In this subtitle the following words have the meanings indicated. “Accounting period” means a calendar year unless another 12-month period is selected by a fiduciary. “Accounting period” includes a portion of a calendar year or other 12-month period that begins when an income interest begins or ends when an income interest ends. “Beneficiary” includes, in the case of a decedent’s estate, an heir and legatee and, in the case of a trust, an income beneficiary and a remainder beneficiary. “Fiduciary” means a personal representative or a trustee. “Fiduciary” includes an executor, administrator, successor personal representative, special administrator, and a person performing substantially the same function. “Income” means money or property that a fiduciary receives as current return from a principal asset. “Income” includes a portion of receipts from a sale, exchange, or liquidation of a principal asset, to the extent provided in Part IV of this subtitle. “Income beneficiary” means a person to whom net income of a trust is or may be payable. “Income interest” means the right of an income beneficiary to receive all or part of net income, whether the terms of the trust require it to be distributed or authorize it to be distributed in the trustee’s discretion. “Mandatory income interest” means the right of an income beneficiary to receive net income that the terms of the trust require the fiduciary to distribute. “Net income” means the total receipts allocated to income during an accounting period minus the disbursements made from income during the period, plus or minus transfers under this subtitle to or from income during the period. “Person” means an individual, corporation, business trust, statutory trust, estate, trust, partnership, limited liability company, association, joint venture, government; governmental subdivision, agency, or instrumentality; public corporation, or any other legal or commercial entity. “Principal” means property held in trust for distribution to a remainder beneficiary when the trust terminates. “Remainder beneficiary” means a person entitled to receive principal when an income interest ends. “Terms of a trust” means the manifestation of the intent of a settlor or decedent with respect to the trust, expressed in a manner that admits of its proof in a judicial proceeding, whether by written or spoken words or by conduct. “Trustee” includes an original, additional, or successor trustee, whether or not appointed or confirmed by a court. “Unitrust” means a trust from which the income beneficiary is entitled to receive annually a fixed percentage of the fair market value of the trust’s assets.

In allocating receipts and disbursements to or between principal and income, and with respect to any matter within the scope of Parts II and III of this subtitle, a fiduciary: Shall administer a trust or estate in accordance with the terms of the trust or the will, even if there is a different provision in this subtitle; May administer a trust or estate by the exercise of a discretionary power of administration given to the fiduciary by the terms of the trust or the will, even if the exercise of the power produces a result different from a result required or permitted by this subtitle; Shall administer a trust or estate in accordance with this subtitle if the terms of the trust or the will do not contain a different provision or do not give the fiduciary a discretionary power of administration; and Shall add a receipt or charge a disbursement to principal to the extent that the terms of the trust and this subtitle do not provide a rule for allocating the receipt or disbursement to or between principal and income. In exercising a discretionary power of administration regarding a matter within the scope of this subtitle, whether granted by the terms of a trust, a will, or this subtitle, a fiduciary shall administer a trust or estate impartially, based on what is fair and reasonable to all of the beneficiaries, except to the extent that the terms of the trust or the will clearly manifest an intention that the fiduciary shall or may favor one or more of the beneficiaries. A determination in accordance with this subtitle is presumed to be fair and reasonable to all of the beneficiaries.

A trustee may convert a trust into a unitrust as described in this section if: The trustee receives a written request from a beneficiary to exercise the power conferred by this subsection to convert to a unitrust; The trustee invests and manages the trust assets in the manner set forth in § 15–114(b) and (c) of this title; The trustee determines that the conversion will enable the trustee to better carry out the intent of the person who created the trust and the purposes of the trust; and The trustee complies with the notice requirements of § 15–502.3 of this subtitle and all qualified beneficiaries consent; or A court reviews a petition filed under § 15–502.3 of this subtitle and approves the proposed decision to convert to a unitrust. In deciding whether to exercise the power conferred by subsection (a) of this section, a trustee shall consider all factors relevant to the trust and its beneficiaries, including the following factors to the extent they are relevant: The nature, purpose, and expected duration of the trust; The intent of the creator of the trust; The identity and circumstances of the beneficiaries; The needs for liquidity, regularity of income, and preservation and appreciation of capital; The assets held in the trust and: The extent to which they consist of financial assets, interests in closely held enterprises, tangible and intangible personal property, or real property; The extent to which an asset is used by a beneficiary; and Whether an asset was acquired by the trustee or received from the creator of the trust; Whether and to what extent the terms of the trust give the trustee the power to invade principal or accumulate income and the extent to which the trustee has exercised a power from time to time to invade principal or accumulate income; The actual and anticipated effect of economic conditions on principal and income and the effects of inflation and deflation; and The anticipated tax consequences of a unitrust conversion. After a trust is converted to a unitrust, all of the following apply: The income of the trust that the income beneficiary is entitled to receive under the governing instrument shall be an annual unitrust distribution equal to a payout percentage of 4% of the net fair market value of the trust’s assets, whether those assets would be considered income or principal under any other provision of this subtitle, averaged over the lesser of: The 3 preceding years; or The period during which the trust has been in existence; Expenses that would be deducted from income if the trust were not a unitrust may not be deducted from the unitrust distribution; Any provision in the governing instrument directing or authorizing the trustee to distribute principal or authorizing a beneficiary to withdraw a portion or all of the principal may not be affected by the conversion to a unitrust; Unless otherwise provided by the governing instrument, the unitrust distribution shall be paid first from net income of the trust, as net income would be determined if the trust were not a unitrust, and then from principal; and The trustee may determine to account for the unitrust distribution in accordance with the following rules: To the extent net income is insufficient, the unitrust distribution shall be paid from net realized short–term capital gains; To the extent income and net realized short–term capital gains are insufficient, the unitrust distribution shall be paid from net realized long–term capital gains; and To the extent income and net realized short–term and long–term capital gains are insufficient, the unitrust distribution shall be paid from the principal of the trust. The trustee shall determine: The effect of other payments from or contributions to the trust on the trust’s valuation; How frequently to value nonliquid assets and whether to estimate their value; and Whether to omit from the calculations trust property occupied or possessed by a beneficiary. If authorized by a court order, in accordance with a petition filed under § 15–502.3 of this subtitle, the converted unitrust may provide that: The payout percentage is different than 4%; A distribution of net income, as would be determined if the trust were not a unitrust, shall be made if in excess of the unitrust distribution and if that distribution is necessary to preserve a tax benefit; or Valuation of the trust’s net assets shall be averaged over a period other than 3 years. A trustee may not convert a trust into a unitrust under subsection (a) of this section if: The conversion would result in the disallowance of an estate tax or gift tax marital deduction that would be allowed, in whole or in part, if the trustee did not have the power to convert; Payment of the unitrust distribution would change the amount payable to a beneficiary as a fixed annuity or a fixed fraction of the value of the trust assets; The unitrust distribution would be made from any amount that is permanently set aside for charitable purposes under the governing instrument and for which a federal estate or gift tax deduction has been taken, unless both income and principal are so set aside; Possessing or exercising the power to convert would cause an individual to be treated as the owner of all or part of the trust for federal income tax purposes and the individual would not be treated as the owner if the trustee did not possess the power to convert; Possessing or exercising the power to convert would cause all or part of the trust assets to be subject to estate or gift tax with respect to an individual and the assets would not be subject to estate or gift tax with respect to the individual if the trustee did not possess the power to convert; or The trustee is a beneficiary of the trust. If subsection (f)(4), (5), or (6) of this section applies to a trustee and there is more than one trustee, a cotrustee to whom the provision does not apply may convert the trust to a unitrust under subsection (a) of this section, unless exercise of the power by the remaining trustee or trustees is prohibited by the governing instrument. If subsection (f)(4), (5), or (6) of this section applies to all the trustees, the trustees may petition a court under § 15–502.3 of this subtitle to direct a conversion under subsection (a) of this section. A trustee may release the power conferred by subsection (a) of this section to convert to a unitrust if: The trustee is uncertain about whether possessing or exercising the power will cause a result described in subsection (f)(4), (5), or (6) of this section; or The trustee determines that possessing or exercising the power will or may deprive the trust of a tax benefit or impose a tax burden not described in subsection (f) of this section. A release described in paragraph (1) of this subsection may be permanent or for a specified period, including a period measured by the life of an individual. If the trustee receives a written request from a beneficiary to reconvert a trust from a unitrust, the trustee may reconvert a trust from a unitrust if: The trustee complies with the notice requirements of § 15–502.3 of this subtitle and all qualified beneficiaries consent to reconvert from a unitrust; or A court reviews a petition filed under § 15–502.3 of this subtitle and approves the proposed decision to reconvert from a unitrust. Unless it is clear from the terms of the trust that the terms are intended to deny the trustee the power conferred by subsection (a) of this section, the terms of a trust that limit the power of a trustee to convert to a unitrust do not affect the application of this section.

A trustee may adjust between principal and income to the extent the trustee considers necessary if: The trustee receives a written request from a beneficiary to exercise the power conferred by this subsection to make an adjustment; The trustee invests and manages the trust assets in the manner set forth in § 15-114(b) and (c) of this title; The terms of the trust describe the amount that may or must be distributed to a beneficiary by referring to the trust’s income; The trustee determines, after applying the rules in § 15-502(a) of this subtitle, that the trustee is unable to comply with § 15-502(b) of this subtitle; The trustee determines that conversion of the trust to a unitrust in accordance with § 15-502.1(a) of this subtitle is an inappropriate method to comply with § 15-502(b) of this subtitle based on a review of all factors relevant to the trust and its beneficiaries; and The trustee complies with the notice requirements of § 15-502.3 of this subtitle and all qualified beneficiaries consent; or A court reviews a petition filed under § 15-502.3 of this subtitle and approves the adjustment. In deciding whether and to what extent to exercise the power conferred by subsection (a) of this section, a trustee shall consider all the factors relevant to the trust and its beneficiaries, including the following factors to the extent they are relevant: The nature, purpose, and expected duration of the trust; The intent of the creator of the trust; The identity and circumstances of the beneficiaries; The needs for liquidity, regularity of income, and preservation and appreciation of capital; The assets held in the trust and: The extent to which they consist of financial assets, interests in closely held enterprises, tangible and intangible personal property, or real property; The extent to which an asset is used by a beneficiary; and Whether an asset was acquired by the trustee or received from the creator of the trust; The net amount allocated to income under other provisions of this subtitle and the increase or decrease in the value of the principal assets, which the trustee may estimate as to assets for which market values are not readily available; Whether and to what extent the terms of the trust give the trustee the power to invade principal or accumulate income and the extent to which the trustee has exercised a power from time to time to invade principal or accumulate income; The actual and anticipated effect of economic conditions on principal and income and the effects of inflation and deflation; and The anticipated tax consequences of an adjustment. Unless authorized by a court order in accordance with a petition filed under § 15-502.3 of this subtitle, a trustee may not make an adjustment under subsection (a) of this section in any accounting period if the adjustment results in a distribution of net income to the income beneficiary: That is greater than 4% of the net fair market value of the trust assets on the first business day of that accounting period, if the net income for that accounting period is less than 4% as determined under this subtitle before application of the provisions of subsection (a) of this section; or That is less than 4% of the net fair market value of the trust assets on the first business day of that accounting period, if the net income for that accounting period is greater than 4% as determined under this subtitle before application of the provisions of subsection (a) of this section. A trustee may not make an adjustment under subsection (a) of this section: That diminishes the income interest in a trust that requires all of the income to be paid at least annually to a spouse and for which an estate tax or gift tax marital deduction would be allowed, in whole or in part, if the trustee did not have the power to make the adjustment; That reduces the actuarial value of the income interest in a trust to which a person transfers property with the intent to qualify for a gift tax exclusion; That changes the amount payable to a beneficiary as a fixed annuity or a fixed fraction of the value of the trust assets; From any amount that is permanently set aside for charitable purposes under a will or the terms of a trust unless both income and principal are so set aside; If possessing or exercising the power to make an adjustment causes an individual to be treated as the owner of all or part of the trust for income tax purposes, and the individual would not be treated as the owner if the trustee did not possess the power to make an adjustment; If possessing or exercising the power to make an adjustment causes all or part of the trust assets to be subject to estate or gift tax with respect to the individual and the assets would not be subject to estate or gift tax with respect to the individual if the trustee did not possess the power to make an adjustment; If the trustee is a beneficiary of the trust; or If the trust has been converted to a unitrust in accordance with § 15-502.1 of this subtitle. If subsection (d)(5), (6), or (7) of this section applies to a trustee and there is more than one trustee, a cotrustee to whom the provision does not apply may make the adjustment under subsection (a) of this section unless the exercise of the power by the remaining trustee or trustees is not permitted by the terms of the trust. A trustee may release the entire power conferred by subsection (a) of this section or may release only the power to adjust from principal to income if the trustee is uncertain about whether possessing or exercising the power will cause a result described in subsection (d)(1), (2), (3), (4), (5), or (6) of this section or if the trustee determines that possessing or exercising the power will or may deprive the trust of a tax benefit or impose a tax burden not described in subsection (d) of this section. The release authorized under paragraph (1) of this subsection may be permanent or for a specified period, including a period measured by the life of an individual. The terms of a trust that limit the power of a trustee to make an adjustment between principal and income do not affect the application of this section unless it is clear from the terms of the trust that the terms are intended to deny the trustee the power of adjustment conferred by subsection (a) of this section.

In this section, “qualified beneficiary” means: A person who, on the date that notice is given by the trustee in accordance with subsection (b) of this section: Is a distributee or permissible distributee of the income or principal of the trust estate; Would be a distributee or permissible distributee of the income or principal of the trust estate if the interests of the distributees described in item (i) of this paragraph terminated on the date that notice is given by the trustee; or Would be a distributee or permissible distributee of the income or principal of the trust estate if the trust were to terminate on the date that notice is given by the trustee and no powers of appointment were exercised; If an individual described in paragraph (1) of this subsection is a minor, the individual’s natural or legal guardian; or If an individual described in paragraph (1) of this subsection is a disabled person, as defined in § 13-101 of this article, any person acting on behalf of the individual under a guardianship, conservatorship, or committee. A trustee shall give notice of a proposed decision regarding the exercise or nonexercise of the discretionary power conferred under: Section 15-502.1(a) of this subtitle to convert a trust to a unitrust; Section 15-502.1(i) of this subtitle to reconvert from a unitrust; or Section 15-502.2(a) of this subtitle to adjust between principal and income. The trustee shall mail the notice required under subsection (b) of this section to: All qualified beneficiaries, except that notice of the proposed decision need not be given to any qualified beneficiary who consents in writing to the proposed decision at any time before the notice is mailed; and The creator of the trust, if living. The notice of proposed decision shall state that it is given in accordance with this section and shall state the following: The name and mailing address of the trustee, together with the name and telephone number of a person who may be contacted for additional information; A description of the decision proposed to be taken and, if the proposed decision also includes an action that requires an order of a court in accordance with § 15-502.1 or § 15-502.2 of this subtitle, a description of that action; The time within which written consents to the proposed decision may be given to the trustee, which shall be at least 30 days after the mailing of the notice of proposed decision; and The date on or after which the proposed decision may be taken or is effective, which shall be after the end of the time within which consents to the proposed decision may be given to the trustee. If the trustee receives the written consent of all qualified beneficiaries, then the trustee shall undertake the proposed decision unless the proposed decision also includes an action that requires an order of a court in accordance with § 15-502.1 or § 15-502.2 of this subtitle. If any qualified beneficiary does not consent to the proposed decision, or if the proposed decision includes an action that requires an order of a court under § 15-502.1 or § 15-502.2 of this subtitle, then the trustee or any qualified beneficiary may file a petition to review the proposed decision in the circuit court for the county in which the trustee resides in this State, if the trustee is an individual, or in which the principal place of business of the trustee is located in this State. In a proceeding under subsection (f) of this section: With respect to the power to convert to a unitrust under § 15-502.1(a) of this subtitle or to reconvert from a unitrust under § 15-502.1(i) of this subtitle, the sole remedy in the proceeding is to direct, deny, or revise the conversion to a unitrust or reconversion from a unitrust; and With respect to the power to adjust between principal and income under § 15-502.2(a) of this subtitle, the sole remedy in the proceeding is to direct, deny, or revise the adjustment between principal and income. Notice of the proceeding shall be given by the petitioner to the trustee and to all qualified beneficiaries. Any action taken or not taken in accordance with the provisions of this section shall be binding on the trustee, all qualified beneficiaries, and any other person who has a present or future interest in the trust, vested or contingent, including any unborn or unascertained beneficiary, and the trustee is not liable to any person for that action taken or not taken.

The rules in subsections (b) through (e) of this section apply: In the case of an estate, after a decedent dies; or After an income interest in a trust ends. A fiduciary of an estate or of a terminating income interest shall: Determine the amount of net income and net principal receipts received from property specifically given to a beneficiary under the rules in Parts III through V of this subtitle which apply to trustees and the rules in subsection (e) of this section; and Distribute the net income and net principal receipts to the beneficiary who is to receive the specific property. If the income and principal receipts from the specific property are not sufficient to pay the taxes, ordinary repairs, and other expenses of management and operation relating to the property, or if there are no income or principal receipts, then expenses in excess of income and principal receipts shall be charged to and paid by the beneficiary who is to receive the specific property immediately on written demand of the personal representative, or at the option of the beneficiary, charged against a share of the estate to which the beneficiary may be entitled. If the beneficiary who is to receive the specific property fails to make payment to the personal representative within 15 days from the date of written demand, the personal representative may sell at either public or private sale the specific property to satisfy the excess charges, taxes, and expenses accrued. Proceeds of the sale in excess of the charges, taxes, and expenses, including the expenses of the sale, shall subsequently be distributed to the beneficiary in full satisfaction of the right to receive the specific property. If the proceeds of the sale are insufficient to satisfy charges, taxes, and expenses incident to the specific property, then the personal representative may pay the excess expenses, taxes, and other charges out of the residuary estate. A fiduciary shall determine the remaining net income of a decedent’s estate or a terminating income interest under the rules in Parts III through V of this subtitle which apply to trustees and by: Including in net income all income from property used to discharge liabilities; Paying from income or principal, in the fiduciary’s discretion, fees of attorneys, accountants, and fiduciaries; court costs and other expenses of administration; and interest on death taxes, but the fiduciary may pay those expenses from income of property passing to a trust for which the fiduciary claims an estate tax marital or charitable deduction only to the extent that the payment of those expenses from income will not cause the reduction or loss of the deduction; and Paying from principal all other disbursements made or incurred in connection with the settlement of a decedent’s estate or the winding up of a terminating income interest, including debts, funeral expenses, disposition of remains, family allowances, and death taxes and related penalties that are apportioned to the estate or terminating income interest by the will, the terms of the trust, or applicable law. A fiduciary shall distribute the remaining net income in the manner described in § 15–504 of this subtitle to all other beneficiaries, including a beneficiary who receives a pecuniary amount in trust, even if the beneficiary holds an unqualified power to withdraw assets from the trust or other presently exercisable general power of appointment over the trust, but excluding a beneficiary other than a surviving spouse who receives a pecuniary amount that is not in trust. A fiduciary may not reduce principal or income receipts from property described in subsection (b) of this section because of a payment described in § 15–523 or § 15–524 of this subtitle to the extent that the will, the terms of the trust, or applicable law requires the fiduciary to make the payment from assets other than the property or to the extent that the fiduciary recovers or expects to recover the payment from a third party. The net income and principal receipts from the property are determined by including all of the amounts the fiduciary receives or pays with respect to the property, whether those amounts accrued or became due on or after the date of a decedent’s death or an income interest’s terminating event, and by making a reasonable provision for amounts that the fiduciary believes the estate or terminating income interest may become obligated to pay after the property is distributed.

Each beneficiary described in § 15–503(d) of this subtitle is entitled to receive a portion of the net income equal to the beneficiary’s fractional interest in undistributed principal assets, using values as of the distribution date. If a fiduciary makes more than one distribution of assets to beneficiaries to whom this section applies, each beneficiary, including one who does not receive part of the distribution, is entitled, as of each distribution date, to the net income the fiduciary has received after the date of death or terminating event or earlier distribution date but has not distributed as of the current distribution date. In determining a beneficiary’s share of net income: The beneficiary is entitled to receive a portion of the net income equal to the beneficiary’s fractional interest in the undistributed principal assets immediately before the distribution date, including assets that later may be sold to meet principal obligations; The beneficiary’s fractional interest in the undistributed principal assets shall be calculated without regard to property specifically given to a beneficiary and property required to pay pecuniary amounts not in trust; The beneficiary’s fractional interest in the undistributed principal assets shall be calculated on the basis of the aggregate value of those assets as of the distribution date without reducing the value by any unpaid principal obligation; and The distribution date for purposes of this section may be the date as of which the fiduciary calculates the value of the assets if that date is reasonably near the date on which assets are actually distributed. If a fiduciary does not distribute all of the collected but undistributed net income to each person as of a distribution date, the fiduciary shall maintain appropriate records showing the interest of each beneficiary in that net income. A fiduciary may apply the rules in this section, to the extent that the fiduciary considers it appropriate, to net gain or loss realized after the date of death or terminating event or earlier distribution date from the disposition of a principal asset if this section applies to the income from the asset.

An income beneficiary is entitled to net income from the date on which the income interest begins. An income interest begins on the date specified in the terms of the trust or, if no date is specified, on the date an asset becomes subject to a trust or successive income interest. An asset becomes subject to a trust: On the date it is transferred to the trust in the case of an asset that is transferred to a trust during the transferor’s life; On the date of a testator’s death in the case of an asset that becomes subject to a trust by reason of a will, even if there is an intervening period of administration of the testator’s estate; or On the date of an individual’s death in the case of an asset that is transferred to a fiduciary by a third party because of the individual’s death. An asset becomes subject to a successive income interest on the day after the preceding income interest ends, as determined under subsection (d) of this section, even if there is an intervening period of administration to wind up the preceding income interest. An income interest ends on the day before an income beneficiary dies or another terminating event occurs, or on the last day of a period during which there is no beneficiary to whom a trustee may distribute income.

A trustee shall allocate an income receipt or disbursement other than one to which § 15–503(b) of this subtitle applies to principal if its due date occurs before a decedent dies in the case of an estate or before an income interest begins in the case of a trust or successive income interest. A trustee shall allocate an income receipt or disbursement to income if its due date occurs on or after the date on which a decedent dies or an income interest begins and it is a periodic due date. An income receipt or disbursement shall be treated as accruing from day to day if its due date is not periodic or it has no due date. The portion of the receipt or disbursement accruing before the date on which a decedent dies or an income interest begins shall be allocated to principal and the balance shall be allocated to income. An item of income or an obligation is due on the date the payer is required to make a payment. If a payment date is not stated, there is no due date for the purposes of this subtitle. Distributions to shareholders or other owners from an entity to which § 15–508 of this subtitle applies are deemed to be due on the date fixed by the entity for determining who is entitled to receive the distribution or, if no date is fixed, on the declaration date for the distribution. A due date is periodic for receipts or disbursements that must be paid at regular intervals under a lease or an obligation to pay interest or if an entity customarily makes distributions at regular intervals.

In this section, “undistributed income” means net income received before the date on which an income interest ends. “Undistributed income” does not include an item of income or expense that is due or accrued or net income that has been added or is required to be added to principal under the terms of the trust. Except as provided in paragraph (2) of this subsection, when a mandatory income interest ends, the trustee shall pay to a mandatory income beneficiary who survives that date, or the estate of a deceased mandatory income beneficiary whose death causes the interest to end, the beneficiary’s share of the undistributed income that is not disposed of under the terms of the trust. If a beneficiary has an unqualified power to revoke more than 5% of the trust immediately before the income interest ends, the undistributed income from the portion of the trust that may be revoked shall be added to principal. When a trustee’s obligation to pay a fixed annuity or a fixed fraction of the value of the trust’s assets ends, the trustee shall prorate the final payment if and to the extent required by applicable law to accomplish a purpose of the trust or its settlor relating to income, gift, estate, or other tax requirements.

In this section, “entity” means a corporation, partnership, limited liability company, regulated investment company, real estate investment trust, common trust fund, or any other organization in which a trustee has an interest other than a trust or estate to which § 15–509 of this subtitle applies, a business or activity to which § 15–510 of this subtitle applies, or an asset–backed security to which § 15–522 of this subtitle applies. Except as otherwise provided in this section, a trustee shall allocate to income money received from an entity. Except as provided in subsection (f) of this section, a trustee shall allocate the following receipts from an entity to principal: Property other than money; Money received in one distribution or a series of related distributions in exchange for part or all of a trust’s interest in the entity; Money received in total or partial liquidation of the entity; and Money received from an entity that is a regulated investment company or a real estate investment trust if the money distributed is a capital gain dividend for federal income tax purposes. Money is received in partial liquidation: To the extent that the entity, at or near the time of a distribution, indicates that it is a distribution in partial liquidation; or If the total amount of money and property received in a distribution or series of related distributions is greater than 20 percent of the entity’s gross assets, as shown by the entity’s year–end financial statements immediately preceding the initial receipt. Money is not received in partial liquidation, nor may it be taken into account under subsection (d)(2) of this section, to the extent that it does not exceed the amount of income tax that a trustee or beneficiary must pay on taxable income of the entity that distributes the money. In this subsection the following words have the meanings indicated. “Investment fund” means an entity that is exempt from registration under the Investment Company Act of 1940 based on the authority in 15 U.S.C. § 80a–3(c)(1), is treated as a partnership for federal income tax purposes, has 50 or more investors, and more than half the assets of which consist of cash and marketable securities, including its proportionate share of these assets owned by any entity in which it owns an interest. “Unit” means an equity interest in an investment fund. If the trustee makes an irrevocable written election to have this subsection apply, distributions per share or unit made in any calendar year by a regulated investment company or an investment fund from realized or unrealized capital gains occurring in the calendar year shall be allocated by the trustee to income to the extent required in order for the sum of the distributions per share or unit from ordinary income and from realized or unrealized capital gains to equal an amount determined by multiplying the net asset value of a share or unit of the regulated investment company or investment fund on January 1 of such calendar year (or on such later date of acquisition by a trustee during such calendar year) by the annual federal mid–term rate applicable to January 1 of such calendar year (or to such later date of acquisition) established by the Secretary of the Treasury under § 1274(d)(1) of the Internal Revenue Code of 1986, adjusted to reflect the proportion of the calendar year in which the share has been held by a trustee. A trustee may rely upon a statement made by an entity about the source or character of a distribution if the statement is made at or near the time of distribution by the entity’s board of directors or other person or group of persons authorized to exercise powers to pay money or transfer property comparable to those of a corporation’s board of directors.

A trustee shall allocate to income an amount received as a distribution of income from a trust or an estate in which the trust has an interest other than a purchased interest, and shall allocate to principal an amount received as a distribution of principal from such a trust or estate. If a trustee purchases an interest in a trust that is an investment entity, or a decedent or donor transfers an interest in such a trust to a trustee, § 15–508 or § 15–522 of this subtitle applies to a receipt from the trust.

If a trustee who conducts a business or other activity determines that it is in the best interest of all the beneficiaries to account separately for the business or activity instead of accounting for it as part of the trust’s general accounting records, the trustee may maintain separate accounting records for its transactions, whether or not its assets are segregated from other trust assets. A trustee who accounts separately for a business or other activity may determine the extent to which its net cash receipts must be retained for working capital, the acquisition or replacement of fixed assets, and other reasonably foreseeable needs of the business or activity, and the extent to which the remaining net cash receipts are accounted for as principal or income in the trust’s general accounting records. If a trustee sells assets of the business or other activity, other than in the ordinary course of the business or activity, the trustee shall account for the net amount received as principal in the trust’s general accounting records to the extent the trustee determines that the amount received is no longer required in the conduct of the business. Activities for which a trustee may maintain separate accounting records include: Retail, manufacturing, service, and other traditional business activities; Farming; Raising and selling livestock and other animals; Management of rental properties; Extraction of minerals and other natural resources; Timber operations; and Activities to which § 15-521 of this subtitle applies.

A trustee shall allocate to principal: To the extent not allocated to income under this subtitle, assets received from a transferor during the transferor’s lifetime, a decedent’s estate, a trust with a terminating income interest, or a payer under a contract naming the trust or its trustee as beneficiary; Money or other property received from the sale, exchange, liquidation, or change in form of a principal asset, including realized profit, subject to this subtitle; Amounts recovered from third parties to reimburse the trust because of disbursements described in § 15–524(a)(7) of this subtitle or for other reasons to the extent not based on the loss of income; Proceeds of property taken by eminent domain, but a separate award made for the loss of income with respect to an accounting period during which a current income beneficiary had a mandatory income interest is income; Net income received in an accounting period during which there is no beneficiary to whom a trustee may or must distribute income; and Other receipts as provided in Part III of this subtitle.

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

An amount received as interest, whether determined at a fixed, variable, or floating rate, on an obligation to pay money to the trustee, including an amount received as consideration for prepaying principal, must be allocated to income without any provision for amortization of premium. A trustee shall allocate to principal an amount received from the sale, redemption, or other disposition of an obligation to pay money to the trustee more than 1 year after it is purchased or acquired by the trustee, including an obligation whose purchase price or value when it is acquired is less than its value at maturity. If the obligation matures within 1 year after it is purchased or acquired by the trustee, an amount received in excess of its purchase price or its value when acquired by the trust shall be allocated to income. This section does not apply to an obligation to which § 15-516, § 15-517, § 15-518, § 15-519, § 15-521, or § 15-522 of this subtitle applies.

Except as provided in subsection (b) of this section, a trustee shall: Allocate to principal the proceeds of a life insurance policy or other contract in which the trust or its trustee is named as beneficiary, including a contract that insures the trust or its trustee against loss for damage to, destruction of, or loss of title to a trust asset; and Allocate dividends on an insurance policy: If the premiums on the insurance policy are paid from income, to income; and If the premiums on the insurance policy are paid from principal, to principal. A trustee shall allocate to income proceeds of a contract that insures the trustee against loss of occupancy or other use by an income beneficiary, loss of income, or, subject to § 15-510 of this subtitle, loss of profits from a business. This section does not apply to a contract to which § 15-516 of this subtitle applies. This subsection applies to any obligation for the payment of money at a future time, provided the obligation was held as an asset of a trust that was irrevocable on October 1, 2000 (regardless of whether the asset was acquired before or after October 1, 2000), and provided the trustee makes an irrevocable election on the first year–end accounting of the trust’s principal and income stated after September 30, 2000 to allocate distributions in accordance with this subsection, including: A bond; A zero coupon bond; An annuity contract before unitization; A life insurance contract before the death of the insured; and An interest in a common trust fund as defined under § 584 of the Internal Revenue Code with respect to charitable remainder trusts as defined under § 664 of the Internal Revenue Code and pooled income funds as defined under § 642(c)(5) of the Internal Revenue Code. Unless otherwise provided in the trust instrument or in this subtitle, the increment in value of an obligation for the payment of money payable at a future time in accordance with a fixed, variable, or discretionary schedule of appreciation in excess of the price at which it was issued shall be distributable as income. The increment in value is distributable to the beneficiary who was the income beneficiary at the time of the increment from the first principal cash available or, if none is available, when realized by sale, redemption, or other disposition. Whenever unrealized increment is distributed as income, but out of principal, the principal shall be reimbursed for the increment when realized. For purposes of this subsection, the increment in value of an obligation for the payment of money shall be available for distribution only when the trustee receives cash on account of the obligation.

If a trustee determines that an allocation between principal and income required by § 15-516, § 15-517, § 15-518, § 15-519, or § 15-522 of this subtitle is insubstantial, the trustee may allocate the entire amount to principal unless one of the circumstances described in § 15-502.2(d) of this subtitle applies to the allocation. This power may be exercised by a cotrustee in the circumstances described in § 15-502.2(e) of this subtitle, and may be released for the reasons and in the manner described in § 15-502.2(f) of this subtitle. An allocation is presumed to be insubstantial if: The amount of the allocation would increase or decrease net income in an accounting period, as determined before the allocation, by less than 10 percent; or The value of the asset producing the receipt for which the allocation would be made is less than 10 percent of the total value of the trust’s assets at the beginning of the accounting period.

In this section the following words have the meanings indicated. “Payment” means a payment that a trustee may receive over a fixed number of years or during the life of one or more individuals because of services rendered or property transferred to the payer in exchange for future payments. “Payment” includes: A payment made in money or property from the payer’s general assets or from a separate fund created by the payer; or For the purposes of subsection (d), (e), (f), or (g) of this section, any payment from a separate fund, regardless of the reason for the payment. “Separate fund” includes a private or commercial annuity, an individual retirement account, and a pension, profit–sharing, stock–bonus, or stock–ownership plan. To the extent that a payment is characterized as interest, a dividend, or a payment made in lieu of interest or a dividend, a trustee shall allocate the payment to income. The trustee shall allocate to principal the balance of the payment and any other payment received in the same accounting period that is not characterized as interest, a dividend, or an equivalent payment. If no part of a payment is characterized as interest, a dividend, or an equivalent payment, and all or part of the payment is required to be made, a trustee shall allocate to income 10% of the part that is required to be made during the accounting period and the balance to principal. If no part of a payment is required to be made or the payment received is the entire amount to which the trustee is entitled, the trustee shall allocate the entire payment to principal. For purposes of this subsection, a payment is not “required to be made” to the extent that it is made because the trustee exercises a right of withdrawal. Except as otherwise provided in subsection (e) of this section, subsections (f) and (g) of this section apply, and subsections (b) and (c) of this section do not apply, in determining the allocation of a payment made from a separate fund to: A trust to which an election to qualify for a marital deduction under § 2056(b)(7) of the Internal Revenue Code of 1986 has been made; or A trust that qualifies for the marital deduction under § 2056(b)(5) of the Internal Revenue Code of 1986. Subsections (d), (f), and (g) of this section do not apply if, and to the extent that, the series of payments would, without the application of subsection (d) of this section, qualify for the marital deduction under § 2056(b)(7)(C) of the Internal Revenue Code of 1986. A trustee shall determine the internal income of each separate fund for the accounting period as if the separate fund were a trust subject to this subtitle. On request of the surviving spouse, the trustee shall demand that the person administering the separate fund distribute the internal income to the trust. The trustee shall allocate: A payment from the separate fund to income to the extent of the amount of the internal income of the separate fund and distribute that amount to the surviving spouse; and The balance of the payment to principal. On request of the surviving spouse, the trustee shall allocate principal to income to the extent the internal income of the separate fund exceeds payments made from the separate fund to the trust during the accounting period. If a trustee cannot determine the internal income of a separate fund but can determine the value of the separate fund, the internal income of the separate fund is deemed to equal 4% of the fund’s value, according to the most recent statement of value before the beginning of the accounting period. If the trustee cannot determine both the internal income of the separate fund and the fund’s value, the internal income of the fund is deemed to equal the product of the interest rate and the present value of the expected future payments, as determined under § 7520 of the Internal Revenue Code of 1986 for the month preceding the accounting period for which the computation is made. This section does not apply to payments to which § 15–517 of this subtitle applies.

In this section, “liquidating asset” means an asset whose value will diminish or terminate because the asset is expected to produce receipts for a period of limited duration. “Liquidating asset” includes a leasehold, patent, copyright, royalty right, and right to receive payments during a period of more than 1 year under an arrangement that does not provide for the payment of interest on the unpaid balance. “Liquidating asset” does not include a payment subject to § 15-516 of this subtitle, resources subject to § 15-518 of this subtitle, timber subject to § 15-519 of this subtitle, an activity subject to § 15-521 of this subtitle, an asset subject to § 15-522 of this subtitle, or any asset for which the trustee establishes a reserve for depreciation under § 15-525 of this subtitle. A trustee shall allocate to income 10 percent of the receipts from a liquidating asset and the balance to principal.

To the extent that a trustee accounts for receipts from an interest in minerals or other natural resources pursuant to this section, the trustee shall allocate them as follows: If received as nominal delay rental or nominal annual rent on a lease, a receipt shall be allocated to income; If received from a production payment, a receipt shall be allocated: If and to the extent that the agreement creating the production payment provides a factor for interest or its equivalent, to income; and The balance shall be allocated to principal; If an amount received as a royalty, shut–in–well payment, take–or–pay payment, bonus, or delay rental is more than nominal, 90% shall be allocated to principal and the balance to income; and If an amount is received from a working interest or any other interest not provided for in paragraph (1), (2), or (3) of this subsection, 90% of the net amount received shall be allocated to principal and the balance to income. An amount received on account of an interest in water that is renewable shall be allocated to income. If the water is not renewable, 90% of the amount shall be allocated to principal and the balance to income. This subtitle applies whether or not a decedent or donor was extracting minerals, water, or other natural resources before the interest became subject to the trust. If a trust owns an interest in minerals, water, or other natural resources on October 1, 2000, the trustee may allocate receipts from the interest as provided in this subtitle or in the manner used by the trustee before October 1, 2000. If the trust acquires an interest in minerals, water, or other natural resources after October 1, 2000, the trustee shall allocate receipts from the interest as provided in this subtitle.

To the extent that a trustee accounts for receipts from the sale of timber and related products pursuant to this section, the trustee shall allocate the net receipts: To income to the extent that the amount of timber removed from the land does not exceed the rate of growth of the timber during the accounting periods in which a beneficiary has a mandatory income interest; To principal to the extent that the amount of timber removed from the land exceeds the rate of growth of the timber or the net receipts are from the sale of standing timber; To or between income and principal if the net receipts are from the lease of timberland or from a contract to cut timber from land owned by a trust, by determining the amount of timber removed from the land under the lease or contract and applying the rules in paragraphs (1) and (2) of this subsection; or To principal to the extent that advance payments, bonuses, and other payments are not allocated pursuant to paragraph (1), (2), or (3) of this subsection. In determining net receipts to be allocated pursuant to subsection (a) of this section, a trustee shall deduct and transfer to principal a reasonable amount for depletion. This subtitle applies whether or not a decedent or transferor was harvesting timber from the property before it became subject to the trust. If a trust owns an interest in timberland on October 1, 2001, the trustee may allocate net receipts from the sale of timber and related products as provided in this subtitle or in the manner used by the trustee before October 1, 2000. If the trust acquires an interest in timberland after October 1, 2000, the trustee shall allocate net receipts from the sale of timber and related products as provided in this subtitle.

If a marital deduction is allowed for all or part of a trust whose assets consist substantially of property that does not provide the spouse with sufficient income from or use of the trust assets, and if the amounts that the trustee transfers from principal to income under § 15-502.2(a) of this subtitle and distributes to the spouse from principal in accordance with the terms of the trust are insufficient to provide the spouse with the beneficial enjoyment required to obtain the marital deduction, the spouse may require the trustee to make property productive of income, convert property within a reasonable time, or may request the trustee exercise the power conferred by § 15-502.2(a) of this subtitle. The trustee may decide which action or combination of actions to take. In cases not governed by subsection (a) of this section, proceeds from the sale or other disposition of an asset are principal without regard to the amount of income the asset produces during any accounting period.

In this section, “derivative” means a contract or financial instrument or a combination of contracts and financial instruments which gives a trust the right or obligation to participate in some or all changes in the price of a tangible or intangible asset or group of assets, or changes in a rate, an index of prices or rates, or other market indicator for an asset or a group of assets. To the extent that a trustee does not account under § 15-510 of this subtitle for transactions in derivatives, the trustee shall allocate to principal receipts from and disbursements made in connection with those transactions. If a trustee grants an option to buy property from the trust, whether or not the trust owns the property when the option is granted, grants an option that permits another person to sell property to the trust, or acquires an option to buy property for the trust or an option to sell an asset owned by the trust, and the trustee or other owner of the asset is required to deliver the asset if the option is exercised, an amount received for granting the option shall be allocated to principal. An amount paid to acquire the option shall be paid from principal. A gain or loss realized on the exercise of an option, including an option granted to a settlor of the trust for services rendered, shall be allocated to principal.

In this section, “asset-backed security” means an asset whose value is based upon the right it gives the owner to receive distributions from the proceeds of financial assets that provide collateral for the security. “Asset-backed security” includes an asset that gives the owner the right to receive from the collateral financial assets only the interest or other current return or only the proceeds other than interest or current return. “Asset-backed security” does not include an asset to which § 15-508 or § 15-516 of this subtitle applies. If a trust receives a payment from interest or other current return and from other proceeds of the collateral financial assets, the trustee shall allocate to income the portion of the payment which the payer identifies as being from interest or other current return and shall allocate the balance of the payment to principal. If a trust receives one or more payments in exchange for the trust’s entire interest in an asset–backed security in one accounting period, the trustee shall allocate the payments to principal. If a payment is one of a series of payments that will result in the liquidation of the trust’s interest in the security over more than one accounting period, the trustee shall allocate 10% of the payment to income and the balance to principal.

A trustee shall make the following disbursements from income to the extent that they are not disbursements to which § 15–503(c)(2) or (3) of this subtitle apply: One–half of the regular compensation of the trustee and any person providing investment advisory or custodial services to the trustee; One–half of all expenses for accountings, judicial proceedings, or other matters that involve both the income and remainder interests; All of the other ordinary expenses incurred in connection with the administration, management, or preservation of trust property and the distribution of income, including interest, ordinary repairs, regularly recurring taxes assessed against principal, and expenses of a proceeding or other matter that concerns primarily the income interest; and Recurring premiums on insurance covering the loss of a principal asset or the loss of income from or use of the asset.

A trustee shall make the following disbursements from principal: The remaining one–half of the disbursements described under § 15–523(1) and (2) of this subtitle; All of the trustee’s compensation calculated on principal as a fee for acceptance, distribution, or termination, and disbursements made to prepare property for sale; Payments on the principal of a trust debt; Expenses of a proceeding that concerns primarily principal, including a proceeding to construe the trust or to protect the trust or its property; Premiums paid on a policy of insurance not described in § 15–523(4) of this subtitle of which the trust is the owner and beneficiary; Estate, inheritance, and other transfer taxes, including penalties, apportioned to the trust; and Disbursements related to environmental matters, including reclamation, assessing environmental conditions, remedying and removing environmental contamination, monitoring remedial activities and the release of substances, preventing future releases of substances, collecting amounts from persons liable or potentially liable for the costs of those activities, penalties imposed under environmental laws or regulations and other payments made to comply with those laws or regulations, statutory or common law claims by third parties, and defending claims based on environmental matters. If a principal asset is encumbered with an obligation that requires income from that asset to be paid directly to the creditor, the trustee 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.

In this section, “depreciation” means a reduction in value due to wear, tear, decay, corrosion, or gradual obsolescence of a fixed asset having a useful life of more than 1 year. A trustee may transfer to principal a reasonable amount of the net cash receipts from a principal asset that is subject to depreciation, but may not transfer any amount for depreciation: Of that portion of real property used or available for use by a beneficiary as a residence or of tangible personal property held or made available for the personal use or enjoyment of a beneficiary; During the administration of a decedent’s estate; or Under this section if the trustee is accounting under § 15-510 of this subtitle for the business or activity in which the asset is used. An amount transferred to principal need not be held as a separate fund.

If a trustee makes or expects to make a principal disbursement described in this section, the trustee may transfer an appropriate amount from income to principal in one or more accounting periods to reimburse principal or to provide a reserve for future principal disbursements. Principal disbursements to which subsection (a) applies include the following, but only to the extent that the trustee has not been and does not expect to be reimbursed by a third party: An amount chargeable to income but paid from principal because it is unusually large, including extraordinary repairs; A capital improvement to a principal asset, whether in the form of changes to an existing asset or the construction of a new asset, including special assessments; Disbursements made to prepare property for rental, including tenant allowances, leasehold improvements, and broker’s commissions; Periodic payments on an obligation secured by a principal asset to the extent that the amount transferred from income to principal for depreciation is less than the periodic payments; and Disbursements described in § 15–524(a)(7) of this subtitle. If the asset whose ownership gives rise to the disbursements becomes subject to a successive income interest after an income interest ends, a trustee may continue to transfer amounts from income to principal as provided in subsection (a) of this section.

A tax required to be paid by a trustee based on receipts allocated to income shall be paid from income. A tax required to be paid by a trustee based on receipts allocated to principal shall be paid from principal, even if the tax is called an income tax by the taxing authority. A tax required to be paid by a trustee on the trust’s share of an entity’s taxable income shall be paid: From income to the extent that receipts from the entity are allocated only to income; From principal to the extent that receipts from the entity are allocated only to principal; Proportionately from principal and income to the extent that receipts from the entity are allocated to both income and principal; and From principal to the extent that the tax exceeds the total receipts from the entity. After applying subsections (a) through (c) of this section, the trustee shall adjust income or principal receipts to the extent that the trust’s taxes are reduced because the trust receives a deduction for payments made to a beneficiary.

A fiduciary may make adjustments between principal and income to offset the shifting of economic interests or tax benefits between income beneficiaries and remainder beneficiaries which arise from: Elections and decisions, other than those described in subsection (b) of this section, that the fiduciary makes from time to time regarding tax matters; An income tax or any other tax that is imposed upon the fiduciary or a beneficiary as a result of a transaction involving or a distribution from the estate or trust; or Subject to subsection (b) of this section, the ownership by an estate or trust of an interest in an entity whose taxable income, whether or not distributed, is includable in the taxable income of the estate, trust, or a beneficiary. A trustee shall make an adjustment from principal to income to compensate an income beneficiary for taxes paid or payable by the income beneficiary in respect of the taxable income of an entity that is taxable to the income beneficiary but that is distributed to the trustee and allocated to principal. If the amount of an estate tax marital deduction or charitable contribution deduction is reduced because a fiduciary deducts an amount paid from principal for income tax purposes instead of deducting it for estate tax purposes, and as a result estate taxes paid from principal are increased and income taxes paid by an estate, trust, or beneficiary are decreased, each estate, trust, or beneficiary that benefits from the decrease in income tax shall reimburse the principal from which the increase in estate tax is paid. The total reimbursement must equal the increase in the estate tax to the extent that the principal used to pay the increase would have qualified for a marital deduction or charitable contribution deduction but for the payment. The proportionate share of the reimbursement for each estate, trust, or beneficiary whose income taxes are reduced must be the same as its proportionate share of the total decrease in income tax. An estate or trust shall reimburse principal from income.

This subtitle shall be so applied and construed to effectuate its general purpose to make uniform the law with respect to the subject matter of this subtitle among those states which enact it.

This subtitle may be cited as the “Maryland Uniform Principal and Income Act”.