised Code;	775

(2) All of the trustee's compensation calculated on principal	776
as a fee for acceptance, distribution, or termination, and	777
disbursements made to prepare property for sale;	778

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

779

(4) Expenses of a proceeding that concerns primarily	780
principal, including a proceeding to construe the trust or to	781
protect the trust or its property;	782

(5) Premiums paid on a policy of insurance not described in	783
division (D) of section 1340.81 of the Revised Code of which the	784
trust is the owner and beneficiary;	785

(6) Estate, inheritance, and other transfer taxes, including	786
penalties, apportioned to the trust;	787

(7) Disbursements related to environmental matters, including	788
reclamation, assessing environmental conditions, remedying and	789
removing environmental contamination, monitoring remedial	790
activities and the release of substances, preventing future	791
releases of substances, collecting amounts from persons liable or	792
potentially liable for the costs of those activities, penalties	793
imposed under environmental laws or regulations and other payments	794
made to comply with those laws or regulations, statutory or common	795
law claims by third parties, and defending claims based on	796
environmental matters.	797

(B) If a principal asset is encumbered with an obligation	798
that requires income from that asset to be paid directly to the	799
creditor, the trustee shall transfer from principal to income an	800
amount equal to the income paid to the creditor in reduction of	801
the principal balance of the obligation.	802

Sec. 1340.83.  (A) As used in this section, "depreciation"	803
means a reduction in value due to wear, tear, decay, corrosion, or	804
gradual obsolescence of a fixed asset having a useful life of more	805
than one year.	806

(B) A trustee may transfer to principal a reasonable amount	807
of the net cash receipts from a principal asset that is subject to	808
depreciation, but shall not transfer any amount for depreciation	809
under any of the following circumstances:	810

(1) Any amount for depreciation of that portion of real	811
property used or available for use by a beneficiary as a residence	812
or of tangible personal property held or made available for the	813
personal use or enjoyment of a beneficiary;	814

(2) Any amount for depreciation during the administration of	815
a decedent's estate;	816

(3) Any amount for depreciation under this section if the	817
trustee is accounting under section 1340.59 of the Revised Code	818
for the business or activity in which the asset is used.	819

(C) An amount transferred to principal need not be held as a	820
separate fund.	821

Sec. 1340.84.  (A) If a trustee makes or expects to make a	822
principal disbursement described in this section, the trustee may	823
transfer an appropriate amount from income to principal in one or	824
more accounting periods to reimburse principal or to provide a	825
reserve for future principal disbursements.	826

(B) Principal disbursements to which division (A) of this	827
section applies include all of the following, but only to the	828
extent that the trustee has not been and does not expect to be	829
reimbursed by a third party:	830

(1) An amount chargeable to income but paid from principal	831
because it is unusually large, including extraordinary repairs;	832

(2) A capital improvement to a principal asset, whether in	833
the form of changes to an existing asset or the construction of a	834
new asset, including special assessments;	835

(3) Disbursements made to prepare property for rental,	836
including tenant allowances, leasehold improvements, and broker's	837
commissions;	838

(4) Periodic payments on an obligation secured by a principal	839
asset to the extent that the amount transferred from income to	840
principal for depreciation is less than the periodic payments;	841

(5) Disbursements described in division (A)(7) of section	842
1340.82 of the Revised Code.	843

(C) If the asset whose ownership gives rise to the	844
disbursements becomes subject to a successive income interest	845
after an income interest ends, a trustee may continue to transfer	846
amounts from income to principal as provided in division (A) of	847
this section.	848

Sec. 1340.85.  (A) A tax required to be paid by a trustee	849
based on receipts allocated to income shall be paid from income.	850

(B) A tax required to be paid by a trustee based on receipts	851
allocated to principal shall be paid from principal, even if the	852
tax is called an income tax by the taxing authority.	853

(C) A tax required to be paid by a trustee on the trust's	854
share of an entity's taxable income shall be paid proportionately	855
as follows:	856

(1) From income, to the extent that receipts from the entity	857
are allocated to income;	858

(2) From principal, as follows:

859

(a) To the extent that receipts from the entity are allocated	860
to principal; and	861

(b) To the extent that the trust's share of the entity's	862
taxable income exceeds the total receipts described in divisions	863
(C)(1) and (2)(a) of this section.	864

(D) For purposes of this section, receipts allocated to	865
principal or income shall be reduced by the amount distributed to	866
a beneficiary from principal or income for which the trust	867
receives a deduction in calculating the tax.	868

Sec. 1340.86.  (A) A fiduciary may make adjustments between	869
principal and income to offset the shifting of economic interests	870
or tax benefits between income beneficiaries and remainder	871
beneficiaries that arise from any of the following:	872

(1) Elections and decisions, other than those described in	873
division (B) of this section, that the fiduciary makes from time	874
to time regarding tax matters;	875

(2) An income tax or any other tax that is imposed upon the	876
fiduciary or a beneficiary as a result of a transaction involving	877
or a distribution from the estate or trust;	878

(3) The ownership by an estate or trust of an interest in an	879
entity whose taxable income, whether or not distributed, is	880
includable in the taxable income of the estate, trust, or	881
beneficiary.	882

(B) If the amount of an estate tax marital deduction or	883
charitable contribution deduction is reduced because a fiduciary	884
deducts an amount paid from principal for income tax purposes	885
instead of deducting it for estate tax purposes, and as a result	886
estate taxes paid from principal are increased and income taxes	887
paid by an estate, trust, or beneficiary are decreased, each	888
estate, trust, or beneficiary that benefits from the decrease in	889
income tax shall reimburse the principal from which the increase	890
in estate tax is paid. The total reimbursement shall equal the	891
increase in the estate tax to the extent that the principal used	892
to pay the increase would have qualified for a marital deduction	893
or charitable contribution deduction but for the payment. The	894
proportionate share of the reimbursement for each estate, trust,	895
or beneficiary whose income taxes are reduced shall be the same as	896
its proportionate share of the total decrease in income tax. An	897
estate or trust shall reimburse principal from income.	898

Sec. 1340.90.  (A) Sections 1340.40 to 1340.91 of the Revised	899
Code may be cited as the "uniform principal and income act	900
(1997)."	901

(B) In applying and construing the "uniform principal and	902
income act (1997)", consideration shall be given to the need to	903
promote uniformity of the law with respect to its subject matter	904
among states that enact the "uniform principal and income act	905
(1997)".	906

Sec. 1340.91.  Sections 1340.40 to 1340.90 of the Revised	907
Code apply to every trust or decedent's estate existing on the	908
effective date of this section except as otherwise expressly	909
provided in the will or terms of the trust or in sections 1340.40	910
to 1340.90 of the Revised Code.	911

Sec. 2109.67.  (A) Unless the will otherwise provides and	912
subject to division (B) of this section, all expenses incurred in	913
connection with the settlement of a decedent's estate, including	914
debts, funeral expenses, estate taxes, penalties concerning taxes,	915
allowances to a surviving spouse, minor children, or both,	916
including, but not limited to, the allowance for support under	917
section 2106.13 of the Revised Code, fees of attorneys and	918
personal representatives, and court costs shall be charged against	919
the principal of the estate.	920

(B) Unless the will otherwise provides, income from the	921
assets of a decedent's estate after the death of the testator and	922
before distribution, including income from property used to	923
discharge liabilities, shall be determined in accordance with the	924
rules applicable to a trustee under Chapter 1340. of the Revised	925
Code and distributed as follows:	926

(1) To specific legatees and devisees, the income from the	927
property bequeathed or devised to them respectively, less property	928
taxes, ordinary repairs, interest, and other expenses of	929
management and operation of the property, and an appropriate	930
portion of taxes imposed on income, excluding taxes on capital	931
gains, income in respect of a decedent, and other items allocable	932
to principal, which accrue during the period of administration;	933

(2)(a) To all other legatees, except as provided in division	934
(B)(2)(b) of this section, the balance of the income, less the	935
balance of property taxes, ordinary repairs, interest, and other	936
expenses of management and operation of all property from which	937
the estate is entitled to income, and taxes imposed on income,	938
excluding taxes on capital gains, income in respect of a decedent,	939
and other items allocable to principal, which accrue during the	940
period of administration, in proportion to their respective	941
interests in the undistributed assets of the estate, computed at	942
times of distribution on the basis of inventory value;	943

(b) A legatee, other than the testator's surviving spouse,	944
of a pecuniary legacy not in trust shall not be paid interest on	945
the legacy, and the legacy shall not be entitled to receive any	946
part of the income received by the estate during the period of	947
administration as income on the legacy. A legacy to the	948
testator's surviving spouse of a pecuniary amount shall carry with	949
it a proportionate part of the income of the estate from the	950
testator's death to the date of satisfaction, determined in	951
accordance with division (B)(2)(a) of this section.	952

(C) If a will or trust instrument gives the fiduciary	953
discretion in crediting a receipt or charging an expenditure to	954
income or principal or partly to each, no inference of imprudence	955
or partiality arises from the fact that the fiduciary has made an	956
allocation contrary to this section, section 2109.66, or sections	957
1340.011340.40 to 1340.131340.91 of the Revised Code.	958

(D) A fiduciary may credit a receipt or charge an	959
expenditure to income or principal with respect to a decedent's	960
estate, a trust under a will, or property passing to a trust under	961
a will, that is eligible for a federal or Ohio estate tax marital	962
deduction or estate tax charitable deduction only to the extent	963
that the credit of the receipt or charge of the expenditure will	964
not cause the reduction or loss of the deduction.	965

(E) As used in this section, "federal estate tax charitable	966
deduction," "federal estate tax marital deduction," "Ohio estate	967
tax charitable deduction," and "Ohio estate tax marital deduction"	968
have the same meanings as in section 1340.02 of the Revised Code.:	969

(1) "Federal estate tax charitable deduction" means the	970
estate tax charitable deduction allowed by subtitle B, Chapter 11	971
of the "Internal Revenue Code of 1986," 26 U.S.C.A. 2055, as	972
amended.	973

(2) "Federal estate tax marital deduction" means the estate	974
tax marital deduction allowed by subtitle B, Chapter 11 of the	975
"Internal Revenue Code of 1986," 26 U.S.C.A. 2056, as amended.	976

(3) "Ohio estate tax charitable deduction" means the estate	977
tax charitable deduction allowed by division (A) of section	978
5731.17 of the Revised Code.	979

(4) "Ohio estate tax marital deduction" means the estate tax	980
marital deduction allowed by division (A) of section 5731.15 of	981
the Revised Code.	982

Sec. 2109.68.  In all cases not covered by section 2109.66 or	983
2109.67 of the Revised Code, allocation of receipts and	984
expenditures by an executor, administrator, or testamentary	985
trustee shall be as prescribed in sections 1340.011340.40 to	986
1340.131340.91 of the Revised Code.	987

Section 2. That existing sections 1340.35, 2109.67, and	988
2109.68 and sections 1340.01, 1340.02, 1340.03, 1340.031, 1340.04,	989
1340.05, 1340.06, 1340.07, 1340.08, 1340.09, 1340.10, 1340.11,	990
1340.12, and 1340.13 of the Revised Code are hereby repealed.	991